Gold bull may have ended in August 2011

In the Lead: “India Dodging Silver Bullet?”

Almost all of the recent wariness over gold’s price gain prospects has to do with substantially lowered expectations of global liquidity growth among speculators, but in particular, the doubts that have emerged about a third round of Fed QE. In fact, in the opinion of veteran market watcher and economist Dennis Gartman, the “fatal blow to gold’s ten-year bull market” was in fact delivered last week by none other than a very mildly hawkish Ben Bernanke.

Mr. Gartman dissected gold’s trend-lines and came to the conclusion last Thursday that “in retrospect it does appear that gold has not been in a bull market but has indeed been in a bear market” since August 2011, when it peaked above $1,900. “Since then,” he added “each new interim low has been lower and each new interim high has followed [lower as well].”

China was in the global markets’ focus once again on Tuesday as its customs bureau reported an unexpected trade surplus of $5.35 billion. The issue with the trade picture was the fact that while exports did show an increase of 8.9%, imports climbed by only 5.3% pointing to tepid domestic demand. Analysts had expected a deficit of $3.15 billion and were thus somewhat alarmed by the actual numbers as they still indicate a deeper economic slowdown than many have projected for the country. Asian markets declined in concert on the Chinese trade data and their selling sprees spilled over into the US equity market where the Dow lost 213 points and showed lingering concern about Friday’s jobs numbers as well as China-related anxieties at work.

The trade news from China and the highest reading in stockpiles in 22 years sent crude oil lower for a second day in New York yesterday. Black gold traded down 1.65% to touch $100.89 per barrel; a two-month low. Bellwether copper fell 1.5% as specs wondered where the demand for the orange metal might come from at this point. Back in the days when China was racing ahead economically at break-neck speed, it was easy to sit back and expect that country to provide the boost that so many fund managers and analysts dreamed of when projecting sky-high prices for everything from iron to copper to gold and to oil.

Now that a different economic reality is apparently setting in, the job of parsing China’s impact on commodities and figuring out the demand for same, has just become a tad more…difficult, to say the least. Researchers opine that there is a shift already underway in China from “hard” commodities to “soft” ones. The fact that a lot of housing and major infrastructure has already been completed – and perhaps even overbuilt – points to the next wave of demand as possibly taking place in agricultural and other “non-metallic” commodities. Oil, of course, will continue to play a critical role in powering everything.

If the IMF’s projections turn out to be correct, perhaps copper, oil, and other commodity traders and speculators might have to look far and wide (and beyond China as well) for demand that would support higher – or even current – price levels. The IMF warned that the price of “stuff” is in fact more likely to decline this year and next, rather than continue the torrid pace at which it grew over the past decade. In an update to its recently-issued (January) World Economic Outlook, the agency cautioned commodity-exporting nations to brace themselves for just such a potential scenario and it continued to place emphasis on crude oil as an important determining factor for the future of commodity prices.

The IMF also pointed out that central bank-originated stimulus does have its limitations. Many monetary authorities have already brought interest rates close to nil, and at that level, not only does it become not possible to cut them further, but “high government debt may constrain the scope for deficit-financed transfers of debt.” The international agency will hold its spring meeting just a few days before the Fed meets later this month.

In news from the Old World, it now appears that if conditions deteriorate sufficiently on the economic front over in Spain, that country’s banks will need more capital in order to remain afloat. A deep recession would probably result in the writing of some obituaries for certain Spanish banks. Last week’s bond auction in Spain did not exactly give comfort to the markets, but, now, the Central Bank’s Governor, Miguel Angel Fernandez Ordonez, has stated that while recent reforms go some way towards resolving the Spanish banking industry’s problems, it might be a good idea for them to raise more capital…just in case.

Such developments have prompted some currency experts to project that the euro’s recent advances and stability may be ephemeral, at best. During Q1, the common currency appreciated by nearly 3% in the wake of the EU agreement on a second Greek bailout, and after the ECB gave regional banks a hefty helping of dough. However, all of that is now history, and the risk of a larger than 5% drop in the euro is seen as quite real by several of the most accurate foreign currency forecasting experts.

Analysts at Well Fargo & Co. and at Westpac Banking Corp. are calling for a $1.24-$1.26 euro/dollar rate by, or prior to, the end of this year. This is notable because we have seen a tandem gold/euro trade (inverse to the US dollar) having been manifest quite a number of times in recent months. Meanwhile, you may consult the technical report on the greenback, as produced by analysts at right here; it advises “buying the dips.”

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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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