A bit of an advance in European equities on the heels of rising German business confidence gave rise to modest buying of commodities this morning and pushed the US dollar a tad lower to just under the 80 pivot point on the trade-weighted index. The euro did not rise much above the $1.30 level however, despite the boost that the aforementioned economic metric provided for equities and crude oil. Euro specs can thank Mario Draghi for that. See below.
Overnight trading action saw the euro dipping once again and nearing an 11-month nadir after ECB head Mario Draghi smothered hopes regarding more bond purchases by his institution. While there is support for the debt instruments of certain embattled EU nations on the part of the ECB, Mr. Draghi stated that such purchases are not to be regarded as "infinite." He also warned that 2012 will likely turn out to be a difficult year for the eurozone’s financial sector as well as its economy. Market messages of the not so pleasant kind keep coming our way at this instant and you would be well-advised to ponder them as we head into 2012.
Such a view is being echoed by PIMCO’s CEO Mohamed El-Erian, who said yesterday that in his opinion it is clear that the ECB does not wish to utilize the ‘big bazooka’ and that 2012 will be defined by de-levering, de-globalization, and policy inconsistencies. More importantly, and with potential implications for gold fans, the coming year, in Mr. El-Erian’s take, will therefore be a "risk-off" period at leas for the first half. We all know what the "risk-off" mentality among investors and speculators has engendered price-wise in the precious metals’ space since September…
Gold once again meandered around the $1,600 mark but strayed only about $10 on either side of it and showed a lack of conviction among participants to take a stand in either direction as their ranks palpably thinned ahead of the holiday weekend. Indian physical demand continued on the lackluster side of the ledger, as locals await lower prices as well as the calendar’s turning nearer to January 14th; a time until which is it considered inauspicious to buy the yellow metal.
Bullion’s recent cave-in has prompted more warnings and more caution to come from the managed money sector. Yesterday gold futures closed below $1,600 per ounce for the fourth consecutive trading session and the metal is still notably under its 40-week moving average. Veteran gold observer Martin Pring (Pring.com) reports that "gold has now completed a massive head-and-shoulders top," and that "for the record, the head-and-shoulders objective for the gold price calls for an eventual move to the $1,300 area."
Kitco commentator Clive Maund notes that the euro (BFF of gold in 2011) has also broken down from a head-and-shoulders pattern top and that it could be headed for the $1.20 price target., while the greenback could test index levels around the 88 to 90 value zone since it has recently negated a double-top formation. Consider what that might translate into, in gold.
Both Messrs. Maund and Charles Price (Minyanville) feel that gold’s recent breakdown is a possible clarion call for 2008-like conditions, or worse. Deflation is the biggest bogey on the radar, and you can mothball inflation and inflation fear-mongers for some time to come. Kitco News reports that gold’s chart outlook has "deteriorated significantly" and that the precious metal is poised for a re-test (a critical one) of the $1,543-$1,550 support zone by all indications. Go ahead, shoot the messenger(s).
JP Morgan’s Asset Management chief market strategist, David Kelly, said that gold’s "change in correlation with the stock market is very significant because it is saying this is an unstable asset class. "It means the fundamental support of gold is pretty shaky" (which is pretty much what you have been reading in these columns foe some time now…) and that "people should be very nervous if something changes that easily from a zebra to a leopard."
Other asset managers such as High Tower Strata Wealth Management group have reduced the weighting of gold in portfolios by anywhere from 3 to 6 percent (down to near the 5% level) as people are beginning to reassess gold’s function and performance in the wake of the EU debt crisis. However, it is not just the European situation that gold has not reacted in the expected manner to; the historic correlation to geopolitical events that gold used to exhibit is also coming into question.
Yesterday’s virtual non-reaction by the yellow metal to the demise of North Korea’s Kim Jong-il did not go unnoticed by certain gold market observers. Arora Report’s Nigam Arora notes that gold is trading under a ‘new model’ and that as such is reacts less or not at all to geopolitical news of the unsettling kind. Mr. Arora feels that "Kim’s death has shown us that unless geopolitical conditions around the world get much worse, the short-term direction in gold and silver as well as in miners is down."
Spot New York dealings started off near the $1,605 mark for gold and just above the $29 level for silver. Short-term traders are watching the price zone that extends from $1,620 on up to the $1,650 level as potential selling opportunities prior to year-end. Silver is still seen as being potentially headed for the $22 area by Elliott Wave analysts. As for gold, the EW short-term analysis issued on Monday evening noted that "Last week's close of $1599.26 basis spot represents the first weekly close below the lower channel line shown on the chart since it was formed 21⁄2 years ago. It also marks the first weekly close beneath the 40-week moving average (200-day moving average) since January 2009, nearly 3 years ago."
EW also reminded its readers that "many investors monitor this particular average and some even make long-term investment decisions based on the juxtaposition of prices and the average. In our view, gold is declining in a third wave at several degrees of trend, a position that suggests that the selloff is far from over. Prices should work their way down to the next target surrounding the $1300 level, near the wave 4 of (5) low as shown on the charts. Greater bearish potential exists."
Platinum added $14 to rise to $1,422 while palladium was ahead by $7 at the $614 bid quote per ounce. No changes were reported in rhodium this morning; the noble metal was quoted at $1,350 bid-side. Dow, S&P, and NASDAQ futures were up by about 1% with half an hour left ahead of the opening bell.
We leave you today with another bit of anxiety-inducing news from…China. Bloomberg News reports that the country’s banks may be understating their exposure to ‘runaway local borrowing’ by some huge margins. "Huge" in this case, means that at a time when the four largest Chinese banks have reported a debt level of a certain size, Bloomberg’s tally is at odds with the official numbers.
More than 230 local government financing companies have accumulated debt of nearly two-thirds of a trillion dollars; more than the current size of the European bailout fund. An author of two books on China’s financial system, Fraser Howie, told Bloomberg (about the facts that have been uncovered): "You should be more worried than you think. Certainly more worried than the banks will tell you. You know how this story ends—badly."
Until tomorrow (at least), keep watching and thinking about such stories, and more.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America