Overnight gains in the U.S. dollar against the euro moderated gold buying overseas and actually gave rise to a modicum of profit-taking among hitherto unflappable speculators. Though dropping to near $1,310 during the wee hours can hardly be called a “correction,” the yellow metal could possibly be exhibiting the first signs that a departure from the norm that has had it notching new records on a daily basis of late could be in the cards.
Monday’s metals market action commenced with modest declines across the boards as the U.S. dollar regained some of the ground it lost last week. Spot gold dealing opened at $1,314.30 per ounce, down $4.30 while silver fell 7 cents to start at $22.02 after a brief overnight dip to under the round figure. Platinum and palladium were off a bit as well, the former losing $5 and opening at $1,670.00 and the latter dropping $4 to start the day off at $569.00 the ounce.
The U.S. currency, meanwhile, climbed to 78.35 on the trade-weighted index following an initial dip against the common currency in the wake of remarks by Premier Wen of China. It may turn out that, no matter what the final intensity of the U.S. economic recovery’s slowdown turns out to be, the rest of the world may just get by without suffering too much.
While the U.S. economic engine still amounts to better than 18% of the roughly $78 trillion global, there is one school of thought (as embodied in Merrill, Credit Suisse, and Goldman analysis) that sees only muted global effects from the rough idle conditions manifested by the former. At the root of it all, is a diminished reliance on U.S. trade. Only a severe case of contraction exhibited by the U.S. economy would endanger the rest of the globe’s economies and revive a deleterious contagion.
The Chinese leader noted that his country will support a stable euro and not reduce its euro-bond holdings. Following that speech (to the Greek parliament, no less) the euro did in fact fade, amid news that Spanish joblessness spiked to above 4 million and that economist Joseph Stiglitz diagnosed the eurozone as possibly terminal “due to competitive tensions within the region.”
Meanwhile, those same smug-as-a-gold-bug-in-a-golden-rug players who have aggressively sold the greenback to buy something yellow with, are now suddenly noting that bullion did in fact rise some six percent over the last month; but did so, basically…only in dollar terms (the metal lost 2.25% in euro translation). Not a development that generally makes for sustained moves to lunar orbit.
Lunar or not, the achievement of the $1,320 price point last week does usher in the possibility of a foray into the ultimate EW target area of $1,375-$1,385 before a larger decline materializes. All of the odds-making about such actions hinges on – you guess correctly – the Fed.
Fed-centric obsession will likely continue all the way up to the November 3 meeting of same. As well, Fed official-originated statements will continue to be parsed with all the care generally reserved for radio signals coming from the SETI program of not long ago. Philly Fed President Plosser told the Financial Times that – to put it bluntly – the Fed must not launch a new round of asset purchases without consideration about what it is that it is trying to achieve, exactly.
Them’s probably fightin’ word to the Fed’s Mr. Dudley, who, last week helped heat up the climate in the gold market with his “let’em have bonds” statements. Mr. Plosser sees little harm in experiencing ‘one or two months of deflation’ –an obvious jab at Mr. Bernanke’s deflation-obsessed language (and intended actions).
At any rate, Mr. B is likely to have his policy hands full – or fuller – next year. “The Three Hawks” (Plosser, Fisher, and Kocherlakota) – Fed non-voting members who will morph into voting ones come 2011 – are set to give him a run for the…money. In fact, it is now largely true that if the Fed wants to pull the QE trigger this quarter, and do it with only one (voting) dissent, well, it had better do so, and quick. As it was pointed out here last week, internal warfare at the Fed is heating up and could boil over around the time the tipping point in policy materializes. We’ve put a ‘sell-by’ date on that to June-September of 2011.
War of words or not, the very efficacy of the bond purchase program by the Fed is also very much in doubt. Not to mention one of the potential outcomes of same; higher (not a typo) interest rates. Yes, such a shopping spree by the U.S. central bank could actually push borrowing costs higher. Say what? Well, the markets are certainly acting (i.e. is pricing in, as seen in T-note yields and gold) as if the Fed has already bought somewhere between $300 and $700 billion of assets. That could mean there is very little room for additional gains when and/or if the Fed does open up its wallet. Any downturn due to disappointment over not having such candy made available to markets could be brutal.
Yet, there are some other ‘subtle’ indicators that some other behavioral patterns could be flashing to this market; however, the ‘ignorance is bliss’ syndrome present during practically every trading day in September (and certainly over that month’s final two weeks) remains manifest and still dominate among participants. For example, there is no apprehension about the fact that – in typical historical fashion – governments (read: central banks) are last to act on a trend.
There is more than one chart floating around (and easily findable) in the blogosphere that shows the near-perfect inverse correlation between gold prices and central bank buying/selling of the metal itself. While many see a new paradigm in the recent slow-down of gold disposals by the official sector, there are also those who point out that urgent calls to back up the gold-buying truck were being issued precisely when certain brilliant minds were dumping the stuff out of U.K. and Swiss vaults at prices under $300 between 1999 and 2002. Well, that paid off rather handsomely, no?
What exactly has changed? If in fact buying the metal is supposed to be a vote of total lack of confidence in ‘gubmint’ actions, then what exactly is it about those same central banks’ acquiescence (and implied bullishness) to buy and/or to hold on to gold at an all-time high that gives comfort and…confidence? Beware when you are told ‘this time it’s different.’ We’ve seen that movie, too.
Previews of coming attractions, on the other hand, shows a bunch of ‘action’ headed the markets’ way this week. Monday’s tallies will include pending home sales and August factory orders. Later in the week, several central bank interest rate decisions will be the main feature. Finally, as the week turns into the home stretch, the bellwether U.S. initial jobless claims and Friday’s unemployment report will fill the screen(s) for market spectators (and active players, mostly).
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America