Gold’s losses aggravated as Thursday’s markets opened for trading and the yellow metal breached the $1,750 support point in the process, falling to a one-week low. The fresh decline (four out of four trading sessions’ worth) took place despite a 0.30% drop in the US dollar on the trade-weighted index but in concert with the fall to under $1.35 by the beleaguered euro and the rise in certain European bond yields back to above “alarm” levels.
However, the principal worry here is the one related to the spreading bond yield wildfire that is now threatening to engulf the markets of Spain and France after having charred those of Greece and Italy. Market participants remain extremely wary of the odds of successfully putting out said fires as the two main actors in this game – France and Germany – are now engaged in arguments over what role the ECB ought to play in this crisis instead of grabbing the nearest hose and extinguishing the flames that threaten to throw the region into an economic contraction – if they haven’t already done so.
Fitch’s Ratings opines that Italy, for one, may already be in a recession. None of that stopped Chancellor Merkel from bluntly (once again) cautioning that “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” Her BFF, Monsieur Sarkozy, might just be one of those ‘politicians.’ He is certainly loath to see La France lose one of its coveted “A” s from the triple crown it currently enjoys.
Other commodities sank as well, most notably copper, which lost 2.85% today on the back of anxiety over the near-term state of Europe’s economy and the housing price slide taking place in China. Values in China’s four largest cities fell by 0.3% in October, lending credence to the school of thought that something has changed in that country and that such a ‘change’ might result in a hard touchdown on the economic tarmac.
China really has no “stand-by and activate” alternatives to economic growth if real estate flounders. Residential property is thought to have accounted for as much as 6.1% of the nation’s GDP last year. Consider the factoid that Chinese housing activities constitute 20% of the country’s steel demand. Talk about over-dependence and irrational exuberance…
Speaking of China, yet another set of bold assertions by the hard money newsletter marketing machines fell victim to reality recently. You do recall being told that China finally became ‘disgusted’ with US assets and that the reduction in purchases of Treasuries by that country in August was ‘the beginning of the end’ of the dollar and of US debt. Cut to reality: China bought not hundreds of tonnes of gold with its money, but the largest amount of US government notes and bonds since March of 2010 in the month of…September.
Oops. The country bought nearly $21 billion in US instruments and bumped up its long-term holdings to $1.14 trillion in the process. Some level of ‘disgust’ that little shopping spree reveals, eh? Not only is China continuing to support the US Treasury market, but all indications are that Japan, too, is not shying away from increasing its stake. The world’s second largest holder of US debt raised its ownership level of such assets by 2.2% and now owns nearly $960 billion of American Treasuries. Total foreign holdings of US obligations came to a record $4.66 trillion in September. Enough said.
Industrial commodities might be headed for a downturn on the combination of ebbing demand from Europe and from China’s inability to make up for that slack with its own demand. Analysts at Capital Economics feel that while China will do its best to keep afloat, it will come to contradict those rosy projections that it alone can support the world’s commodity demand. With expectations that China’s economic growth might contract to the 6% growth pace, crude oil values might just need to be “re-evaluated” as might those of other commodities as well. Early signs of such a reassessment came with this morning’s 2% decline in WTI crude (only 44-cents away from the century mark), but the slippage was largely the result of Euro-centric angst and the profit-taking that was to be expected following the achievement of a five-month pinnacle in prices.
Spot bullion dealings opened with a loss of $18.40 per ounce in New York this morning and gold was quoted at $1,743.50 the ounce after having touched lows near $1,739 overnight. Prices then fell as low as the $1,724 (down $38+) level in hectic mid-morning trade in New York. Gold continues to behave more and more like a risk asset and it is unfortunately not exhibiting the attributes for which it is traditionally sought out by worried investors. Gold also continues to do the euro-tango and one must ask themselves what the projected (by BNP Paribas) mid-$1.20 euro/dollar rate might portend for it by the end of the first trimester of 2012.
The precious metal’s safe-haven status is also once again under scrutiny and perhaps in question, despite ETF managers’ pleas that we all ‘keep the faith’ and despite positive spins being placed on supply/demand statistics that would normally argue for relatively poor market fundamentals (a 5% increase in mine production, the continued over-dependence on investment demand, a 26% slump in Indian physical demand, a 10% drop in already moribund jewelry off-take, and the incipient signs of mine hedging).
Silver fell 172 cents (5.1%) to the $31.86 bid level after having broken the $32.00 even figure this morning. Albeit its recent triangle pattern could have implied the advent of another rally towards the $37 to $39 per ounce area, a convincing breach of the $32.00 mark could well obviate such a push to higher ground and instead usher in a slippage towards the mid (initially) and then the low $20s. The white metal remains in a bear market by most definitions. Its own fundamentals are rather similar to those seen in gold at the moment; i.e., a surplus of supply over demand, growing mine output and a dangerous addiction to investment demand while core traditional demand areas (as in: industrial) are floundering.
Platinum and palladium both traded lower by double-digits this morning; the former lost $35 to touch $1,582 and the latter dropped $35 to reach $613 the ounce. Recent Johnson Matthey-supplied data indicates that platinum supplies are set to rise 6% this year and that the market could end the year with a small (relative to the total market’s size) surplus of 195,000 ounces. JM continues to project “solid” demand for the noble metal and it envisions a floor under the market near the $1,450 area while it allows for an average price of $1,650 and a potential spike to $1,800 over the next six months.
Bolstering the case for such positive near-to-medium-term projections on platinum is this morning’s report that covers the difficulties over at major producer Implats. South Africa’s second largest platinum mining firm saw its production of the noble metal decline 12% in Q3, while its refined output fell 27% to only 388,000 ounces troy. Meanwhile, the cost of production on that ounce of platinum rose by 10.8% on the quarter, due in large part to wage renegotiations and on-going electrical power supply issues (in this case, tariff hikes on electricity). Palladium production at Implats dropped 12% as well but rhodium output was slightly less affected; it only declined by 7%. The issues of majority ownership transition processes (still unresolved) and the loss of lives (three in the past quarter) in accidents (which also resulted in lost production) continue to present challenges for the firm.
Closing out today’s roundup: The Dow remained virtually flat, the jobless claims figures came in at their lowest level in April, U.S. housing starts were showing signs of life, $600 million or so are still ‘missing’ from MF Global, and Freddie Mac ‘consultant’ Newt Gingrich, who [this week anyway] leads the GOP polls, was accused of corruption by someone who…should know the meaning of that word: Jack Abramoff.
Until tomorrow, spectators to all of this we shall be….
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America