Gold and other precious metals prices opened sharply lower this morning as a duo of news from China and from Europe rattled the commodities’ space and sent speculators scurrying towards the exit doors in large numbers. Friday’s commodity niche optimism morphed into gloom as Chinese economic growth figures and potential French downgrades surfaced and landed straight in the middle of the markets.
Spot gold fell $30 to open at $1,641 while spot silver slid 106 pennies to start today’s session off at $30.74 per ounce. Platinum and palladium were not spared either; the former declined $29 to $1,520 and the latter dropped $16 to $601 the ounce. Crude oil fell only marginally, but copper prices fell 2.35% as the news we will cover below made their impact felt nowhere more than in commodities.
The irony that gold ought to actually be moving much higher on account of such troublesome news items has not been lost on some observers. These are some of the very conditions that many a hard money newsletter vendor has been scaring the readership with, for years now. Analysts at Standard Bank (SA) rang a bell of worry this morning when they noted that it is becoming disconcerting to see “that precious metals are failing to garner much interest from safe-haven demand, which reminds us of several weeks ago, when cross-asset liquidations saw gold and silver lose considerable ground. Once again it appears that regardless of the general risk-off sentiment, precious metals look set to suffer the same fate as equities and other risky assets. In addition, as highlighted yesterday, we can expect a period of heightened volatility in the build-up to this weekend’s EU summit.”
It may have taken a while, and a bunch of indecisive moves, but the ‘congestion’ in the precious metals markets appears to have been ‘resolved’ to the downside this morning. The risk of a renewed bout of selling that we pointed to in yesterday’s posting was indeed dependent on how much of an attraction the US dollar might represent for safe-haven seekers and what such a quest might be based upon. That also became clearer this morning, as a one-two punch of rather unsettling news hit the speculative crowd and sent many under the greenback’s relatively safe umbrella. The back gained 0.20 and climbed to 77.33 on the trade-weighted index.
Underscoring the interrelatedness of today’s world, it was reported that China’s economy grew at “only” 9.1% in Q3. While that is a figure that many a country around the world cannot even dream of these days, it is still a pace of growth that is the slowest since 2009. More importantly, the slowing was attributed in large part to the seemingly interminable European debt situation, showing that what happens (or actually does not happen in this case) a world away can and does have consequences in China.
However, the internal picture in the country is not all that rosy, either. We reported last week that the nation’s sovereign wealth fund had invested large sums in the top four Chinese lenders. Analysts have gleaned that the move reveals the level of apprehension that officials are thought to have about the country’s banks.
China’s rate of expansion has been running at a rate some five times higher than that of the US but apprehensions of a hard landing or of a slowing to a rate that – for China – implies trouble have reasserted themselves this morning. Early signs of an unpleasant runway event to possibly come have been discerned in falling land prices in several Chinese cities.
Money supply growth and lending activity showed signs of expanding at their lowest level in a decade and since 2009, respectively. Some China watchers argue that that country’s jarring touch-down may already be underway and that the 40 to 60 percent cratering in year-on-year real estate sales is the all the prima facie evidence of an imploding Sino-bubble that one needs.
Chinese exports to the EU shrank by nearly to 10% of its GDP last month and they had been running and nearly 22% of same in August. To be fair, the Chinese government had actively sought a cooling in the pace of the country’s expansion and inflation levels and had orchestrated a series of tightening moves in previous months (five rate hikes in one year), some of which appear to have taken hold now. The latest statistics might not immediately result in the easing or reversal of such moves, but they might also place on hold any further restrictive ones for the PBOC.
The other news of import this morning was the warning by – who else? – Moody’s that France may be stripped of its AAA sovereign credit rating due to its exposure to the Eurozone’s debt crisis and the state of affairs in some of its banks. Coming on the heels of Chancellor Merkel’s unequivocal warning that the crisis does not have an immediate or comprehensive solution and that we will all be reading about Europe’s trials and tribulations well into 2012, the news could not have struck a gloomier chord with investors. They sold whatever they could get a hold of this morning; equities as well as “stuff.” Raising cash once again became the investment fashion’s flavor of the day. Who can blame them?
Certain investors might well blame themselves in the future, as opposed to today. That is, if their heavy bets on hyperinflation coming to a theatre near us all, do not materialize. See the curious case of one, John Paulson. Not only did the fund wizard appear to ignore Warren Buffett’s first two rules of investing (1. Do not lose money. 2. Don’t forget the first rule.), but he made an enormous bet on an inflationary boom while forgetting to factor in the “what if I am wrong?” safety valve/ escape clause.
MarketWatch’s Charles Sizemore relays that “Paulson had roughly 30 percent of his fund in financials, 15 percent in materials, and 9 percent in oil and gas. Paulson also happens to be the largest shareholder in the SPDR Gold Trust and is so enamored with the yellow metal that he offers his investors the opportunity to denominate their shares in gold. (Though this was a savvy marketing ploy, it has absolutely no real value. It doesn't matter what "currency" you report on your quarterly statements. Returns are returns. Paulson's clients who chose to denominate their account in gold took losses every bit as large as those that denominated in dollars.)”
Last week’s relatively rosy report on the mining industry in Peru got a bit of ice-cold water thrown upon it by certain other reports from…Peru. Apparently, Newmont Mining had to shut down work at one of its major facilities in the country yesterday in the wake of protests over compensation payments being sought by local residents affected by the firm’s activities. The firm said the work stoppage was declared in order to ensure the safety of its employees. More than $800 million per annum is being collected by Peru’s government from the four largest mining firms operating in the country.
We end today with a note on the regulatory front. The CFTC is set to vote today on whether to curb trading activities in oil, wheat, gold and other popular speculative vehicles. We have for many moons cautioned that the Dodd-Frank rules for financial market overhauls could present a sticky situation for the throngs of euphoric commodity specs. Bitter and polarized debates have accompanied the four-year-long build-up to today’s vote and the gloves are now all but off.
What parts of all of this hoopla end up in court or being enacted remains to be seen, but we are one step closer to finally finding out. Reuters says that “the limits could temper investors who have poured over $300 billion into commodity markets, often via index swaps with banks. Under the new rules, banks will no longer be given an exemption for such speculative swaps, although they will be able to hedge on behalf of corporate customers.” As for what parts of the new rules will be obeyed and with whom they will “stick” that is something that surely remains to be seen. Greed is a powerful drug; one for which we know of no “substitutes” just yet.
Jon Nadler is a Senior Metals Analyst at Kitco Metals