Gold’s gains evaporate after European bond sales

In the Lead: “Knock, Knock, Knockin’ On Berlin’s Door…”

Tuesday’s hard-fought gains in the precious metals complex evaporated overnight in the wake of a heavy surge in French and Belgian bond yields and the news that China’s ‘flash’ manufacturing survey for November shows a degree of contraction not witnessed in nearly three years. Gold prices promptly fell to lows near $1,679 and silver more than wiped out its gains from the previous session with a $1.60+ drop per ounce in the wee hours. Add options expiry and pre-holiday weekend book-squaring to the above and we might be looking at an ‘active’ market over the next few hours, to say the least.

Spot bullion dealings opened the midweek session with assorted losses across the price boards: gold fell $7 to open at $1,692.50 while silver was off $1.06 (3.2%) at a quoted bid of $31.71 per ounce. Platinum dropped $18 to the $1,549 level while palladium slipped $16 to the $584 mark. The near two-month high that the dollar is hitting this morning is clearly keeping the pressure on the complex and at least one trader interviewed by TheStreet.com yesterday feels that (in his view) gold might become ‘touchable’ when and if it tests the pivotal $1,605 figure. The chart damage in gold is visible as is the heavy overhead resistance around the $1,750 area.

Yesterday we brought you Swiss Customs data on platinum and palladium imports. Today we focus –along with our friends at Standard Bank Commodities — on the Chinese import activity in the noble metals’ space. Albeit Switzerland continued to be a net exporter of platinum in October, the data reveals a softening in Chinese imports of same. The country took in 46,395 fewer ounces of platinum in October than in the previous month. Palladium exports from Switzerland fell sharply in October following a September spike in same (mainly to the US and Germany where it is believed that carmakers took advantage of the price slump in the metal and re-stocked their inventories).

The HSBC flash manufacturing Purchasing Managers Index declined to an undeniably contractive reading of 48 this month, significantly under what had been projected (50.1). While various analytical. sources tried to put a positive spin on the shrinkage by saying that it points towards an ‘engineered’ soft landing, other observers see China’s economy at risk for a hard touchdown owing to the emergent collapse in housing prices and the European crisis coming together and adding to the slowing momentum perhaps in a fashion that had not been anticipated.

We have often cautioned in these posts that what happened in the world’s second largest economy cannot but impact subsequent price events taking place in the commodities’ space. The Globe and Mail reports this morning that the Chinese data is stoking fears about a ‘tipping point’ being reached as regards the odds of the global economy once again slipping into recession. Yesterday’s downward revision of the pace of growth in the world’s largest economy – that of the US – also added to such angst. This morning’s durable goods orders reading – albeit better than anticipated – did not manage to lift trading spirits a whole lot, either. Dow futures were still pointing lower forty minutes ahead of the market’s opening bell.

Over in Europe, while few were surprised that the yields on French bonds started ballooning once again, there was some consternation when Germany (!) came up short of bids at a government bond auction it held. Belgian bond yields bumped higher as well and market watchers continue to fret about spreading contagion in the Eurozone and the fresh dip in the common currency (down to $1.33 against the greenback this morning). The German bond auction’s inability to garner sufficient bids for the entire tranche up for grabs shook market sentiment as it is seen as a manifestation of the European crisis having gotten to the very core of the region.

The head of the European Commission this morning unveiled a plan by the region’s governments to issue bonds that would be jointly guaranteed. The idea has previously been met with stiff resistance on the part of Germany. Perhaps the souring of the German bund auction towards cabbage side-dish levels this morning might soften the country’s stance on the creation of an equivalent of US Treasurys, but one might wish not to hold their breath just yet when it comes to that matter.

Meanwhile, the US dollar climbed a resolute 0.80% on the trade-weighted index this morning, and was seen nearing the 79 level if the trend were to continue. The dollar advanced despite yesterday’s fretting that the US might face another ratings ‘adjustment’ within months (thanks, Supercommittee!) and despite news that the Fed wants to boost confidence in the US banking network by ordering 31 of the nation’s largest institutions to conduct stress tests on their loan portfolios.

It was reported yesterday that the number of “problem” banks in America experienced yet another shrinkage and that the FDIC’s list now contains only 844 names. When considering the fact that the US still has 7,436 banks around, the fact that 89 percent of them are in decent shape should temper alarmist newsletter doomsayers who have assured us that the US banking sector would be dead and gone by now.

We close today with an interesting angle on the gold market as provided by Seeking Alpha contributor Dmitri Lifatow. The author delves into the long-term (and we mean looong term- going back to the year 1264!) inflation-adjusted gold price charts and comes up with some potentially sobering conclusions. Chief among these is the finding that – in British Pound (GBP) terms and on a 748-year time scale – the low and high ‘fair price’ of gold extends from about 200 GBP to 800 GBP. You will have to glance at the chart yourself as we cannot post it without authorization just yet, but do consider the principal points in the Lifatow analysis. Quote:

  • The level of 200 GBP per troy ounce is the level of "the lowest fair price" for gold (the lower horizontal red line on the graph). If it falls below this support line, it recovers very rapidly.
  • The level of 800 GBP per troy ounce is the level of "the highest fair price" for gold (the higher horizontal red line on the graph). If it ascends above this resistance line, it falls rapidly (except the late Middle Ages). That is why gold is very expensive now. With the absence of fundamental imbalances between gold supply and demand as in the late Middle Ages, when the gold price was higher than 800 GBP per troy ounce for more than one century, the emergence of a gold price bubble is obvious.
  • In 2011 the gold price touched the upper limit of the ascending trend channel. The classical technical analysis tells us that the drop below in 2012 is very likely.
  • The level of 580 GBP per troy ounce is the first target of the decline (the higher horizontal blue line on the graph). This analysis is based upon the previous significant extreme.
  • If the gold price falls below this level (580 GBP per troy ounce), it will probably fall further to the level of 380 GBP per troy ounce — another significant support line (the lower horizontal blue line on the graph) and further to the lower bound of the trend channel. If the support line of 580 GBP per troy ounce remains unbroken, gold will start rising again. In this case the decline of 2012 will be only a price glitch.
  • Thus, in 2012 the annual average gold price for the first time in 12 years should close in [the] minus. Although nobody can predict the relative high the gold price will achieve in 2012, as the graph shows only annual average prices, it is logical on the eve of such developments to start dumping gold, at least by large ETFs. The probability of a price glitch, at least, is very high.

Should that obviate the need – and the wisdom – of the maintenance of a core ten percent gold insurance allocation? Why, of course not. But should it give some food for thought to those who have gotten so used to what gold has been doing since 2001 that they no longer connect the dots and the lines of charts of the type that are shown by such market observers? We do believe so. All angles deserve fair consideration when it comes to your money.

To our many American readers, we do wish you all a very Happy Thanksgiving!

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

Websites: www.kitco.com and www.kitco.cn

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