Metals markets opened the midweek session on the downside as the euro’s “Draghi Rally” fizzled out and the US dollar recovered to near 82.50 on the trade-weighted index. The common currency had rallied (and gold along with it) on the back of rising optimism that EU officials might take certain easing or interventionist measures to shore up flagging economies and runaway bond yields. Forex traders expect the euro to trade between $1.22 and $1.24 for the time being, barring any surprises on the statistical or regional political front. S&P lowered its rating outlook on Greece to “negative” from “stable” in the latest round of cuts. Greece already has a CCC rating, which is eight levels below investment grade (read: junk).
However, a decline of nearly three-quarter percent ensued this morning in the wake of reports that German industrial production fell 0.9% in June, industrial orders declined 1.7%, and that exports slid 1.5% on the month. Both figures were below economists’ projections. Italy’s economy once again contracted in the second quarter with its GDP falling 0.7%. The country has now experienced four consecutive quarters of economic decline and is firmly in the grip of a deep recession. The situation has prompted Capital Economics analyst Ben May to caution that “Italy faces huge economic and fiscal problems. Although the pressure from the markets has recently eased, we still think that it is only a matter of time before Italy is forced to seek a sovereign bailout.”
Market watchers are becoming increasingly convinced that after half a year on the job, Mr. Draghi might be a “man who can talk the talk, but stumbles badly when it comes to the bit where he has to attempt the walk. The evidence is starting to mount up that when it comes to reassuring the market, Mr. Draghi has about as much credibility as Greek bond salesmen.”
Spot gold prices drew closer to the $1,600 psychological support level, falling for the first time in four days, with an initial decline of nearly $10 and a bid-side quote at $1,602.50 per ounce. VTB Capital analyst Andrey Kryuchenkov writes that “Bullion continues to trade with the single currency with little physical interest. So far, gold has failed to attract any safe-haven inflows, instead trading as any other risk asset and in line with the broader market sentiment.” Speaking of physical interest (or the lack thereof), projections made by the Bombay Bullion Association place the level of Indian year-to-date (to September) gold imports at 450 tonnes as compared to the 753 tonnes imported in the same period last year.
On the other hand, Sharps Pixley market analyst Shamik Bhose points to the maintenance of the $1,525 support level in gold (now thrice tested) as being pivotal for the yellow metal. We have, several times, also mentioned the same value zone as being singled out in many an Elliott Wave analysis as being a critical one to have to hold. The analysis notes that “gold is in a downtrend now. It’s been in a downtrend since September . It edged lower in March and April, but that downtrend has suddenly accelerated in May and now the moving averages are all sloping down.”
Shamik Bhose also remarks that gold’s 252-day moving average has been broken only once since 2001, and that was back in 2008. Over the past few weeks however, that same breach has once again manifested itself and that is why, if and when $1,525 is taken out on the downside, we may look for $1,400 or perhaps even $1,250 gold, where “even in the worst-case scenario, I would hope for us to find a bottom.”
Currently, Sharps Pixley asks the rhetorical question “Can Fear Refuel the Investment Demand for Gold?” Well, perhaps not fear just yet; just the never-ending hope that the Fed will launch a QE3 and give the easy money junkies their much-awaited fix. Yesterday, the story that Boston Fed President and major dove Mr. Rosengren encouraged the Fed to go “all out” with a massive and open-ended QE3 made it into “heavy rotation” on the hard money sites. Albeit Mr. Rosengren is not on the FOMC this year, and will not call the decisive shots, commodity bulls appeared to cheer his suggestion with abandon. Dallas Fed President Fisher called Mr. Rosengren’s recommended steps as nothing more than a “mistake” to be avoided so close to the Presidential election period. Others prefer to focus on the fact that the US is approaching the “fiscal cliff moment” in January and that any Fed action notwithstanding, that railroad crossing is far more important to watch. Base jumping, anyone? Some say so.
Spot silver fell 30 cents to near $27.75 and platinum dropped $8 to $1,395 the ounce. The decline in palladium was only about $2 and the noble metal was quoted at $581 per ounce. Sister metal rhodium showed no change at $1,170 on the bid. Background markets showed the euro at $1.234, crude oil down 50 cents to $93.18 per barrel and US stock index futures tilted lower after the aforementioned weak data came out of the EU’s economic engine.
The markets are also gearing up for the release of a slew of Chinese economic data on Thursday and Friday. For the time being, what is already known is that the country’s economic engine is showing lower RPMs already. Freight volumes are down by 2.4% year-on-year and by 8.6% on a month-to-month basis. The metrics are undeniably bearish for industrial commodities as they underscore feeble underlying demand. Copper, iron ore, aluminum, and platinum are at risk from such weak readings.
Reuters News reports that “China's imports of crude oil, copper, coal and iron ore are expected to drop for the second consecutive month in July as a stuttering economy and high stockpiles keep buyers at bay. China is the world's biggest consumer of commodities, and last month saw global iron ore prices tumbling 13 percent and thermal coal prices hitting a 30-month low, declines that would normally have encouraged restocking.”
We close today with a couple of news items on the topic of gold production; current and future. First, it was reported that China’s gold mining production climbed 7.7% to 177 tonnes in the first six months of this year. The country is firmly cementing its first-place ranking among global gold producers.
Further, The Guardian reports that “A “new frontier” in mining is set to be opened up by the underwater extraction of resources from the seabed off the coast of Papua New Guinea, despite vehement objections from environmentalists and local activists. Canadian firm Nautilus Minerals has been granted a 20-year license by the PNG government to commence the Solwara 1 project, the world’s first commercial deep sea mining operation. Nautilus will mine an area 1.6km beneath the Bismarck Sea, 50km off the coast of the PNG island of New Britain. The ore extracted contains high-grade copper and gold. The project is being carefully watched by other mining companies keen to exploit opportunities beneath the waves.”
Until Friday, hum along….