The agreement on further austerity measures that was reached by Greece’s political leaders not only failed to ignite the orbital launch of many a risk asset, but it also actually resulted in what one might call a “launchpad failure.” While it could be argued that speculators had bought the ‘rumor’ of the agreement and then sold the ‘news’ that it has been arrived at, the deeper layers of the market story are certainly also worth considering. Because, in effect, Greece is now headed for a de facto referendum on whether or not its citizens might wish to remain an integral part of the European Union. In the interim, it is borrowing more time while restless demonstrators continue to circle government buildings.
No sooner had Athens signaled that further belt-tightening had been finally agreed upon that new demands for “show us the goods” were intimated by Europe’s finance ministers, and they have now pushed the prospect of Greece finally getting the money it so badly needs in order to avert a messy default into next week, at best. Standard Bank (SA) analysts listed the EU finance ministers’ “to-do” list as follows in this morning’s market report:
“Three conditions remain before approval will be considered—a further €325m in cuts, Greek parliamentary approval (should be this Sunday) and a pledge from Greek political leaders that they will maintain the reforms after the country’s general elections (this April). While indications are that the Greek parliament will approve these measures, there is enough uncertainty to keep markets on edge as we enter the weekend.” As a result, Friday is shaping up as a decidedly ‘risk-off’ day, and the aforementioned launch into orbit of assets other than the dollar was “rescheduled” for a later date. Houston, we have a problem, and it’s (still) called Greece.
Spot precious metals dealings opened on the weak side with all four principal metals that we track losing more than 1.2 and up to 2.1% this morning. Spot gold was down by nearly $25 at $1,704 per ounce, while silver was bid at near $33.25 with a loss of more than 60 cents. A first-in-two-years decline in Chinese exports and imports also added to the selling pressure in precious and base metals this morning. Standard Bank analysts opine that, should gold slip further, then the $1,700-$1,720 zone could be a good one within which to establish fresh short positions. While folks in India may or may not be buying or shorting gold at the moment, they sure are borrowing heavily against it.
So heavily, in fact, that the Reserve Bank of India is considering much more stringent regulations as regards to loan-to-value ratios being offered by gold-based lending firms. Borrowers pledging gold as collateral are frequently paying as much as 18-25% in interest to do so. The phenomenon brings to mind the word “margin call” in the event of a serious price slide in the yellow metal – many such extensions of credit are being made at rates of 75% loan-to-value and perhaps higher, prompting observers to believe that people who have pledged their bullion might be living on (literally) borrowed time. Gold is the one thing one ought not buy with borrowed money or hypothecate for the borrowing of (paper) money.
Speaking of positions, value and such, small retail investors who are still trying to figure out “why gold?” and “how much gold?” were faced with a string of news and statements of the head-scratching variety this week and are probably more confused than they have been in a while. To wit: economist Dennis Gartman said he is “wild-eyed bullish” on stocks and that he is now returning to gold as well (which he sees higher in euro and yen terms). Stop us if you’ve heard this one before, but, given long-term market history, equities and gold are supposed to be doing anything but moving in the same direction, at the same time. In fact, gold is normally added to a portfolio in order to mitigate against potential declines in stocks.
Next up, we have Warren Buffett who now feels that stocks, or investments in any productive asset, will "prove to be the runaway winner" over bonds or gold "over any extended period of time" and "more important, it will be by far the safest." Mr. Buffett is no stranger to the world of precious metals; he once (not that long ago) bought roughly 138 million ounces of silver (about as much as one year’s worth of retail demand) for himself, and then sold it all at a handsome profit.
However, his B-H shareholder newsletter notes that “what motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.” Money Box’s Matthew Yglesias encapsulates the phenomenon as one wherein: “you're betting that in the future more people will want to bet that future people will want to bet on gold.” Mr. Buffet, for his part, still prefers productive assets, such as farmland and businesses.
Finally, if you thought that gold rising in the wake of a Bernanke speech is as reliable a knee-jerk reaction as you would expect following a hit by your physician’s rubber mallet, well, think again. Marketwatch contributor Mark Hulbert has found no evidence of there being a reliable correlation between what Mr. B says and gold taking off for the stratosphere. This, despite urgings of the type we see in newsletters that declare that the Fed Chairman has ‘green-lighted’ gold’s next ‘orbital sortie.’ You might think of availing yourself of a different gold trading theory and strategy at this point. Perhaps the length of skirts on the runway or the Giants winning the Super Bowl.
Gold conspiracy theories that have cast the CME as the “uber-villain” that prevents freedom in trading by small investors were also dealt a bit of a “setback” overnight as the exchange lowered margin requirements for trading gold, silver and platinum. So much for the alleged never lowering of margins. At any rate, the shrinkage in margins now required evidently failed to ignite speculative enthusiasm in the complex.
Platinum fell by $24 of its own to trade at $1,633 while palladium slipped $14 to be indicated at $695 the ounce in New York. Rhodium was the standout gainer this morning, adding $25 to the bid-side and reaching the $1,500 mark once again. January’s Chinese car sales were dealt quite a setback by the calendar this year. The earlier-than-normal Lunar New Year resulted in many dealers closing shop for a full week or longer, and this resulted in the lowest monthly auto sales level in that country in seven years.
Still, nearly 1.4 million vehicles rolled out of Chinese showrooms last month and analysts expect this year’s sales to show a growth rate of probably 8% (almost four times better than in 2011). The euro was struggling near $1.318 while the U.S. dollar advanced 0.60% to the 79.10 level on the trade-weighted index. Overseas, equity prices suffered in Europe and U.S. stocks fell 125 points in the initial half-hour of trading today as risk appetite was ‘shelved’ for another session ahead of the weekend. Copper fell 2.4%, and crude oil slipped 1.9% lower this morning.
Have a pleasant weekend,
Senior Metals Analyst Kitco Metals Inc. North America