Gold hurt as downside momentum accelerates

January 29, 2013 04:18 AM
In the Lead: “Momentous Momentum Moment”

Gold and silver started the new trading week on a weak footing, picking up where they left off on Friday, with the former touching fresh two-week lows in the cash market at the $1,651 per ounce level. Some of the selling was related to options expiry while parts of it were caused by the reporting of a solid durable goods orders figure for the month of December. Metric after U.S. economic metric continues to come in at, or above consensus expectations and such data strings have fueled anxieties among speculators in certain assets (gold certainly one of them) to reassess their “QE to Infinity” positions.

One of the fears that caused gold to sell off again yesterday is in fact related to the fact that — in light of the improving economy — the Fed might not have much if anything (of a dovish thing) to say to the markets after it meets today. To top it all off, the perception that the much-feared debt “bomb” and attendant U.S. credit rating downgrade have been (at the very least temporarily) defused, is adding to the woes of the doomsayers out there. Such apprehensions have chipped away at gold’s safe-haven premium rally since last fall; it’s just that the perma-bulls have not acknowledged it; then, or now.

One ought not to count on the euro to “save the day” for gold, either. The former BFFs have at least partially parted ways recently, and may further diverge in coming months. Never mind that the recent rally in the euro is suspect and subject to a retracement.  Deutsche Bank believes that the common currency’s rise will shortly begin to damage Europe’s exporters and put pressure on the ECB to try to depress the euro’s value. BofA, on the other hand, sees the euro’s approach to near key resistance chart levels ($1.34 to $1.36) as a not-to-be-ignored sell signal in the making: “When you get up to those levels, based on the head-and-shoulders pattern developing in euro-sterling and euro-dollar, it usually says that we need to start looking for signs of a top, then a turn to the downside.”

Gold managed to narrow its early morning losses somewhat as a December drop in pending home sales temporarily overshadowed the robust durable goods report. Silver fell along with the yellow precious metal on Monday, touching lows near $30.65 per ounce. The white metal has lost 5% in just 3.5 trading sessions (once again, repeat after us: Silver is gold on steroids). If silver were to breach support near the Jan. 11 low of $30.11, then the focus could rapidly shift towards the mid-$20s as a potential target. In the interim, there appears to be no shortage of ridiculous, ill-conceived takes on what is happening in the silver market. Caveat lector.

Late Monday-issued EW wave analysis noted that gold closed lower for the fourth straight session on Monday and that daily momentum was pointed “firmly lower” but that hourly momentum was diverging a bit. Thus, a short-term bounce to resistance levels near $1,669-$1,679 cannot be ruled out. The present target for the unfolding move in gold is not $1,625, but, rather it is the round figure at $1,600 per ounce. It would take a convincing break above $1,696 per ounce on the upside in order to alter that ‘bearish’ view.

News from India and the physical side of the gold market continues to be disturbing for those who heavily rely on that country to take up the slack in the metal’s fundamental overhang. India is reported to have notified Thailand that it intends to slap a 10% duty on Thai-imported baubles into the country. Once again, the move reflects how serious the Indian government is about trying to curb gold demand appetite in the country.

India’s Business Standard reports that “currently, India has early harvest scheme (EHS) with Thailand under which gold jewelry has been imported at 0% [duty] since 2004. This concession is available only if there is minimum 20% value addition in jewelry in Thailand before coming to India.” However, “The [Indian] government suspects that the norm of value addition of 20% is not being adhered to. In fact, instead of gold jewelry, [actual] gold is being imported into India, it is suspected. Besides, most gold jewelry imported from Thailand is reportedly coming from China and Malaysia since Thailand is not a known gold jewelry producer.”

