Gold slip underlines equities correlation

Good Morning,

A fresh surge in the value of the yen brought the Japanese currency nearer to the 84 mark against the US dollar (a fifteen-year high of 84.17 was recorded overnight) and a further step closer to direct currency market intervention. The operative words used to jawbone against these gains were no longer “undesirable” or “worrisome” but more like “grave concern.” Guess what happens next, when such words are uttered at “emergency” press conferences while the backroom shop talks to the G-7 nations on the hotline…

Naturally, the Nikkei average fell overnight, losing over 120 point as the nation’s currency was soaring. The rest of the global equity markets did not fare much better as Tuesday’s trading sessions unfolded in various locations. Worries continued to linger about the fate of the global economic recovery as players awaited a slew of US reports ranging from home sales to durable goods orders, and from consumer confidence to revised GDP numbers. As the week wears on, so will any number of nerves belonging to apprehensive investors the world over.

Gold prices fell for the third day in a row, and to well under the $1,220 mark during the overnight and early Tuesday overseas trading sessions. Spot New York dealing opened with a $12.80 per ounce loss in the precious metal, which was quoted at $1213.10 as against a 0.19 gain in the greenback on the trade-weighted index (to the 83.54 mark) and as against a freshly slipping euro (down to 1.258).

Once again, the headlines relating to gold’s slippage served to underscore its recent positive correlation to equities (and certain currencies); assets against which it normally moves against, but ones that the entrée of speculative hedge funds into the bullion market has now morphed into the current paradigm. The yellow metal traded at one-week lows near the $1,215.00 level in the wake of the “generalized selling.” It was—once again—the dollar’s turn to grab “safe-haven” related headlines this morning.

Thus, this morning, there were more than a few news outlets citing “everything is falling and being sold off” as the reason for gold not doing what it is actually supposed to do under such circumstances. “We will continue to see lower gold prices,” said Wallace Ng, Hong Kong-based executive director with ABN Amro Securities Asia Ltd. “It is following the weakness of general markets, like stocks, commodities and energy.”

Crude oil was also on the defensive, for a fifth straight session this morning, losing yet another $1+ to drop to near the $72.25 per barrel price marker – a fresh seven-week nadir. “Investors in crude futures are now at a crossroads,” according to Olivier Jakob, an analyst at Petromatrix.

“Traders who previously built long positions when oil futures were at these prices, among the lowest of the year so far, must now choose either to add to their long hedges and support a bottoming of the price collapse or start to be exposed to margin calls if the oil market continues to slide down," Mr. Jakob said, according to the Wall Street Journal.

Silver prices opened weak as well, with the white metal losing 14 cents to start at the $17.85 per ounce level on the back of industrial demand-related jitters. Platinum and palladium continued to feel the impacts of continued fund profit-taking and slipped lower as well. The former dropped $16 to the $1,490.00 mark, while the latter declined $10.00 to start at the $472.00 per ounce figure. Primary demand from the automotive users appears to run into difficulties above $1,500 and $500 respectively, for the two noble metals. Spec funds, on the other hand, (not unlike in gold) continue their high-wire act in the niche.

There were a few scattered bright spots in the financial news flows this morning, however. Germany’s Q2 growth picked up the pace, driven by a surge in exports and a notable increase in consumer spending levels. A 2.2% gain in the country’s GDP qualified for the label of “strongest/fastest” quarterly growth rate since the country was reunified.

Such a robust bounce-back as seen in Germany did not appear to faze Joseph Stiglitz— the Nobel Prize laureate in whose opinion the eurozone region is still at risk of falling into recession once again, in a classic case of double-dip. Mr. Stiglitz dismissed the EU’s efforts to cut deficits to below the 3% of GDP “target” rate and is concerned that underneath the rosy statistics lurks a weakening regional recovery.

Amid such on-going concerns, the news that European banks may be stress-tested more frequently comes as relatively encouraging news. In fact, testing the soundness of the region’s lenders may now turn into a periodic ritual (period as yet unknown) following the less-than-confident welcome (by investors) that the last such round of examinations was met with. In fact, the numbers were openly challenged by skeptics as “not credible.”

Nevertheless, the procedures have resulted in the publication of the balance sheets of the institutions in question and they are thought to be reason enough to bolster confidence levels among members of the investing public. Aha. The investing public has been burned by so much hot soup over the past several years that they are now seen blowing on ice cream…just in case.

Someone else exhibiting signs of caution: at least seven of the Fed’s 17 officials. Most of them either opposed or were uncertain about the US central bank’s decision to continue to stimulate and not yet head for the exit door of the accommodations room. Mr. Bernanke prevailed, at the end of the day. His obsession with not falling into a replay of you-know-what-year is famed. Yet, at this juncture, he finds himself at odds with Messrs. Hoenig, Warsh, and Fisher. An August meeting to remember could morph into a series of final three such 2010 get-togethers full of open dissent.

No dissent over in California Attorney General Jerry Brown’s office; it sued TV tax “resolution” guru Roni Lynn Deutch for $34 million for allegedly swindling thousands of her clients. How do you spell relief? T-A-K-E from those who come to you for help. Ouch. First, Dr. Laura quits radio over the “you-know-what-letter-that comes-before-O” word. Now, the tax help star might vanish from TV. What will the audience be left with? Apparently, only bar and cub tips from Snooki.

However, well before we are faced with that kind of an infernal reality—Paul B. Farrell assures us—we will actually have WWIII on our hands; before 2020 rolls around. Mr. Farrell envisions all-out warfare over food, water, and essential energy supplies. Forget gold. Trading a gallon of H20 for a cup of wheat will be the new “it” trade, according to Mr. Farrell.

Sounding every bit the standard hard-money newsletter oracle, Mr. Farrell blames the human genetic predilection for war – that, and a liberal dose of greed, arrogance, and…the Righteous Right, for what is sure to come (in his playbook). As dark and foreboding a piece as was ever written for Marketwatch. Forget 2012. The new watch-out-for number is the double twenty. That, and Newt Gingrich’s poll numbers.

Happy Bunker Building.

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

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

About the Author
Jon Nadler

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

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