Geopolitical turmoil made an unwelcome reappearance on the scene overnight as North Korea’s 200-plus artillery shells landed on South Korean territory and prompted return fire as well as the scrambling of the latter’s fighter jets. The death of two S. Korean marines and the wounding of a dozen other military personnel raised tensions to sufficiently high levels to elicit declarations of support and concern from the White House and the planning of an emergency UN Security Council session.
Although most markets (MSCI Index, Asian stock markets, the Dow) reacted negatively to the hostilities, there was at least one beneficiary that showed further gains on the back of them: the US dollar. The greenback rallied 0.70 on the trade-weighted index (reaching 79.30) as global investors pushed the ‘risk-off’ button and fled to its relative safety following the news from the Korean peninsula.
Also playing into the US currency’s latest gains were revised GDP figures showing the American economy actually expanding at the 2.5% rate during Q3, as opposed to the previously reported 2% pace. The GDP data improvement did not manage to offset the scare factor descending on various markets in the wake of the military incident that unfolded overnight.
The strongest component in the GDP data breakdown was the category of ‘business investment’ – up by more than 10%. One area of economic activity that continued to manifest rather tenuous conditions remains in housing. US existing home sales fell by more than it had been anticipated for the month of October. Although the monthly decline was on the order of only 2.2%, the NAR report also found that sales were down 28% compared to the figures for the same period in 2009, and that median US home prices fell by nine-tenth of a percent from their one-year ago levels.
The concern that Irish debt problems might yet spill over into other eurozone countries also helped push the US dollar to higher levels. Germany’s Finance Minister rekindled the touchy topic of the fate of the euro being at stake and urged other EU members to continue further consolidation efforts aimed at slicing significant amounts of extant budget deficits. It is widely thought that a collapse in the common currency would send a sizeable tide of flight funds into the US dollar, as alternatives are quite scarce.
Meanwhile, Irish woes or not, the broader region’s private sector grew at a quite faster-than-anticipated pace this month, boosted by robust activity on the services as well as manufacturing fronts in France and Germany. Thus, at this point, the global economy shows that is it clearly on the mend even if certain ‘exceptions’ (read: China slowing ‘on purpose’) might become manifest in coming months.
One of the metrics being tracked and also showing signs of much-awaited improvement in the US economic picture is the job market. The most recent set of labor market statistics indicates that US payroll ranks rose in 41 states last month (California and Michigan led the gainers) while unemployment rates sank in 19 US states.
The trend is certainly welcome, however it still leaves eight states with joblessness levels of more than ten percent. The upcoming holiday shopping season is expected to help improve the labor market conditions, as hopeful American retailers will likely hire extra workers.
Gold prices were initially held in check as attempts to build on geopolitically induced gains were countervailed by mounting weakness in the euro. That was true up to a point only, however. Gold has historically shown strong bids in the wake of projectiles flying between countries, and this morning was no different.
Although options expiry, the impending truncated trading week, and the vigor being exhibited by the dollar all played into gold and other commodities’ market participants’ caution during the initial couple of trading hours, the yellow metal did manage an advance to as high a level as the $1,380.00 one per ounce, later in the session. The safe-haven nod being given to gold did not translate into corresponding gains in the white and noble metals’ sector however.
Silver lost 31 cents and fell to a low just above the $27 level in early trading. Platinum dropped by about $15 to the $1,646.00 mark and palladium declined $12 to reach the $681 mark. Rhodium was down $10 quoted at the $2,290.00 per ounce bid price. Volatility is set to continue in the coming hours and tomorrow as well, as players roll positions into the February contracts and square trading logs ahead of the Thanksgiving holiday period.
CFTC data showed a fairly sizeable exodus out of bullish positions in the wake of last week’s price declines in metals. The trimming of long positions represented the fifth such weekly decline in the gold market’s COT report and the seventh consecutive one in silver. Platinum and palladium positions showed a similar pattern of position cutbacks among both managed-money and non-commercial players.
Stage players at the San Francisco Hard Assets Conference tendered varying opinion on the prospects for gold prices going forward. In this Marketwach video clip, the ‘bulls’ outnumber the ‘bear’ by 2:1 but all of them agree on the vital need for gold ownership in a time of uncertainty. The emphasis is on the wisdom of a gold allocation as opposed to pure price performance (unless, of course, one has placed most of their fortune in the metal in anticipation of doom, and simply must expect hyper-performance from the asset as a consequence).
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America