Gold volume spikes as debt uncertainty rises

In the Lead: “Deal Or…No Deal?”

South Africa’s state-owned power utility, Eskom, sweetened is wage offer to unionized workers in a bid to avert a strike that might have serious impacts on the mining industry in that country. However, the freshened offer – now at 7% – is still some distance away from the 16% that workers have been demanding. Labor difficulties continue to impact the smooth production of South African fuel, paper, chemicals, diamonds, coal, and of course platinum-group metals as well as gold.

Speaking of not-so-hot fundamentals, the latest in tallies – courtesy of ABN AMRO and the VM Group – finds that the gold market remains in a near 1,200 tonne surplus mode. A total global gold supply of 4,116 tonnes is being projected by the VM Group, whilst demand is forecast to be 2,926 tonnes for the year. Mine supply is slated to touch a fresh record (2,523 tonnes) and so is scrap supply (1,501 tonnes).

A similar statistical position is the paradigm in silver, where the label “Shortage? What shortage?” amply applies at this time. The white metal is projected to tally a surplus of nearly 8,000 tonnes in 2011. This, as total supply is estimated to come in at 36,143 tonnes courtesy of an output of 25,000 tonnes from the world’s mines and a near-11,000 tonne inflow from scrapped metal. Demand on the industrial side might likely remain steady at near 12,700 tonnes.

In the background, crude oil was trading about 2 pennies shy of the $99 level as players anticipated a resolution to the US’ budget ceiling issue and as they perceived the EU rescue package as a positive for the region’s economy. As it turns out, the EU’s industrial orders expanded at a faster-than-anticipated rate (3.6%) in May after a bit of a slump (-0.1%) that was experienced in April. The US dollar was up 0.13 on the trade-weighted index; it was quoted at 74.17 at last check. The euro, on the other hand, advanced to beyond $1.44 following the EU rescue package news.

Meanwhile, in Washington, President Barak Obama and House Speaker Boehner were trying to cobble together an agreement to hike the country’s debt ceiling while also cutting government spending by a meaningful sum in the trillions. Mr. Obama was however seen as facing resistance by his own party’s leaders rank-and-file due to the fact that he was perceived to be giving away core Democratic priorities in his efforts to strike a deal with the GOP.

Moreover, the “Dems” have expressed overt concerns that the Tea Party’s agenda appears to be prevailing in the deal-making; something they see as unacceptable. Today essentially marks the beginning of “crunch-time” in DC; recall that the initial date that the White House had set for the striking of a bi-partisan deal to resolve the matter, was, in fact, July 22nd. The logistics of the legislative process basically imply that in order to allow for sufficient time for such decisions to pass, a deal must be made on this very day. Tick…tick….tick….and as of 10AM Mr. Boehner dismissed reports that there might be an agreement with Mr. Obama. Good for a $16 pop in gold courtesy of the ultra-long crowd. Deal or no deal? Quick, someone call Howie Mandel and have him sit betwixt Messrs. Obama and Boehner. Ms. Pelosi ain’t even invited.

The clock also appears to be ticking for China’s central government as far as it having to take pre-emptive action to avert a tidal wave of bankruptcies that some experts say could cripple its (and the global) economy. A high-profile lobby, the All China Federation of Industry and Commerce has urged Beijing to concentrate on doing something in order to prevent some 7.5 million (!) businesses in the country from going belly-up as they face tightened credit and rising inflation conditions. Such a mushroom cloud of business failures would clearly have a deleterious impact on China’s economy, and perhaps more than just that. China’s property bubble is indeed shaping up to have potential ramifications that are just now beginning to crystallize, and they appear to be anything but confidence-inducing.

Property ownership, on the other hand, appears to be a fad that is so “last century” as far as Americans are concerned. The USA is fast becoming a nation of renters, according to the latest computations by Morgan Stanley; the firm found that home ownership in the States has now fallen below 60%. To be clear, the falling off from the 66.4% level at the end of March to the 59.7% mark tallied by MS factors in the estimated 7.5 million delinquent homeowners who might soon be forced to sign rental agreements in lieu of redecorating their 3,000 sq. ft. McMansions. Hmmm….marriage, steady jobs, home ownership. Who knows what’s next on the “endangered species” list for the American dream and American societal aspects?

In the meantime, enjoy the “buy everything, no matter what the excuse is” syndrome that has gripped the specs once again (okay, all but those who dabble in the Dow – at least today) and have a pleasant weekend. Deal?

Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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