Metals update for May 25

Global equity markets sagged overnight as apprehensions about a zonal slowdown in Europe undermined investor appetite for taking much, if any, risk. The European debt crisis remained front and center on global market stages as the IMF presses Spain for further budget cuts and what it called a ‘labour overhaul.’ Meanwhile, currency traders continued to flog the euro as rising confidence in its eventual parity vis a vis the greenback became manifest once again.

Albeit the common currency’s decline has been rather significant, it has not hitherto been too much of a case of a ‘free-fall’ and thus the ‘i’ word has not yet been used in conjunction with it. However, it has been indirectly and not very subtly hinted that the ECB will use intervention if it feels it must. Thus, sellers of the euro are treading fairly lightly as they try to push it towards the 1.20 mark.

As opined last week, this is still a game of ‘chicken’ and bluff-calling between speculators and officialdom. FIFA has nothing on this battle, it would seem. The spectacle is intense; the euro gained 4% over two days last week and is fast giving back much of that gain this week.

Shorting the euro is as popular a market sport as bashing the dollar was late last year. Even if a soft common currency implies better chances at export growth for the economically-challenged region, we could have the makings of a bear trap here and the ECB…bears close-watching. Nearly 35 central bank currency market interventions have been recorded over the past decade, with the Bank of Japan and the Swiss National Bank taking home the Oscar for ‘most active intervention in a supporting role.’

What is benefiting from the euro’s woes? Why, the US dollar, of course. Its share of global currency reserves got a hefty boost in Q1 as the outlook for better US growth and the euro’s crumble left little in the way of alternatives to consider. The greenback’s share of reserves now probably stands at just above 62% of the pie while the euro’s slice shrank to a little above 27%.

What was a ‘diversification’ out of dollars in 2009 is now apparently a trend in the opposite direction. Behold the higher-than 87.00 print on the US dollar index as of this morning. A figure that, just a few months ago (see Q4), was seen in reverse number order, amid promises that it would drop to under the 70 mark. All is quiet on the dollar-bear front, these days.

Spot bullion prices opened flat-to-lower this morning as overnight losses of nearly 300 points in the Nikkei index raised fears that the Dow would follow and that such declines will engender more margin calls (and related asset liquidations to pay for same). Gold started with a 40-cent gain at $1192.70 after having once again made an attempt at stabbing the $1200 prize and coming $2 shy of it overnight.

No such luck in silver, which dropped 22 cents out of the gate, to open at $17.67 the ounce. As Kitco’s AM Roundup indicates, gold bulls need to show some mettle in coming days in order to avoid “serious near-term chart damage.” The yellow metal is currently bouncing to correct the initial decline from its May 14 high at $1250.45.

According to the Elliott Wave perspective, “prices have pushed to initial resistance near $1200, but it would not be unreasonable if they decide to extend a bit higher. Subsequent resistance is in the $1208-$1229 area. Once gold closes beneath the lower channel line, which crosses $1128.50 tomorrow and is rising at approximately $1 per day, the price peak will be confirmed and gold should rapidly descend to the $950-$1000 area. Even lower targets remain probable.”

The good news/bad news routine continued to be the order of the day as regards Indian gold demand. Spurred by hefty price declines in April, the country’s gold imports surged by 71% (to a monthly figure of 34.2 tonnes). Nowadays, however, the local price is near a record high and sales are anything but stellar. In fact, sales –as in sell-backs of the scrap variety- are possibly about to hit the market. This, as local farmers prepare to buy seeds and fertilizer ahead of the ‘kharif sowing season.’ Such secondary supplies of gold and silver are projected to cut into the Indian metals import figures for May/June.

Platinum and palladium resumed their southerly headings with a $32 fall in the former (to $1495) and a $17 decline in the latter (to $428). Industrial buyers are sitting on the sidelines and are perceived to be awaiting lower prices once again.

ETF Securities Ltd. opines that platinum might indeed see a ‘soccer spike’ and hopefully not a ‘head-fake’ as the World Cup gets underway next month in South Africa.

Power supplies to the mines that produce the metal may be diverted to light up the matches while the miners may have to light matches in order to continue to dig. State-owned utility Eskom is ‘confident’ that it will be able to supply sufficient juice to shed light on both customers.

The drama keeps escalating, but let us not lose focus of the fact that the footie event is but one-month long. Short-term effects are one thing, but technical analysts at Barclays Capital (that name just keeps popping up) envision palladium falling to around $380 per ounce following a ‘temporary gain’ courtesy of ETF attention and risk appetite.

Such appetite as well as assorted apprehensions were on display as of the last check, when US home price data (showing a 0.5% decline in March) lifted gold and kept crude under pressure. The Dow fell 220 points out of the starting gate and commenced the session at under the $10K level. Buckle up for continuing turbulence over the next 72 hours. Margin calls remain the air pockets to watch out for.

Happy Trading.

Jon Nadler is a Senior Analyst at Kitco Metals Inc.North America

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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