Meanwhile, The Cutting Edge News reports that large-scale gold imports are straining not only India’s finance but, potentially, its social fabric as well. India produces virtually no gold yet it imports about from 500 to 900 tonnes every year in order to feed domestic demand. Professor N. Bhanumurthy of the National Institute of Public Finance and Policy says that the real cost of the $56 billion of imported gold in the most recent fiscal year (11% of the country’s total imports) is the contribution it makes to the Indian trade deficit. Prof. Bhanamurthy says gold should be viewed as an “unproductive” investment. “More than half of the current account deficit has been contributed by the imports of gold in the recent period. The savings should be channelized for some investment activity. Gold is neither investment nor financial savings.”  

Evidently, there is still some ‘education’ left to do. India is reported to have imported 33% more gold this month in an effort by its traders and jewelers to race ahead of the government’s imminent duty hike. While that’s not the same as being able to conclude that higher tariffs won’t make a difference (as some have declared), it is reflective of a possible protracted ‘battle’ between the government and (at least) India’s jewelers and (possibly most) denizens.

Meanwhile, the key to some commodities’ fate in 2013 lies just a short airplane’s journey away in China. Dankse Bank has issued a set of views the other day that might elate some commodity bulls — at least for a short while.  Danske Bank’s analysts are projecting that, while rebounding Chinese growth might make for good price gains in certain “stuff” in the first half of this year, the latter six months might cause some grief for same. Let’s dive into these views a bit more:

Danske Bank advised that “overall, we recommend clients on the consumer side to hedge [first half] commodities exposure early in the year, but potentially leave some exposure open for [second half] to benefit from the stabilization or even price declines.” Now, while this may sound like some far-fetched and perhaps ill-conceived speculation on the part of Danske Bank, we really want you to pay attention to the core concepts being relayed therein. Read on:

The over-arching theme in the Danske Bank advisory review is that (contrary to the stuff you might read in a plethora of hard-money newsletters): “Even as Chinese data lately have provided spots of sunshine, there is no guarantee that this is a longer-term trend. Before the upbeat readings recently, the Chinese economy had been slowing down for almost two years, fueling ‘the question of whether the slowdown has been partly structural in the sense that China’s long-term growth potential is starting to decline.’”  

The Danish bank also believes that “Going forward, focus in China will increasingly be on longer-term structural reforms and on making the economy more consumer — rather than export — and investment-driven; this should, all else being equal, also dampen the country’s appetite for commodities.” This should come as no surprise to anyone; the Chinese leadership itself has recently given signals that is must shift the focus from exports to domestic consumption. Without this change, the country’s economy might be fatally flawed and subject to future difficulties. This is well documented, folks.

Then, there is that “pesky” little matter of…the Fed and QE. If you have come to erroneously believe that central banks (be it the Fed, or any other C.B.) is prepared to extend “easy money” for the foreseeable future and beyond, to infinity, and/or is unable to hike interest rates because it is “stuck” in some ultimate “tight spot,” from which it will never, ever extricate itself, well, think again:

Danske Bank warns that “The helping hand from central banks won’t be around to lift commodity prices forever, either. At the December Federal Open Market Committee meeting a majority of the members expressed that they would be in favor of phasing out the aggressive QE program later in 2013, if the economy starts to pick up accordingly. So, there is no Fed [easing more or resting at zero] forever.”  

The above is precisely what Citi Chief Economist Daniel Ahn had on his mind when he stated that his team is “marking-to-market” its gold price projections in the wake of gold’s near 8% decline that has occurred since last October. According to the Business Insider, Mr. Ahn’s team’s forecast for lower gold prices is “largely dependent on one factor that is overwhelmingly driving gold prices right now: The strength (or weakness) of the U.S. dollar.”

