Mild profit-taking emerged as the midweek metals’ trading session got underway in New York this morning. Following Tuesday’s aggressive pushes to the upside in various commodities, the buying appetite faded a tad overnight in the wake of China’s unsurprising announcement that it will hike interest rates yet again, come tomorrow. This will be the third interest rate hike that the Chinese central bank has set into motion in the current year.
The only surprise in the matter was the fact that the PBOC did not wait until Sunday night to take action, as had been speculated yesterday. The country is tackling the strongest inflationary headwinds to be felt since the summer of 2008. As well, after Moody’s sliced another notch from Portugal’s credit rating (this time, let’s call it “junk”) the US dollar picked up additional energy and rose to the 75.05 level on the trade-weighted index; a factor that was not lost on the metals’ specs this morning.
Spot gold dealings opened with a $2.40 per ounce loss in New York and the bid-side quote came in at $1,513.90 against the stronger greenback. Crude oil’s 58-cent slippage to $96.21 per barrel helped depress the yellow metal somewhat as well. Black gold gained nearly $2 on Tuesday, for no apparent logical reason (certainly, the weaker euro and lackluster US factory data were not contributors to its rise). Specs at play in thin, summertime markets, making for outsized moves in assets that would prefer to be snoozing; what else is new?
Silver fell by 11 cents on the open; it was quoted at $35.37 basis spot bid. Platinum and palladium lost $6 and $2 respectively, to start off at $1,733.00 and at $770.00 per ounce in New York. No changes were noted in rhodium; the noble metal was still parked at $1,925.00 on the bid quote. At this juncture, those market participants who are not off at the shore enjoying the breezes will turn their attention to the weekly initial unemployment claims and the non-farm payroll numbers due tomorrow and on Friday.
In the meantime, additional gains in the metals ought not to be ruled out as the European debt turmoil still presents chain-reaction-like potential dangers and investors might wish to remain on the safe side. As such, we could have a second day of tandem dollar-gold gains. The euro could of course receive a bit of a boost from tomorrow’s almost certain to come interest rate hike by the ECB. Prior to that event we will also hear from the Bank of England and its monetary policy committee.
As regards today’s ISM service sector index figures, well, they did show a bit of shrinkage in June. The index fell to 53.3% from 54.6% in May; that was about six-tenths of a percent worse than economists had anticipated. However, the reading still indicates expansion as opposed to contraction as it remains above to 50% mark. The greenback retained its early gain in the wake of the ISM data and it remained above the 75.05 level as the mid-morning wore on.
Another item certain to draw the markets’ and the media’s interest tomorrow will be the bi-partisan talks to be held at the White House on the issues of America’s debt ceiling and spending cuts. President Obama made a second, public plea yesterday and urged leaders of both US political parties to re-group and aim toward finalizing an agreement on these topics. Mr. Obama also advised said leaders to “leave their ultimatums at the door” and to do the same with political rhetoric in order to do that which would be best for the US economy and the people. The August 2 potential debt default date still looms and Mr. Obama does not want the resolution of this matter to “come down to the last second.”
New York Times OP-ED columnist David Brooks notes that “President Obama has a strong incentive to reach a deal so he can campaign in 2012 as a moderate. The Senate majority leader, Harry Reid, has talked about supporting a debt reduction measure of $3 trillion or even $4 trillion if the Republicans meet him part way.” However, Mr. Brooks goes into further detail on that which he sees as “the mother of all no-brainers” i.e., the opportunity for the GOP to “put the country on a sound fiscal footing.”
As Mr. Brooks sees it, the U.S. Republican Party “may no longer be a normal party.” How is that? Well, writes Mr. Brooks, “the members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.
The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it. The members of this movement have no sense of moral decency. A nation makes a sacred pledge to pay the money back when it borrows money. But the members of this movement talk blandly of default and are willing to stain their nation’s honor.”
A final item of potential interest in today’s abbreviated post concerns the fact that, apparently, the lending spigots in America’s banks may finally be turning to the “open” position after having been stuck shut for quite some time now. If the recent gains being tracked in the average credit score in the USA are indeed here to stay, well, perhaps the entire credit and lending landscape might be finally improving in the country.
Analysts say that the average credit score for individuals is a good metric for the probability that a lender will be paid back. That average score has recently risen to 696 and it is at its highest level in nearly five years. As well, the US’ ratio of consumer debt to incomes is at its lowest level in more than fifteen years. Perhaps most importantly, loan delinquencies in the US have decline by 30% over the past 24 months. This situation is a radical departure from the scenarios being depicted in various hard money publications; a gloomy picture of an American consumer indebted to the hilt, unable to do anything but roll over and experience credit death.
James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis strongly disagrees and offers a bit of myth-busting: “The financial situation of the [American] household sector has improved far faster and far more than everyone thought it would two years ago. People are still locked into the view that consumers are facing record burdens, and they are not. There has been a change that is sustainable and durable.” Thus, the fairytale of the “zombie consumer” is not at all applicable to the American version of same – not at this juncture, anyway.
Until tomorrow,
Jon Nadler
Senior Metals Analyst - Kitco Metals
