Gold rally in jeopardy as reality sinks in

In the Lead: “[Reality] Check, please!”

Platinum dropped $10 to start the midweek session off at $1,419 and palladium slipped $9 to a $655 per ounce bid quote. In the background, the US dollar retook the 80 level on the trade-weighted index (to rise to 80.10) while the euro fell back to under the $1.30 pivot figure. Crude oil gave back $1 of Tuesday’s spectacular gains and it traded at $101.92 per barrel (basis WTI). As we noted above, it was time for a reality check after quite a session of New Years’ financial fireworks yesterday.

It took little more than a bit of a “lukewarm” German bond auction and the resurfacing of European bank-oriented anxieties to bring about the pullback in the markets that we witnessed this morning. The action prompted CMC Markets analyst Michael Hewson to remark that Before investors get too carried away it would be prudent to remember markets exhibited similarly positive tendencies 12 months ago in the first trading days after the Christmas and New Year break, and the backdrop then wasn’t as bleak as the one facing markets now.” France comes to market with bonds tomorrow and Spain and Italy will do so next week. Stay tuned. It does not take very much these days to extinguish risk appetite.

And now, it would appear, it is payback time for ill-placed and/or ill-timed 2011 bets. Citigroup’s Singapore unit is suing hedge fund manager Raghavendran Rajaraman to the tune of $1.03 million in trading losses he incurred after gold fell from its $1,900+ pinnacle in September. The fund manager’s $19.2 million position was sold in the face of a “rapidly deteriorating market” but it left Citi with a larger than $1 million shortfall. Another fund that took a drubbing (but not of the legal variety) from investors was PIMCO. More than $5 billion in client redemptions were executed in 2011 when the world’s largest mutual fund trailed its competition quite badly after a wrong-way bet on Treasurys.

Speaking of Treasurys, let’s stretch a bit and “talk” Fed. The US central bank has decided to make public its own officials’ rate forecasts as we go forward. This is quite a step in the direction of transparency from an institution that Mr. Paul would like to abolish, in part, due to its putative opacity. Starting this month, the Fed will announce the forecasts for the fed funds rates as opined by its members.

The first such announcement will be made following the January 24-25 meeting of the FOMC. What might be most relevant (for gold bugs) in the upcoming Fed statement however is the fact that it now appears that the US central bank’s officials are set to alter the language regarding ultra-low rates “through mid-2013” towards something else (of a shorter timeframe). Some Fed watchers have already concluded that such a public showing of the Fed’s “hands” might only add to the confusion in the markets as it might reveal just how splintered the hawks and the doves within it are. Stay tuned for that, as well…

Finally, speaking of rates and such, we note that the speculation about a possible Chinese cut (in either bank reserve requirements of key rates) has flared up once again. The culprit? Falling home prices across the country. Home values have declined in 60 out of 100 cities that are being tracked by SouFun Holdings Ltd. (sort of the Zillow of China). Others have expressed some doubts about where property values in China are headed by saying that It’s actually very hard to tell whether China’s property market will succeed a soft landing.”

The contraction in this all-important sector is prompting the speculation that the PBOC will do something to try to avert a runway incident that could take parts of the country’s economy down with it. Meanwhile, CTV have quite a different take to offer on the state of the US housing market. You know, the one that has already undergone what we are now starting to see in China…

Until tomorrow,

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

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