Gold caught in consolidation limbo

In the Lead: “Who Needs Crab-Fishing When You can Drive a Lambo?”

Thursday was official sector news day as policy decisions from the ECB and the BoE hit the wires early in the trading day in North America. Coming in with less of a surprise than Sarah Palin’s not running for the US Presidency, the ECB left rates unchanged at 1.5% citing conditions in the eurozone. The reins at Europe’s central bank will be handed over by Mr. Trichet next month to the current head of Italy’s central bank, Mario Draghi. That gentleman has his job cut out for him as he steps into the office being vacated by Mr. Trichet after eight years.

Pundits expect a cut in the ECB’s key lending rate sometime between December and March. Mr. Trichet urged European banks to reinforce their balance sheets during the press conference he held after the rate decision announcement. He was echoing the sentiment of Juan Manuel Barroso (President of the European Commission) who said that his agency is attempting to get its member states to recapitalize the banks in the region. Presumably, a fresh round of “stress tests” is in the offing for the banking sector in Europe. This, in order to avert bigger “stress” already quite manifest in the markets and among investors.

Meanwhile, Bloomberg Business Week reports that “In a dramatic turnaround, a senior official for the International Monetary Fund is retracting an earlier statement that the IMF could intervene in bond markets to support struggling Italy and Spain. Antonio Borges says that "The fund can only lend its resources to countries, and cannot use these resources to intervene in bond markets directly." The latest twist comes at a time when anxiety levels are on the rise about the state of the European financial system. France and Belgium are seen as trying their best to keep Dexia Bank from being the first major European lender to roll over and expire since the end of the 2008 credit crunch. The waiting game is on.

No waiting over in London; the Bank of England announced that it will buy 75 billion pounds in government bonds in an attempt not to let inflation fall under the critical, targeted rate of 2 percent. The BoE noted that global expansion has “slackened” sufficiently for it to have made its latest easing maneuver. The pound took a swift pounding in the wake of the bond purchase news and it promptly fell to a 15-month low against the US currency. The latter kept the recent spring in its step intact and advanced about 0.45 on the trade-weighted index to touch 79.41 this morning.

Against this background, the precious metals markets opened ‘in the green’ but gold parted company with the rest of the complex and headed a tad lower. Spot New York dealings opened with a loss of $4.6 for the yellow metal; its bid-side quote was indicated at $1,638.00 the ounce. Bounce-backs to perhaps as high a level as $1,700 are feasible as the metal consolidates from its recent $1,532 low but the next target (as opined by EW analysis) appears to be $1,300.00 per ounce. For the moment, bullion appears confined to the $1,575-$1,675 channel but we all know that out-sized, intra-day moves can easily push that envelope and test its limits (see Monday’s $80+ swing for reference).

Silver started off with a gain of one quarter dollar at the $30.76 level this morning. Whether or not a sprint towards the recent $33.60 high is in the cards remains unclear, however a breach of the spike low that was recently touched at the $26 mark could likely usher in a dip to the $22-$25 value zone. Platinum and palladium staged double-digit recoveries this morning, with the former rising $12 to $1,499.00 per ounce and the latter gaining $19 to touch the $595.00 mark.

Standard Bank (SA) analysts project that palladium’s supply will fall well short of demand and result in an “ever growing deficit” over the coming half-decade. They also feel that platinum will eventually fall into a deficit paradigm as well, but not likely prior to 2014. The team sees price progress to the upside in the two noble metals as a function not as much of demand-pull but of cost-push. Recent declines have brought platinum and palladium much closer to production costs. From a strict investment perspective, and not factoring in the requirement for a core gold insurance position, it is still most likely that the next batch of returns will come from the noble niche as opposed to gold and/or silver.

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