Gold in sight of $1,200 resistance

Good Morning,

A decline in equity futures prompted by once again rising fears about the quality of the economic recovery gave rise to additional short covering and some fresh purchases of gold overnight. Bullion prices drew to within a couple of dollars of the $1200 resistance area as players eyed soon-to-be-released ADP employment report data as well as nonmanufacturing index figures from the ISM.

Meanwhile, the Nikkei average lost over 200 points while the yen traded at a 15-year high against the US dollar, and European equities recorded declines even as the region’s services and manufacturing sectors grew at a faster rate in July. The euro was seen marking time at 1.32 as of the last price check.

New York spot precious metals trading showed gains in all but palladium as the midweek session got underway. Gold opened with an $11.60 per ounce rise, quoted at $1197.20 as against a reading of 80.58 on the US dollar on the trade-weighted index. The metal still needs a solid close or two above the $1200 psychological figure as well as a push beyond $1210-$1220 –ish in order to show fresh mettle among the bulls. Silver climbed 18 cents to start the day at $18.55 the ounce.

Platinum advanced $6 to the $1583 mark but palladium made a modest $2.00 retreat to one dollar under the round $500 figure. Carmaker Toyota’s Q1 sales rose by 36% in its most important market; North America. We have frequently voiced hopes that the recovery of the auto sector in North America and Europe will be the last piece of the puzzle needed to complete the bullish picture in the noble metals complex.

The Japanese auto giant is looking for additional gain in Q3 and has raised its global auto sales projection to nearly 7.4 million units for the full year that will end in Q1 of next year. Toyota’s earnings rose by 27% despite the wrenching recall period it experienced in the earlier part of the year.

Rhodium remained static at $2170.00 per troy ounce. Something else turned to “static kill” overnight; Indian gold demand, which had shown nice signs of increasing, once again turned dormant as 18,000+ rupee (per 10gm) prices held would-be buyers at bay. Dealers we contacted reported local consumers as “holding out for sub $1080.00/ounce bullion values.”

Such sluggishness in demand is being offset by glowing reports by the gold lobby that China’s further steps in liberalizing its gold trade will invariably lead to more demand for the metal. We do not yet see India’s dominant position in the physical market under the threat of being displaced by China. Growth in Chinese participation in gold might well materialize, but the “paper gold” version still holds a strong allure for the speculative-minded players over there.

Certainly, this step in the process of liberalizing the trade in the country is not some kind of “gold-purchase-by-proxy” maneuver on the part of the government, as some have perceived. At the end of the day, the additional banks to play in the market in the future are likely the happiest campers in the wake of this reform. Every ticket written represents more potential income.

The ADP report revealed a US private sector addition of 42,000 jobs for the month of July. The number was larger than that which economists had anticipated (the median estimate was for 30,000 positions to have been created). The jobs gain recorded last month constitutes the sixth consecutive one, but is still largely within the range of the average of 37,000 previous monthly additions and it does not appear to be indicating an accelerative pattern as yet.

Today’s report is often seen as a prelude to the US government’s own labour market conditions report, due on the Friday following its release. Pundits are currently estimating a net loss in jobs for July as the tally will include the layoffs among persons who had been hired to carry out the US census.

While Dow futures picked up some steam following the ADP report, we have yet to see how this week’s complete employment/unemployment snapshot plays out when it comes to equities, the dollar, and the metals. The good news is we only have about 48 hours to wait. In any case, the greenback got a nice lift in the wake of the data. Then again, so did gold, which rose to just above the round figure by the end of the first hour of trading this morning. Let’s see if it lasts into the close, and beyond.

No waiting over in China, where a government think-tank just reported its expectations that the country’s economy will continue to decelerate after the recent report that manufacturing activity grew at the slowest rate in nearly a year-and-a-half. The government is ratcheting up its efforts to curb property speculation gone wild. But, now, one can add the suffix “bubble” not only to the price of real estate in China, but also to the quantity thereof.

The word “overbuilt” took on a new meaning recently, when media stories alleged that some 65 million urban apartments may be sitting unoccupied across China. That’s enough housing to shelter twice the population of Mexico for example (or, all of Brazil’s, and then some). And the truth is that no one knows the complete extent of the overhang in Chinese apartment inventories.

Consider that, the next time you get starry-eyed reports from commodity-oriented mavens repeating the shopworn concept of China building a Manhattan every x days (a vacant Manhattan that is…). It really is only a matter of time before an ‘adjustment’ will take place as gravity reasserts itself as a still-valid law. At that point, one can take those millions of miles of copper tubing and tonnes of steel girders still thought to be on a one-way demand curve by some pundits and make a nice little stagnant pile out of them for a while, at any rate.

As if to underscore that which we just reported, Chinese banking regulators have told the country’s lenders (last month) to “stress test” themselves for the fallout resulting from a potential 60% (!) decline in residential property values. Recall that previous stress scenarios only went as far as to assume a circa 30% drop in prices. Over 1.4 trillion dollars’ worth of new loans were made to borrowers during the course of 2009.

Clearly, not every one of those buyers was made up of a nice nuclear working family looking for new shelter. Housing prices blasted off into orbit in Q1 of this year, gaining 68% year-on-year. Don’t know what you call that, but around here, the dictionary contains an image of a rainbow-coloured soapy spherical object under that kind of appreciation percentage.

On the other hand, this morning, the appreciation in the ISM’s index as relates to the services sector (to a reading of 53.4) boosted the US dollar back to 80.90 on the index, back above the key 200-day moving average. In turn, the euro slipped under the 1.32 level following the strong(er) set of US data. Risk appetite could once again make an appearance in the wake of this morning’s US economic statistical figures duo.

Meanwhile, the appetite to bicker over the wisdom of keeping or discarding tax cuts currently in force in the US grew another notch this week, as Treasury Secretary Geithner literally took to the road this week to lay out the Obama administration’s proposals to rein in spending and raise revenues; the solutions it envisions as best in order to tackle burgeoning deficit numbers.

Groups with a questionable pedigree, such as the “League of American Voters” have now taken to the US airwaves with scary ads delivered in a menacing tone by hired spokesmen such as actor-turned-politician Fred Thompson (formerly on the GOP ticket as a Presidential candidate), while Mr. Geithner tried to make it clear this morning that the Bush administration’s “misguided” policies have resulted in Americans now living “with the damage.”

Damned if you do (try to bring deficits in line), damned if you don’t (keep the top 2% of taxpayers happy).

Happy Trading.

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

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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