Following a weekend during which Ireland secured a $113 billion rescue package and Korean peninsula tensions remained fairly elevated, the U.S. dollar received fresh safe-haven bids and rose to multi-month highs on the trade-weighted index. The greenback reached 80.75 and its strength kept the commodities complex under pressure, albeit sporadic advances were attempted by speculators at what some perceived were bargain price levels.
South Korea deployed additional long-range artillery missiles on a border island and vowed to make North Korea “pay the price” for its first direct assault on the country since 1953. Although an armistice has been in place since that time, the two Koreas are still technically at war with each other. A top Chinese emissary met with President Lee on Sunday, after China called for a multilateral emergency meeting aimed at defusing the aggravating crisis.
Meanwhile, thanks mainly to the IMF, Ireland got itself a reprieve for several years but will have to undertake a hefty fiscal ‘adjustment’ program intended to tackle its public finances. Spending cuts, tax increases and other assorted unpleasant measure will now be on tap for the country, starting basically right away. In a scene reminiscent of Athens, circa this past summer, more than 100,000 Irish working folk took to the streets of Dublin in freezing weather, protesting the EU/IMF bailout of their country.
Prof. Nouriel Roubini is now suggesting that Portugal should take a bailout ‘pill’ – and soon. Albeit the country is only contributing 2% to the Eurozone’s GDP, the professor sees such a development as perhaps inevitable. More troubling is the situation in Spain. It has been characterized as “too big to fail, but [also] too big to bail [out].” In any event, Roubini is of the opinion that we are eventually looking at a weaker, smaller European union, even if the region does not fully ‘unravel’ back into individual entities and/or its currency does not demise.
MarketWatch’s David Marsh explains the self-feeding loop that is darkening the skies over the Old World these days, as follows: “It was fear of default that drove up government bond yields for the indebted peripheral states on international financial markets last week. This sets up a self-perpetuating spiral in which the better-off states led by Germany profit from lower borrowing costs as international investors pile into their “safe haven” high-quality bonds. As the investment community shuns their bonds in a “winner takes all” action on the capital markets, the worse-off euro members meanwhile see their financing costs rise to unacceptable levels — bringing the danger of a further worsening of economic prospects.”
And, thus, in the aforementioned Roubini-esque angle, “Even highly respected pro-Europeans in Germany are now moving towards the view that one day the weaker countries may no longer be part of the euro — a sign of how grim realism is starting to move to the forefront as the financial and economic mood turns ever uglier across the continent.”
Against this global background, precious metals opened mixed in New York this morning as the first full day of trading resumed following the Thanksgiving holiday. Gold fell $1.90 per ounce at the start of the session and was quoted at $1,362.30 per ounce. The six dollars’ worth of price erosion came from the effects of the US currency’s gains but nearly five dollars’ worth of offsetting gains were the result of funds on the prowl snapping up bullion at lower levels.
Intrepid WSJ reporter Emma Moody recently set out to dissect the gold ETFs and their extant and potential future effects on the gold market. Her colleague, long-time friend and Dow Jones reporter Simon Constable, asked Emma to explain her findings, but both of them came up short of being able to offer a ‘what-if’ scenario in the event gold’s bull run stalls or turns into a ‘stampede’ of…another kind.
We have, repeatedly, pondered what the accelerative effects of such an exit might look like (price-wise) since it is quite clear that the inverse process has added [at the very least] some $150 [and perhaps twice as much] to gold’s present value.
Speaking of value, the latest ABN AMRO Virtual Metals Group Haliburton commodity research team found that the Third Quarter 2010 average gold mine cash cost per ounce of the yellow metal rose by $23 per ounce, to…drum-roll…$585.00 per ounce. That is a gain of 4% on the quarter and it came about primarily as a result of the weakness in the U.S. dollar during the period.
Latin America remains the lowest cost region for gold production globally speaking, with an average cost of $441 per ounce of gold mined. North America came in at the $513 level, an actual decline from the $545 Q1 and $539 Q2 levels. Producers around the world are enjoying a staggering $840 per ounce margin at the moment, but the equation does raise questions of sustainability.
The VM group concludes its report with a cautionary “we are concerned about rising cash costs. The seemingly inexorable rise is not sustainable and it poses long-term dangers to the viability of significant segments of the gold industry.” Unless, of course, one see the road ahead as paved with nothing but four-digit gold prices…in perpetuity.
Silver opened in positive territory, showing an 11-cent gain and a quote on the bid-side at $26.81 the ounce. Mixed price conditions were also present in the noble metals’ complex, where platinum started the session with a $7 drop (at $1,639.00) but palladium advanced $3 to the $682.00 level. Rhodium was steady at $2,280.00 per troy ounce.
Market participants will now be monitoring the fallout from the Irish bailout and the likelihood of any related contagion along with any effect such spillover might have on the euro. For the time being, the common currency remained under duress and was last seen trading near $1.314 against the greenback.
Over in the United States, the focus now shifts to the post-game analysis of “Black Friday” and its sales results. Some 70% of Americans appear to have hit the malls, spending about 6.4% more than they did in 2009. Still, the shopping orgy that kicks off the holiday gift-buying season appears to have netted only 0.3% higher sales levels than last year’s. Players will also be looking ahead at Friday’s unemployment numbers as well as a slew of other economic statistics slated to hit the news wires commencing tomorrow.
Thus, until tomorrow,
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America