The ECB doled out more than $700 billion in loans to over 800 banks this morning in what may have been its last gesture of ‘kindness’ for a long time to come. While many are calling the latest ECB operation as a “liquidity injection” that smacks of an outright gift, we would be wise to note that the amounts in question are loans and that they have a three-year shelf-life. More importantly, it still remains to be seen if the banks will sit on the money like the Emperor penguins they have shown themselves to be on previous occasions, or will go and lend it in order to foster Europe’s economic recovery. That, for the moment, remains an open question.
Analysts at Standard Bank see it this way in their G10 Daily Report this morning: “There’s a big difference between stopping the rot and starting a recovery. The LTRO’s might have done the first, but they won’t do the second. Worse still, it is always possible that Eurozone politicians shy away from the tough fiscal and institutional decisions that will be required to end this crisis, if they feel that the ECB’s cash is doing the job for them. We still believe that in spite of the successful conclusion of Greece’s second bailout and in spite of the new fiscal compact, the Eurozone has not nearly gone far enough in getting to the heart of the debt crisis. What’s been addressed so far is the problem of high debt. It is necessary to do this but it is not sufficient to end the crisis.”
Counter-intuitively, or perhaps in another display of “sell the news” the euro did not make ‘major’ moves in the wake of the LTRO, and neither did the US dollar. In fact, a hint of weakness was initially detected in the common currency. Veteran market observer Ned Schmidt notes in his latest Value View Gold Report that while we “Would like to say signs of intelligent life exist in the currency markets, alas that is not possible. At New Year’s Eve speculators had the highest short position on the Euro ever recorded. As of last week, they had returned to being net buyers. [I am] Trying hard to understand that. Less than 8 weeks ago the Euro was [supposed to be] going to zero, and now they are buying it.”
Certainly, albeit gold did open about $2.50 higher in New York, yesterday’s enthusiasm levels were nowhere near detectable in today’s initial action. In any event, we once again were confronted with abnormal concurrent headlines that observed gold trading at a five-month high and the DJIA closing above 13K for the first time since the crisis erupted in 2008. Chalk it up perhaps to month-end book-squaring and such, but within the first half hour of trading gold went into slightly negative price territory and appeared more comfortable with dipping to near $1,770 (down $15) rather than making a fresh assault on the $1,794 overhead resistance figure which many had anticipated to be demolished this week.
SEB Commodity Research advises that, at this juncture, and given their scaled-back gold forecast (to $1,800 from $2,050 for this year’s average): “Rallies above previous highs should be regarded as good selling opportunities and may well be proceeded by dips on risk aversion as gold has tended to move in — rather than out of — synchronization with risky assets since the summer of 2011, which is bad news for gold as a form of portfolio diversification.”
Another very interesting metric – one that could offer further signs that something is out of kilter in the gold market — was brought to light by analysts at Briefing Research yesterday. Kitco News reporter Debbie Carlson covered the story in-depth. The upshot of the BR findings is that value of the cumulative cube of above-ground gold (near 170,000 tonnes has risen to 13.2% of estimated nominal world GDP. The figure stands at nearly $10 trillion, but the percentage it represents on NWGDP is at its highest since 1981. The ratio peaked at 18.1% back in 1970. However, BR notes that the ‘normal average has been closer to 7.4% since 1970 and that “would be equivalent to a gold price today of $999 per ounce, a decline of 44% from current prices.” (Food for careful thought, in the event you care about such cyclical market ‘trivia’ as ‘reversions to the mean.’)
Silver was still running on speculative inertia and showed a 7 cent gain (to $37.00 per ounce) in the early part of the morning following yesterday’s massive gain that unfolded despite a fairly dismal US durable goods orders report. In the same Value View Gold Report that dissects the speculative action in the euro, analyst Ned Schmidt places silver under the microscope and finds that it “is again trading like an option on Gold. [The] Price of Silver has been moved irrationally higher by traders of futures and options. Every time they have done so with any market, selling has been the best strategy. Silver is now again at a price that should be used to sell it. [The] Current market is the third selling opportunity that has developed. Rarely does a market present itself in such a way. Ignoring that offering is unwise. Looking a gift horse in the mouth three times does not make a lot of sense.”
