The Basel III accord struck a chord with investors during the late weekend hours and as the new trading week got underway this morning. Risk appetite was on the mend in Asian markets on Monday following the Basel Committee’s announcement that new capital rules – albeit requiring more than double the level of minimum equity levels for institutions – were neither as stringent as anticipated, nor likely to be a reality across the board for some seven or eight years.
Under the new rules, the minimum capital requirements would jump from 2% to 4.5% and the total equity ratio would rise to 7% from its current 4%. The decision basically implies that many an Asian bank has nothing to worry about, and that many an Aussie bank has much more capital than will be required. Take ANZ for example, with a ratio of more than 11% or Commonwealth Bank with a 10% ratio. Cheers, mates.
For those observers who are still writing dissertations intended to frighten people into mass hysteria about the future of global banking, ECB chief Jean-Claude Trichet had the following summation to deliver at the end of the Basel summit: “The agreements reached today are a fundamental strengthening of global capital standards. Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.” What do you want to bet that so-called “fiat currencies” are here to stay, along with the global banking system? Faites Vos Jeux accordingly. By the way, Mr. T is also confident that the Basel rules will be implemented in the US banking industry as well
The other item of import that drove risk appetite out of the cave of fear it went into, but not much out, of last week was the weekend report that showed China’s economy growing at 13.9% (!) in August. On top of that rate of growth, the country reported strong retail sales and an inflation rate of 3.5%; perhaps not enough to trigger a pre-emptive rate move on the part of local financial authorities.
Meanwhile, in Greece, no less of an authority than the Prime Minister promised more efforts to neutralize the threat of the country’s default and assured his country’s denizens that the imposition of fresh Spartan flavored belt-tightening measures might not be required if Greece stays the course, fiscally speaking.
The expected consequence of such gains in risk appetite also became manifest as the new week’s New York metals trading sessions opened for business; gold took a safe-haven-on-the-wane-flavored price dip while industrial metals remained well-bid (with silver less so than platinum and palladium).
The opening signal had the yellow metal down $2.60 an ounce, at $1,244.10 and then slipping lower, to $1,240.10 per ounce in the first twenty minutes of action. The Kitco Gold Index was showing the precious metal turning less precious by $12.20 per ounce on account of predominant physical selling by funds, while the much weaker US dollar (which also fell victim to easing risk aversion) – trading at 82.24 on the index – was lending a $9.60-sized hand of support to prices.
Platinum remained relatively firm, showing a $9 gain at $1,549.00 while palladium also rose, adding $2 to start the session off at $520.00 the ounce. The noble metals continue to receive price support from the estimated loss of circa 1,000 ounces of platinum in daily output by the strike unfolding at producer Northam in South Africa.
Silver opened with a gain of one nickel, quoted at $19.93 but later turned to unchanged-to-down a penny (at $19.87) as the selling pressure from the gold pits spilled over into the white metal. Underscoring once again that the entrée of speculative funds has yielded mushrooming precious metal ETFs – and given rise to new risks in the marketplace – was the finding that the iShares Silver Trust outperformed its golden cousin (the GLD) by a factor of almost three in August.
However, Ms. Catherine Raw, a portfolio manager at BlackRock Inc. opines that while it has become quite clear that the advent of such funds has lent a tremendous hand of support to silver prices, the same phenomenon poses a rising risk to same; precisely in the manner that the situation in the gold niche has morphed into. "Physically backed metals ETFs are a source of demand in the marketplace now," she noted. They could become a source of supply in the future."
Add to that, the observation by Morningstar ETF strategist Paul Justice that “it should be noted that silver isn't a foolproof inflation hedge," he wrote. "Unlike gold, silver has industrial applications, which means it's more likely to fluctuate with economic ups and downs."
Highlighting the similar, ETF-engendered paradigm in gold bullion, Waverly Advisors, in a September 3rd strategy note advised caution if gold prices rise to new highs and later show signs of weakness. "There will be many trapped bulls, and with the public increasingly involved in this market through ETFs such as SPDR Gold Shares, there could be a dramatic stampede for the exits," the investment firm said. We brought to your attention last week the fact that DailyFX strategists had found that a whopping 89% of the variance in the spot gold price is explained by variance in the holdings of the SPDR Goldshares ETF.'
Perhaps some of the above has led to a recent assessment of prices by the Economist Intelligence Unit (EIU) suggests that “predicting [gold] prices in the period ahead can be tricky business.” According to the EIU report, expert sources in the international gold industry are exercising more than a hint of caution about future gold prices. The report says that “Phillip Gibb, manager of the 600 million pound Jupiter Absolute Return Fund, recently sold out his position in gold.” One Seeking Alpha analyst tendered the assessment that “gold looks expensive relative to stocks and to agricultural commodities on a historical basis.”
Expensive or not, history also however shows that keeping a core allocation in the yellow metal for a just-in-case eventuality is not only prudent, but perhaps absolutely essential. Not wearing a (golden) helmet while riding the wild investments bucking bronco has its risks as well, obviously. It just does not mean that the helmet has to be as large, or larger, than the rider, or in some cases the stallion.
Happy galloping over to the Kitco eConference this morning! Giddy up!
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America