Gold advances capped by dollar strength

Good Morning,

For the first time in six years, Japanese authorities drew one step closer to halting the seemingly endless gains in the yen via Finance Minister Noda’s cryptic message that his government will take “appropriate” action with regard to the currency. Japanese exports have come under threat from the gains the yen achieved following the Fed’s steps to boost US economic recovery on Tuesday. The currency rose beyond 85 against the US dollar; a fifteen-year high.

The US dollar, meanwhile, showed no signs of giving up any of yesterday’s huge gains it achieved on the trade-weighted index. It was last seen trading at 82.55 and at $1.283 against the euro. The greenback also achieved gains against the Chinese yuan (which fell by the most in nearly two months) after the less-than-rosy outlook for the US economy and the emergent slowing on the domestic front prompted the PBOC to lower its daily reference rate for the currency.

Our roundup continues with news from the Old World. The industrial output level of the euro zone declined in the month of June –led by steep drops in France and Germany. However, for the second quarter as a whole, figures to be released tomorrow will show that the regional GDP grew at what is considered a “solid” 0.7% or more.

Europe is suffering from largely the same syndrome that is currently affecting the US; namely, a background of apparently quite cheery data on inflation (nowhere to be found) and business and consumer sentiment levels. The missing link? Consumer demand. The end result? Good old “slack.”

Economic conditions continue to reflect a mixed-at-best bag over in the US. Home foreclosures jumped by 9% in July –some 93,000 US homes were repossessed by lenders during what marked the 17th straight month of foreclosure filings in excess of 300,000 units. Nevada leads the hit parade, with one in every 82 homes being foreclosed upon.

Underscoring such grim news on the real estate front, the US administration injected some $3 billion into programs designed to keep at least some unemployed homeowners keep their homes, for a while longer at least. Trouble is, even if 400,000 troubled borrowers do receive such assistance, some 3 million are facing possible foreclosure; not a ratio to write…home about.

Against this background of market angst and economic anemia, gold prices recaptured the $1,200 mark overnight, following Wednesday’s sub-$1,200 afternoon spot close. The yellow metal was confined to a fairly narrow overnight $10 range (of from $1198 to $1208) and additional advances appeared capped by persistent dollar strength and declines in other commodities (oil comes to mind, posting a further $1+ loss and falling under $77 per barrel) on the back of worries about global economic growth patterns.

At this point, is it relatively safe to say (and not only judging by yesterday’s 265-point cave-in in the Dow) that the dollar, the yen, and a bit of gold are back in safe-haven fashion after the Fed’s implicit admission that more (time or money) is needed to get the derailed economic freight car back on track.

Questions remain as to gold’s ability to make a run for “it” (higher than $1230+ levels) in the wake of possible margin calls from the stock market’s cratering, and in the face of serious muscle being flexed by the US dollar. The market is looking once again at help from the spec fund world and must-have ETF inflows to help regain the footing it lost in July. Recent (small) additions to the gold ETF are thus quite welcome by the bulls.

Goldman Sachs offered up a $1,300 gold projection within six months, should ultra-low interest rates and further QE gestures by the Fed remain on offer. New highs without a June euro-style crisis? Why, that’s as strong an acknowledgement of the carry trade as applied to gold as has been heard yet. Since the days of the oil (and later euro) rallies to records.

New York spot metals trading opened with a $7.20 gain in gold and more modest advances in silver and other precious metals. Spot gold was quoted at $1,205.10 on the bid side, while silver gained 10 cents to open at $17.98 the ounce.

Platinum rose $2.00 to start at $1,517.00 while palladium moved $3 higher to the $467.00 mark. First-level technical resistance demolition, near $1215, appears to be the order of the trading day for today in gold. Initial jobless claims (highest since February, at 484.000 filings) helped gold as well as the dollar higher after their release.

General Motors is said to be seeking to raise $12 billion or more (perhaps as much as $16 billion) in an IPO that could become the second-largest in US market history. The firm is currently 61% owned by Uncle Sam. Now that the parenting appears to be something that was justifiable, the firm once again aims to reclaim its spot among the companies that lead the US stock market. GM posted its second straight quarter of profitability ($1.3 billion) this morning and it cited strength in the North American market among the factors that helped it achieve the feat.

No change was reported once again in rhodium, last bid at $2,100.00 the troy ounce. In the background, we have the US dollar posting a 0.14 gain on the index (to 82.64) and crude oil deepening its losses with a $1.40 drop to $76.62 per barrel. Dow futures once again indicated more selling in store for the Thursday session. Missed revenue targets by Cisco helped the bears in the equity market remain the dominant species on the trading floor.

Fretting about the (rising) odds of a double-dip will remain on the front burner as the week draws to a close. US numbers of the economic statistical variety are certainly not helping allay such anxieties. Got (10%) gold? Got dollars? Got yen? Got a quick exit strategy from stocks? Got patience to sit this mini-storm out? Of course you do. Next week is just around the corner (and so is much more data to sink your teeth into). Just be careful in loading up on certain assets if in fact the world is turning Japanese. We have all previously witnessed what massive asset fire-sales can bring about.

In the interim, run; don’t walk, and do find this most insightful article written by Michael Casey for the Wall Street Journal.

Yes, the link (http://online.wsj.com/article/SB10001424052748704901104575423712979117210.html) is included, albeit it might lead some of you to find that the story is accessible by subscription only. This piece alone, however, is worth the effort of signing up. Mr. Casey encapsulates that which is currently afoot on the world scene better than most of what has been posted in recent months. Here are some teasers from his brief but brilliant story entitled “Plunging Markets Show Global Policy Failure”

· The 21-month high in the U.S. trade gap in June contains all you need to know about the great global deflation threat and the structural imbalances behind it.

· Right now the rest of the world should be buying U.S. exports. Instead, it is using the sickly U.S. consumer as a cheap fix for its own problems. The world is addicted to U.S. demand. With Wednesday's surge in the dollar, we are feeding the addiction even more. Ultimately, as the U.S. economy weakens, so does everyone else.

· It's tempting for the Chinese authorities to do nothing. Recent credit-tightening moves are deflating a property bubble and easing the recent inflation threat.

· With the Fed looking like it's out of ammunition (even if that's not true) and since few in Washington can stomach more deficit-expanding fiscal stimulus, tariffs could become the path of least resistance for creating U.S. jobs.

· For too long "global rebalancing" has been left in the “too-hard” basket at international forums. The idea of boosting savings in deficit countries and consumption in surplus economies gets G-20 lip service but little more.

Until tomorrow,

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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