Gold spurned as traders reach for safe-haven dollars

In the Lead: “The Euro Pit and the Chinese Pendulum”

Gold staged an attempted recovery this morning following Thursday’s washout in prices that brought it to within striking distance of the pivotal $1,700 level. As things stood early this morning, the yellow metal was on course to record its largest weekly decline in circa two months’ time. Ironically, the vast majority of participants in various weekly price surveys were bullish on bullion’s prospects for this week last Friday.

However, this week’s near Eurozone meltdown and erosion in the common currency derailed the bullish track for precious metals and ended up bolstering the dollar instead. The greenback traded at a five-week high against an assorted basket of currencies mainly on the back of “lesser of all evils” perceptions and a continuing string of fairly positive US economic statistics coming into the news pipelines. In fact, based on the findings that the US economy is growing at the fastest pace of the current year and also at the best such pace in a year-and-a-half, it is not all that surprising that anxiety-ridden money is finding its way into America (via the dollar) at this juncture. What and where are the alternatives?

Spot dealings in New York opened on a mildly higher note this morning but players remained wary of pre-weekend book-squaring effects and of further negative news emanating from Europe. Some feel that the sell-offs might not be complete and that any further damage in the equity markets might bring about margin call situations which might prompt additional mobilization of precious metals positions.

For the time being, the maintenance of the $1,700 mark is critical for gold, as is the $30-31 zone for silver. The white metal fell hard on Thursday and overnight lows were recorded just under $31 per ounce. The persistent fear in the gold and silver markets remains the possible drying up of money markets in Europe in a liquidity squeeze. Little question remains as to the fact that metals would suffer under such a dire scenario (among other assets).

Gold opened with a gain of $9.60 per ounce but soon traded back down in negative territory and under the $1,720 level, while silver initially added 37 cents on the open and later traded under the $32 level per ounce again. Traders we polled in New York this morning indicated that the day could still end in the “red” but that it all depends on euro-flavored news at this juncture. The iShares Silver Trust (SLV) declined almost 7% yesterday and by this morning the SGE hiked silver margin requirements up to 18% of a contract’s value. The white metal has been on a nausea-inducing up/down/up/down path ever since it touched the $50 mark in late April and then fell into a bear market.

It is assumed that the new margin parameters will come into effect on Monday. There is still a chance of further such increases in required margins if today’s action goes beyond daily trade limits. Analysts pointed out that silver’s extreme volatility (since late-April) has made for a very skittish Shanghai Gold Exchange – one that sees the price roller-coaster continuing, and one that aims to prevent devastating losses among small traders. Thus, the fresh record in silver contract margin amounts. Enough said.

Platinum advanced $10 to start the final trading session of the week at $1,591.00 while palladium was unable to join the group and went the other way with a decline of $1 per ounce and a quote on the bid-side at $607 at the opening bell. Copper and crude also made attempts at damage repair with gains of 1.6% and 0.9% respectively. The US dollar paused and slipped to under the 78 level on the trade-weighted index while the euro made efforts to get back closer to the $1.36 mark against it.

One fund manager whose view is not exactly bullish on gold is using the indicators currently flashing in the bond markets to make his case. Michael Gayed, chief investment strategist at Pension Partners LLC, notes that normally investors load up on gold in anticipation of severe inflation and when real interest rates are or are trending negative. However, writes Mr. Gayed, “If the bond market is [currently] right, then we may be entering into a period where we are no longer in a negative real rate environment. If we are headed into deflation that means the any interest rate which is above 0% results in a positive real rate environment (due to negative inflation). This is not an environment historically Gold can do well. That means that despite arguments that Gold continues to outperform Treasury paper, it could very well be that the pendulum swings to Treasuries outperforming Gold.”

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