Metals update for June 7

A quick about-face from Hungary regarding its chance of a default assuaged markets as the new trading week got underway. Barely hours after announcing that there was a ‘grave’ situation facing the nation’s economy, PM Orban and his government pulled out all the stops to reassure turmoil-laden markets that Hungary, is in fact, not Greece. At the end of the day, the country may now add a credibility problem to whatever economic or budget ‘issues’ it still faces.

Markets will now need to rethink whether the concern about possible defaults was warranted but exaggerated. No matter, Friday’s cautionary words did sufficient damage to the euro, the forint, and bonds to be remembered for quite some time to come. U.S. stocks swooned on Friday while most commodities fell out of bed.

Meanwhile, at the Busan meeting of the G-20 this weekend, there was little more than head-butting over how to proceed with the global economic recovery (fast-threatening to turn into something less) and over how to shrink deficits. Some want export growth, others wish to prop up domestic demand. Mr. Geithner warned the gathering that banking on the U.S. consumer to…consume ad infinitum is best done at one’s own peril. The Nikkei racked up a 380-point loss overnight, and the euro did not (yet) manage to come back to trade above 1.20 while the U.S. dollar continued its safe-haven-quest fueled climb towards 89 on the trade-weighted index. Yelling "Fire!” in the crowded European theatre is not the wisest thing one can do these days.

New York spot metals dealings opened under selling pressure this morning. Apparently, despite last Friday’s Hungarian storm-driven gains, some gold players decided that cashing in some chips was perhaps the best course of action given the rising risks of a second wave of asset liquidations a la circa 2008. The gold ETF lost a chunk of its balances in a flight that seems aimed at the USD for the moment.

This was the first such shrinkage in gold ETF balances in about two months’ time and also the heftiest (in terms of ounces –nearly 112,000 ounces) since February. We recently noted that while Q1 2009 additions to the gold ETF were quite noteworthy (at over 460 tonnes) the picture was dramatically different during the first three months of 2010. Ninety-nine percent (!) less "dramatic" as a matter of fact, like 3.8 tonnes of net inflows only, during the trimester.

Gold spot traded at lows near $1,210 in the early part of the morning, before staging a turn-around that brought values back towards the $1,220 mark by around 10:30 NY time. Silver also turned higher by mid-morning, reaching for the $17.50 level after a bit of a shaky start. The white metal suffered a technical breakdown last Friday, one that has invalidated its four-month ascending pattern. Let’s see what today’s repair attempt manages to do.

Whether silver’s crumble points towards similar patterns possibly emerging in gold remains a good question to ponder as we get closer to the onset of the "summer doldrums." Guess it partially depends on what kind of summer this turns out to be. Could be “hot” with scattered Budapest-style brush fires in various European locations, or ‘cold’ as in, investors running to cold, hard cash as they avoid…everything. Stay tuned to the Economic Weather Channel.

“The danger for gold right now is being caught up in the crossfire of other assets falling, triggering margin calls,” Edel Tully, an analyst at UBS AG in London, said today in a report. “As long as financial-market participants are shedding risk, the fear trade should ensure that physical demand for bars and coins remains elevated.”

The noble metals complex was initially under liquidation pressure as well, with platinum sinking towards the $1550 value zone and palladium trading just under $425 an ounce. Rhodium fell about $40 to a bid of $2,510 per troy ounce. In the background, the Dow made tentative advances, recovering about 45 points before losing the same plus another 50 points, while crude oil rose a couple of dimes to the $71.70 per barrel mark.

In other news, London-based metals market consultancy GFMS said on this morning that given the turmoil in the eurozone and resultant potential hit on the demand side, the risk in platinum and palladium is tilted towards the downside. “Of the two precious metals, palladium has more promising fundamentals as demand is concentrated outside of Europe and investor buying is expected on dips, GFMS senior consultant Peter Ryan said in a Tokyo briefing about forecasts issued in April.”

The firm’s spokesman added that the likely trading range for palladium would be $400-$500 for the majority of the current year. GFMS’ earlier forecast, made in late April, and had projected palladium to trade between $400 and $675 an ounce this year. GFMS also said platinum could rise to $1,900 an ounce on investor demand and would likely stay above $1,400 this year.

The firm’s CEO, Paul Walker, said in a March market briefing that investors will remain the principal driver of gold prices in 2010, but cautioned that without such critical participation, gold’s then current levels around $1,200 per ounce would be “difficult to maintain.”

By mid-morning today the spec longs were once again hard at work, pushing gold and silver values higher, as the quest for some shelter from the ugly conditions over in Europe resumed. However, something appears to be suffering from a bit of a “disconnect” in the metals sector. It was palpable at the Cambridge House show, it is being noted in the markets as well. No, it was not the closing of Morton’s Steakhouse in Vancouver (which, in the words of a local, was not going to make it standing while some mining shares lost 80%). It was, and is, that which Mark Hulbert observes in today’s piece on gold at Marketwatch:

“An Ugly Feature/Big Problem (?) marring this happy scene [in the bull camp of the gold market]: the wretched performance of gold shares. The NYSE Arca Gold Bugs (HUI) and the Gold & Silver Index (XAU) both finished the week down. No one seems to understand gold shares' malaise. Unlike gold, they have yet to approach, let alone exceed, their last December highs.”

Meanwhile, the greenback was modestly lower, tracking near 88.30 on the index while the euro ticked near the 1.193 level despite an unanticipated jump in German factory orders. Economists had expected a net drop but orders showed a 2.8% gain as the weaker euro gave export demand a shot of adrenaline in the arm.

The bigger problem, at least according to a Bloomberg survey of 25 London-based economists, is that the euro is seen as dead-and-gone, inside of five years. Well, Bob the Investor might disagree about such unanimity in opinion and point out that it generally means the opposite could take place. While all of this shakes out, you may count on one reliable feature to continue to buffet the markets: volatility.

Well, at least both Frank Holmes and this writer agreed on one essential requirement to navigate whatever lies ahead. The need for a core position in gold and a price-independent one, at that. http://www.kitco.com/reports/news/debate.html

Jon Nadler

Senior Analyst, Kitco Metals Inc.North America

Websites: www.kitco.com and www.kitco.cn

Blog: http://www.kitco.com/ind/index.html#nadler

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