To the extent that you believe in some kind of unfolding global “currency war” (and we do not) you must consider the fact that — as A. Gary Shilling of A. Gary Shilling & Co. frames it — “in effect, competitive devaluations will only add to the [U.S.] currency’s luster as the only haven in an uncertain world.” Consider the alternatives to the greenback, says Mr. Shilling:

The rigidly controlled Chinese economy and financial markets eliminate the yuan as a rival to the dollar for the foreseeable future. Export-dependent and inward-looking Japan doesn’t want the yen to be a primary global currency. And the European crisis eliminated the euro for at least a number of years. The U.K. is a relatively small economy, which curbs the pound’s appeal, and the solid Swiss franc is now tightly controlled. The credibility of the dollar has been strained by its overall decline since 1985, but still is substantial. The troubling U.S. current-account deficit will probably shrink as retrenching consumers moderate imports and U.S. production becomes increasingly competitive and the nation moves toward self-sufficiency in energy.” What’s it going to be, folks? The 3-cent Russian ruble? The 2-cent Indian rupee? Perhaps the 12,285:1 Iranian rial? 

In addition, it also appears that the formerly strong correlation between real interest rates and gold has broken down over the course of the past year. The conclusion reads as follows: Given the high and resilient negative relationship between the U.S. dollar and nominal gold returns, the model assigns a very high 70% weight on dollar drivers, and only a 20% weighting on ETF flows and a 5% weight on real interest rates and inflation respectively, resulting in a forecast for a -4.2% annualized weakening of nominal gold prices to year-end.” Citi is not alone with this kind of price forecast revision, however. Recently, Goldman Sachs issues its own — a bit more dramatic — call for long-term reversion toward the mean (or, at least closer to it) in the yellow metal.

HSBC recently revised not only its gold price forecast but the weighting of the metal in its strategic and tactical portfolios. Marketwatch reports that “HSBC’s Fredrik Nerbrand, the firm’s global head of asset allocation, believes the global recession risk is much smaller now, with reduced fears of a euro meltdown and/or apocalyptic U.S. fiscal situation.” The result of such a view is rather obvious, if you read the following content with care and an objective, open mind.

Over in the U.S., speculative hedge funds and assorted money managers augmented their net-long positions in gold and in silver futures and option last week, according to CFTC data that was released on Friday. Oops. What timing. As it turned out, according to Reuters’ Metals Insider, the funds and big players who had bet on a gold rally for last week ended up on “the wrong side of the market …after they pumped more than $1 billion into New York-traded gold futures.” And now, the only other pillar of support for gold (aside from much-vaunted purchases by Borat’s homeland), gold-based ETFs, appear to be showing some disconcerting “cracks” as well.

The billion dollar betting took place after a previous week of rising prices but it came just “ahead of strong economic data that dimmed the safe-haven allure of the metal.”  But, hey, not all was lost, so to speak. Commodity specs, noted Reuters, “had better results with soybeans, a market where they also committed over $1 billion in fresh net long money and which rose nearly 1% on the week.” Tofu, anyone?

The noble metals presented a mixed price performance picture on Monday. Platinum dropped by $33 to $1,659 per ounce after news reports indicated that miner Amplats might postpone putting into motion a restructuring program announced on January 15th that might result in the loss of perhaps as many as 14,000 jobs as well as a sizeable amount of platinum output (7% of global output). The firm reported an 8% loss of refined platinum production for 2012, owing to the effects of labor actions by its workers. Despite Monday’s setback, platinum has risen dramatically since last summer and is still likely to extend price gains if Amplats’ intended course of action comes to fruition.

Palladium, on the other hand, despite being under a bit of selling pressure as well, fared much better on the trading day. The noble metal recorded a spot price high at $754 (a 16-month peak) but finished with a loss of $4 at $742 on the offered side. Major metals refiner Johnson Matthey estimated on Friday that Russia’s state-owned inventories of palladium may be all but gone.

JM projects official Russian palladium sales to amount to perhaps as little as 96,000 ounces this year. Such sales already witnessed a 68% contraction from 2011 levels last year. The result, according to JM, was last year’s 915,000 ounce shortfall in palladium supply versus demand –the largest in a dozen years. These columns have been alerting you to palladium’s intrinsic “shine” for many moons now, folks.

Until next time, may the momentum be with you.

About the Author

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.