Signs that at least parts of the global economy continue to show a degree of immunity to the unfolding European crisis lifted trading spirits in various asset markets as the first full day of trading for 2012 got underway. Risk appetite made reappearances in gold, crude oil, copper, and assorted equity markets in Asia and Europe. The stronger manufacturing data from the UK, India, Australia and, most importantly, from China, all conspired to augment the bullish betting being made today. However, the IMF still warned that 2012 may yet see it scaling back on global economic growth projections. The institution has already lowered its expectations for the same to 4% on the heels of the aggravating debt situation in the EU. As well, analysts at certain financial firms remain wary about China’s ability to show a decent first quarter of exports and growth.
Chinese Premier Wen underscored such concerns by stating that the country’s business conditions could turn out to be “relatively difficult” due to slackening overseas demand and still-too-high internal inflation levels. Elsewhere in Asia, it was reported yesterday, the Singaporean economy shrank for the second time in three quarters with a notable 4.9% decline in its GDP. Over in Europe, albeit German joblessness levels fell more than anticipated, the region is far from being out of the debt crisis’ woods just yet. The US level of manufacturing activity on the other hand rose at the fastest pace in six months in December, with the reading of 53.9 on the closely-watched ISM factory index. Such growth levels and improving employment conditions might make any QE3 offers by the Fed a very distant -if not moot- probability.
The euro recaptured the pivotal $1.30 mark this morning mainly due to the aforementioned optimism and following oversold conditions that had brought it to more than an eleven month low against the US dollar. Regional leaders remain very much aware of the fact that the debt debacle is still far from being over. While experts say that 2012 is bound to be better than 2011 was, there are plenty of as yet unclear situations and asset valuations to be dealt with in coming months (among them, the fate of gold prices).
All of this brings us to the New York markets’ opening this morning, where the precious metals’ complex had a good day for a change – at least in the initial hour of trading action. We could very well have just cut/pasted the first paragraph of the first article we wrote in 2011 here this morning and note that “New Year’s Eve (likely) champagne-induced cheer morphed into unimpaired optimism as the first financial market sessions of 2011 opened for trading overnight and this morning. The apparent “resolutions” among investors, at least at this early stage of the annual yield-chasing game, are ones of…adding weight – to the profit side of their asset books that is.” In other words: been there, done that, seen that.
Spot gold started the abbreviated business week with a gain of more than $20 and it once again approached resistance levels thought to be residing from the $1,588 up to the $1,600 value zones. Silver added from 75 to 85 cents per ounce and traded near the $28.75 up to $29.00 markers. Platinum and palladium each rose $8 to touch $1,403 and $662 respectively, while rhodium opened at $1,350 with no change in quoted bid prices. US auto sales in December were the best in five years and have placed the industry on track to perhaps record annualized sales levels of near 13.4 million – very near the November metric running at 13.6 million in annual sales. In the background, the US dollar fell 0.50 on the trade-weighted index to touch 79.75 while crude oil (WTI) added an impressive $3.75 to reach $102.50 per barrel following more Iranian sabre rattling on the subject of sanctions and its intentions related to the Straits of Hormuz.
As if December (after the 9th) had not been bad enough, the historically positive in-between holidays period for gold last week was a brutal one for its fans. The yellow metal has experienced nothing but gains in eight out of nine such year-end periods since 2002. Ironically, some of the same sources that had not allowed for any correction in gold prices as recently as its most recent price pinnacle, have now offered the “wisdom” that gold’s precipitous fall was “inevitable.” On the other hand, some notable names in the business have expressed similar, more intense shall we say – views – much earlier on and are now restating them.
Among similar opinions, are the views of one David Frum. The former Canadian-American George W. Bush speechwriter had this capsule observation to tender to his FrumForum readers last Thursday in the wake of yet another massive drop in prices: “Gold is a uniquely strange asset, because so many people in the gold market buy gold as a matter of ideology and identity. Cocoa, copper, or cotton trade as commodities. Gold trades as a way to make a statement. That’s simply not a sensible way to invest. A great many Americans are paying a steep price – and may pay a much steeper price yet – for allowing hucksters and ideologues to sway their economic judgment.” The hucksters and ideologues were unnamed but your inbox contains many of their “advisory” publications – that’s a safe bet.
Recall that most of the gains achieved in gold in recent years (specifically since 2008) came on the back of apprehensions that the Fed’s QE programs would fatally wound the US dollar and that the EU debt crisis would not only make for the demise of another fiat currency (the euro) but would also bring the entire global financial system to its knees, leaving gold as the only alternative holding. The Globe and Mail noted that – according to at least one analyst, Alfred Lee, an investment strategist with BMO Asset Management Inc. in Toronto – “[A stronger U.S. dollar is] going to create a headwind for most of the commodities, and more so for gold because a lot of people were using gold as a hedge against the U.S. dollar,” “Now [the dollar’s rise is] really testing their thesis: Is gold really an alternative to the U.S. dollar?”
Wait. Did he say “stronger dollar?” How is that supposed to be true? How could the dollar already have gained 13% from its record low seen in March of 2008 (that year keeps coming up…) in the wake of the Fed opening its QE spigots to “full-on” (twice) and the crisis in Europe having reached mushroom cloud proportions? Well, it did. The buck rose 13% against the pre-written obituaries it has enjoyed. Not only did the American currency – with all of its flaws (deficits, S&P downgrade, the circus in DC last summer, etc.) flourish in terms of value, but (gasp!) it has actually increased its share of global foreign-exchange reserves. In Q3 of 2011, it did so at the largest clip since…2008, reaching 61.7% of said reserves. This is why we closed out the string of 2011 articles with an undisguised piece of advice about watching your back on account of the…greenback in 2012. Some have already come forward with characterizations of this year as the “Year of the Dollar.”
That same, recent downside price action in gold has prompted veteran market watcher Martin Pring to declare that the “precious metals are in a primary bear market” even if gold did appear somewhat oversold near $1,530. Bullish gold pundits are now hoping that since the Year of the Dragon comes early in 2012 physical demand from China might be as fiery as that creature’s breath. One might as well hope for China to come to the rescue, since the anticipated bump in seasonal gold demand from India last quarter turned out to be more of a…slump.
The so-called “love trade” turned into a “neglect trade” as India failed to import the gold tonnage that many had predicted. We mentioned recently that the probability that gold imports might have declined some 50% in the face of ultra-high prices in that country. As it turns out, the decline was actually on the order of 56% and it resulted in only 125 tonnes being brought into India on the quarter. For a little history and perspective on India and gold and…the weather (as in: the Monsoons) see this Seeking Alpha article. Bring your umbrella, or, your parasol, as the case may be.
Bombay Bullion Association President Prithviraj Kothari noted that locals were even selling (!) gold during the period when the World Gold Council said they ought to have bought almost 300 tonnes of it. Mr. Kothari also feels that Q1 of this year might witness a similarly large (50%) drop in bullion imports in comparison to 2011’s level. Meanwhile, local technical analysts warn their readers over at the Daily News and Analysis that gold has “violated bullish channel support” and that they ought to (for now) “avoid bargain hunting.”
However, it is not just India where the locals have begun to reassess the ‘value’ of $1,900 gold and have started to look elsewhere for the next batch of potential returns on investment. The Saudi Arabians have been similarly “distracted” (primarily with local real estate) as the spiking volatility and record price tags in gold have prompted them to shift funds into other markets. Some local buyers were seen seeking silver as a more affordable alternative but many have opted to plow money into a different “hard” asset: Apartment buildings.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America