Platinum moved $10 higher this morning (it was quoted at $1,725 per ounce) and South Africa’s labor action difficulties are still providing background support to the noble metal. Palladium was off by $2 at $718 per ounce. That unique metal has moved about 6% higher over the past month, while platinum has shown a 9% gain. Compare either one to gold’s 2.6% advance on the month. Rhodium was unchanged at $1,745 per ounce. Crude oil added another fifty cents and traded at $107.07 per barrel. It is worth mentioning that spec fever aside, every $10 gain in the price of black gold tends to shave two-tenth of a percent off of US GDP. Everything has a price.
Analysts at Johnson Matthey had estimated that the platinum market would be basically in balance in 2012 after it recorded a relatively small surplus of 195,000 ounces in 2011. That estimate however was made back in November and it did not account for the most recent developments in South Africa. It is now believed that JM may revise its estimates when it updates its reports in May. Owing to the losses in platinum production Anglo Platinum, the on-going problems at Impala Platinum, we could see the platinum market swing into deficit during this year. South Africa accounts for about 77% of the world’s platinum supply.
The US Commerce Department reported this morning that America’s GDP rose at a revised rate of 3% on an annualized basis; the highest since Q2 of 2010. Economists noted that the combination of job growth, better spending, and credit creation in the US are all symbiotically coming to the aid of such improving readings. The US economy’s expansion rate in the previous quarter came in at the 1.8% level. As one observer characterized it, the US economy “looks decent.” Someone, quick, let Mr. Bernanke in on this development. His pessimism level is so…Q4.
In fact, it appears that Wall Street will now be listening intently to what the Fed Chief might have to say in coming hours when he testifies in front of Congress. The dovish Fed sparked an asset rally that has been with us since January but observers have noted a major disconnect between the near-zero-rate ‘pledge’ (into 2014!) and the projections for rate hikes coming from the Fed’s own members as well as from the improving US economic metrics. Moreover, any further QE also appears in doubt. Quite a few Fed officials are strongly opposing any more QE. Dallas Federal Reserve Bank President Richard Fisher, admittedly a hawk, called the idea of another round of asset purchases “wishful thinking” by Wall Street.
On the other hand, economic expansion in India appears to have hits quite a bump in the road. That country’s growth has slowed to 6.1% in the final trimester of last year and that would make this the lowest pace of progress since 2009. The development places the RBI in a very difficult spot at this juncture. Stimulate by cutting rates? Hold tight because of inflationary pressures? Keep watching and read reports by the World Bank that argue for a generalized slowdown among the emerging and developing economies and chalk it up to the ‘cycle?’ No easy answer is at hand.
The same World Bank has also warned that China is headed for a potential economic collapse unless major reforms are undertaken very soon. In one of his most foreboding pieces to date, Marketwatch contributor Paul B. Farrell cites the World Bank’s warning “that China’s corrupt state-owned companies have created a Chinese Super Rich class aligning communist party bosses and corporate executives,” and concludes that “neither has any interest in the World Bank’s call for reforming their incestuous economic system.”
Fresh off the Marketwatch presses: “North Korea has agreed to a moratorium on the testing of its nuclear and long-range missiles, in addition to the suspension of uranium enrichment for its nuclear power plant, according to the Associated Press on Wednesday. As part of the agreement, North Korea has also agreed to allow inspectors from the International Atomic Energy Agency to confirm the disablement of its reactor at Yongbyon. In return for its cooperation, the U.S. has proposed to ship about 240,000 metric tons of food to North Korea.”
Memo to Mr. Ahmadinejad: Are You Hungry Yet? If not, then consider the other item hot off the (WSJ) presses: “The U.S. Treasury Department disrupted a Dubai-based banking operation that Washington believes had become Tehran's primary conduit for evading international sanctions and processing its oil sales, according to people briefed on the operation. The effort was particularly sensitive because the targeted institution in the United Arab Emirates is partly owned by the local government of Dubai, a close U.S. ally. The chairman of the bank, called the Noor Islamic Bank, is the son of Dubai's ruler. In mid-December, Noor agreed to close off what the people briefed on the operation characterized as Iran's single-largest channel for repatriating foreign-currency oil receipts.”
As well, the US has fired off its first salvo against India’s de facto circumvention of the international community’s anti-Iranian sanctions (with its stated intent to continue to try to buy oil from Iran) by making a statement of “dismay” about India’s behavior…
Until tomorrow, tune in to “Mr. B Goes to Washington”
Jon Nadler is a Senior Metals Analyst at Kitco Metals