Metals update for June 9

Good Morning,

Record prices have a way of engendering profit-taking, and this time was no different. Whether the temptation to skim some chips off a profit-rich gaming table remains the order of the day(s) as we head towards the weekend remains to be seen. The proposal to institute an EU-wide ban on short-selling lifted equities in Europe and pulled the euro up to just over 1.20–a to-be-watched pivot point this morning.

The above combination of factors could become the dominant theme for the next couple of days. That said, record prices also have a way of attracting latecomers who pile into an asset feeling that the train is leaving the station. In so many words, we can look forward to roiling markets as the end of the week approaches.

This morning’s focus is also split between analyzing the contents of the testimony by Fed Chairman Ben Bernanke and the release of the Fed’s Beige Book in the early afternoon. In addition, the effects of the overnight news that Chinese exports surged (a euphemism) by 50% last month will continue to reverberate in the commodities niche during this midweek session. Oil, industrial metals, and the noble metals complex will bear close scrutiny.

New York bullion prices opened mixed, and showed only minor losses in gold. The yellow metal dropped $1.10 to start at $1233.70 per ounce. While the $1230 level was not breached overnight, bullion is still trading some $20 under the peak it scaled on Tuesday. Silver was higher by 4 cents, opening at $18.33 and still not marching onward to etch its own records. Platinum climbed $6 to the $1533.00 mark, while palladium gained $10 to start at $450.00 per ounce. Rhodium continued at $2430.00 the ounce.

In the background, the US dollar was marginally lower, losing 0.18 on the trade-weighted index to reach just under the 88 level. The euro treaded water slightly above the 1.202 level but crude oil moved $1.15 higher on the Chinese exports news (to the $73.14 per barrel mark). The Dow briefly touched the 10K mark ahead of Mr. Bernanke’s testimony.

The ‘improvement’ theme infused with ‘caution’ and ‘this will take some time’ are likely to define the Fed Chairman’s testimony. For now, he sees a ‘clear’ moderation in inflation. Read: deflation. For now, he sees a US recovery that will ‘survive the fiscal drag.’ Read: the sky will not fall. For now, he sees a housing sector that has only firmed ‘a little.’ Read: not enough. For now, he sees private demand as powering US growth. Read: We need more of it.

And, the take-home statement of the morning by Mr. Bernanke: “The U.S. economy is strong enough to withstand the fiscal tightening that is ahead.” Read: Rate hikes on the way, whether you like them or not. Those Q1 2011 bets on rates rising might just have to be…fine tuned a bit. Almost on cue, gold dipped $5 following that salvo across the carry-traders’ bow. The Fed will raise interest rates from a record low before the economy achieves full employment. A game-changer after nearly three years, as America went into the maelstrom first and is now poised to leave it behind first as well.

Just how frothy/tired (or on steroids) this gold market currently appears depends of course on your perspective at this juncture and your take on the future. As is also the case with record price achievements, there has been no shortage of opinion being tendered as to what course the metal is possibly headed for following such a feat.

Some analysts note that “the physical market is unlikely to provide much support for gold over the summer months, typically the seasonally weakest for jewelry demand,” Royal Bank of Scotland Group Plc analysts including Nick Moore said in a report today. “If/when investor momentum wanes, we believe that gold may be vulnerable to a sharp price correction.”

Others are less than speculative as to the waning of said momentum and propose that, if not perhaps at this particular level, but somewhere around here we are scaling the top of K2 and planting the flags for a top. At the very least, they do not see higher mountains (of the size we are frequently shown on some maps) ahead.

Mr. Barry Ritholtz, director of equity research at Fusion IQ, rubbished predictions of gold bulls eyeing future prices at between $5,000 and $8,000 an ounce. "Gold (at) $8,000 is an end-of-the-world bet, (an) armed militia, Mad-Max type of world. I just have a hard time fathoming that.” Mr. Ritholtz said at the Reuters investment summit on Monday.

Some technical analysts opine that the spot price of gold at least could be “reaching a top as both the price chart and correlation between gold and euro/dollar suggest a bearish reversal.” Gold prices could “drop as much as 40 percent from record highs due to bearish technical momentum and deflation related to the euro zone debt crisis.”

That was the opinion of Elliott Wave International President Robert Prechter who spoke at the same Reuters summit on Monday. Today, the Chairman of MMTC -India's largest gold importer, Mr. Sanjiv Batra offered less dramatic correction percentages as a possibility, when he told Deccan Herald reporters that "There can be a correction of 10-20 per cent (in gold prices) if there is an improvement in the European markets."

Phillip Futures Pte Ltd. analysts tendered the opinion that “volatile financial and currency markets will drive investors to acquire gold. Still, gold remains vulnerable to profit-taking at such high prices.” However, long-time friend Paul Walker, CEO of GFMS, speaking from Tokyo, did not rule out the possibility that investment demand might still push gold towards the $1300 figure and that “the sovereign debt crisis may expand from Europe to other regions. That may push gold ‘significantly higher’ than $1,300 an ounce, possibly by a further $500 to $700.”

Watch for currencies pivoting, the ECB rate (non) decision tomorrow, and for the Sarkozy-Merkel “E” team battling the bond and euro vigilantes.

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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