Metals update for June 23

Good Morning,

Perceptions that the global recovery process could be derailed by certain observed trends sank the euro to a one-week low overnight and reignited at least some of the recently faltering safe-haven quest for gold. Lack of strength exhibited by the European manufacturing sector and the slippage in US existing home sales recorded in May conspired to undermine risk appetite among speculators, especially as expectations were in place for a gain in said sales levels.

Meanwhile, sales of new homes in the US might show their biggest drop in nearly 16 years. This, just as the Fed gets ready to judge and then outline its interest rate policy statement later today. Bets that the ‘extended period’ language will be left in place at least until the next tete-a-tete of the FOMC’s decision makers are about as unanimous as those of an election outcome in Cuba. The situation was not the same over in the UK, where the BoE’s minutes revealed a split among policymakers as regards interest rates.

BoE Monetary Policy Committee member Andrew Sentance reportedly uttered a sentence calling for a hike in rates; the first such vote in nearly two years, and one based on the ‘resilience of inflation.’ Unlike the US, Great Britain is looking at greater than the (2%) targeted rate for price rises. More like 3.4% as of the last tally. Like the US however, the UK also shows a notable slack in the economy – one that some believe ought to temper inflationary tendencies more than it has.

At any rate, Britannia breathed a bit of a sigh of relief this morning as Moody’s Investors Service judges that-based on the UK budget- it is inclined to maintain the country’s AAA rating as well as the ‘stable’ outlook. Chalk one up for the specs who are not likely to be seeking safe-haven plays on this summer day. No such relief sighs within audible range yet as regards Spain and its banks

China’s central bank offered its reference rate for the yuan this morning and once again drew the attention of traders and financial markets, mainly for the reason that it appears to be extremely slow and cautious in allowing the currency to appreciate. Perhaps tacitly, Mr. Bernanke could be somewhat joyous about the side effect of the latest Chinese policy, as it will likely result in as salutary effect on the two fronts he is apparently most concerned about since, well, forever: disinflation and jobs growth in the US.

Costlier Chinese goods (will Wal-Mart play its price tag demolition commercials in reverse now?) could halt the unwelcome slowing of US inflation levels and a potential rise in Chinese imports might help add some much-needed jobs to the US economy at a better pace than that which has hitherto been noted. If this sounds like shades of Japan’s two-decade-long welcoming of ‘desirable inflation levels’ well, it probably is.

At a time when the spec trade is piling into the assets that resemble the proverbial coal mine resident canary (at least in colour) as a safety net against what is supposed to be strong inflation, the reality of falling prices and stagnant labour conditions is what is on the Fed’s mind. Perhaps that was one of the reasons why Mr. Bernanke suggested that he fails to follow why gold prices are doing what they have been doing.

Of course, some have interpreted his observations as coming from someone wearing blinders (on purpose perhaps). Par for the course, that. You cannot win, no matter what you say, so long as you say a single word in a certain church. And, if you are not with us, well then, you must be…(you know the rest).

Metals markets opened the midweek session with only modest gains this morning. Gold spot advanced $4.20 at the start of the day, and was quoted at $1242.80 on the bid side. However after the first hour of trading, more profit-taking and probable book-squaring/options expiration-related trades came into the picture and the yellow metal was in the red by about thrice amount of the gains with which it started the session. Yes, a $13 drop was noted in the first 90 minutes of action. $1225 was in sight at last check.

In the background, the US dollar lost a bit of ground and slipped to just under the 86 mark on the trade-weighted index while the euro was hovering around the 1.227 mark without much momentum in either direction from that point. Crude oil fell about a quarter to a $77.60 per barrel quote. Later on, the decline steepened and black gold lost almost $2 a barrel. Over in Japan overnight, the Nikkei average lost 189 points reflecting some of the aforementioned fears about where the global economy might be headed.

Contrarians continue to remain contained in their reaction to Monday’s gold price action. They note what could well have been a key reversal day following gold’s strong decline from a new record level that day, and Tuesday’s action did not offer much in the way of encouragement. Quite a different mood than that in the bull camp, which continues to bask in the glow of news bits such as ‘Jim Rogers loves gold’ (when did he not?) and “ETF holdings at new peak” while ignoring deteriorating market fundamentals.

For MarketWatch’s contrarian sentiment judge Mark Hulbert at least, such reluctance to jump on the gold party wagon by market timers presents a potentially bullish signal. On the technical side of things, any market notes that contain any variant of the word ‘bear’ are not on the horizon until or unless the price slips nearer to the low $1200’s (like some $30 lower than now).

Silver climbed 11 cents at the open, showing a bid of $18.91 the ounce. Meanwhile, platinum gave back $2 to start at the $1581.00 level and palladium advanced $3 to open at $486.00 the ounce. Yet another morning of price stagnation was on tap for rhodium with a $2380.00 quote for the bid.

Continued volatility will remain on the plate as options expire and book-squaring gets underway. Turbulence can be expected between now and just after the upcoming 4th of July holiday weekend in the US. For today the obvious focus remains the Fed, and what it may or may not say.

Comic relief (unless you live near the Gulf): In ‘Duh!’ news of the day, the judge who overturned the Gulf oil drilling ban yesterday, turns out to have ‘extensive’ investments in the energy industry. No! Really?!! Judge(ment) clouded? You be…the judge. A Keith Olbermann ‘special comment’ cannot be far behind…

The markets will soon judge the Fed’s statement. A small and short-lived interruption to the summer doldrums. No interruption to the unplanned flow of oil into Gulf waters – one that started out with estimates of 1,000 barrels per day gushing out and being lost while causing untold damage. One that –as of the latest tallies-could be 35,000? 60,000? Or perhaps 100,000 barrels per day in size?

Final ‘Duh!’ news title of the day. Kid you not: “Spill harming aquatic life, tests show”

Happy (Careful) Trading. Beware of calendar-related potholes.

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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