Gold, Silver, Metal Prices: Commentary – 2/8/2010

Good Morning,

Monday’s early trading action did not start off on a positive note for the euro despite weekend promises by the G-7 leaders to keep stimulus programmes alive, whilst mounting regional debt problems threaten to undermine the very existence of the common currency. The US dollar continued to receive further safe-haven bids from worried investors and climbed to 80.40 on the trade-weighted index while the euro fell to 1.364 and basically met the forecasts that seemed rather outlandish as recently as seventy days ago.

Gold prices staged an attempt at recovering to above the $1070 mark during the overnight hours (and actually managed a rise to $1074), aided by a bit of bargain hunting in the overseas markets and by perceptions that albeit trouble keeps brewing for the euro (there is now emergent talk of a possible rate cut – courtesy of a very fretful ECB), its technical picture is as oversold as it has been in a couple of years. Thus, the tug of war in which gold is currently caught is keeping the action tense and indecisive.

"There’s an increasingly strong downtrend building on the longer-term [gold] charts, but given the intensity of the momentum-fueled break lower, there are good chances for some temporary recovery towards $1,075 an ounce that may well be based on consolidation in the U.S. dollar," analysts at GoldeEssential.com observed last night. They also believe that the $1,000 mark would be kept in focus for a test by Q2 of 2010. At the same time, Standard Bank market analysts described gold’s falls in February as "massively exacerbated by stop-loss trading" and said that "gold’s grass roots activity is meeting alternate waves of buying and selling, pointing to a period of extremely choppy trading."

Monday’s spot metals dealings in New York opened on a mixed note, indicating a possible few sessions of much-needed repair work being underway, but with plenty of nerves remaining manifest as well. Gold was up by $0.20 per ounce, and was quoted at $1065.20 at the start of the session, as against a 0.11 gain by the US dollar on the trade-weighted index (at 80.33 at last check). Silver was off by 8 cents, opening at $15.07 an ounce.

The COT report and analysis thereof, offered by GoldEssential this morning, sums up the most recent gold market developments as follows: "Last week’s report pointed to the bearish implications of the declining open interest. The current report extends these beliefs, as open interest has declined heavily for the second consecutive week. The bearish assumptions are moreover emphasized when we see that — despite the strong decline in OI -the liquidation potential in the speculative (non-commercial) category is nearly unchanged.

It seems clear that the developments mentioned above have attributed to the significant reversal that was seen from Wednesday onwards, and which has slashed over $70 off prices in just three sessions. At current, total open interest in COMEX gold futures as per Friday, February 8th stood at 477,358 lots, only 0.73 pct lower, despite the price-breakdown. This makes us curious for the next report, and suggests that a strong shift in speculative positioning — towards fresh shorting — may be seen. Goldessential continues to estimates the chances "very real" for a drop to the $1,000 an ounce support mark to take place later in the year."

Platinum started lower, losing $4 at $1477.00 per ounce, while palladium shed $1 to $399 the troy ounce. Dollar-watching remains the preferred activity among participants, and increasingly, the tenor of the trade is acquiring a measure of acceptance as opposed to the incredulity that was almost omnipresent when the greenback’s most recent surge began in December. Nothing like a few good trading whacks to alter one’s attitude. The euro was last spotted at 1.36 against the greenback.

Speaking of attitudes, it now appears to be the euro’s turn to play the role of the ugly currency duckling. The greenback is wearing some nice lipstick at the moment, and attracting suitors rather easily. Bloomberg finds that: "Futures traders increased bets to a record level that the euro will decline against the U.S. dollar on concern budget deficits in Greece and other European nations will hamper the region’s economic growth. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, the net position, was 43,741 on Feb. 2, compared with 39,539 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show."

Why is this kind of betting flourishing? Well, when you have Treasury Secretary Geithner declaring (just yesterday) that the US will never lose its Aaa credit rating and that "investors around the world turn to U.S. Treasury securities and dollar-denominated assets whenever they are worried about global stability" then there is very little to wonder about, especially upon closer examination of the euro. Mr. Geithner may be on to something: To wit, the supposedly (by now) dead-and-gone US dollar:

According to Bloomberg, "For all the concern over the $1.6 trillion US budget deficit and record debt load, the dollar is as valuable now as 35 years ago. Measured against a basket of currencies from the G-10 nations proportioned against each other, the greenback is up about 3 percent since 1975, according to the Bloomberg Correlation-Weighted Currency Index. That was four years after the Bretton Woods agreement set up in 1944 to link currencies to gold, collapsed." In other words, "To quote Mark Twain, the reports of the dollar’s demise have been greatly exaggerated" said Win Thin, a senior currency strategist at Brown Bros. Harriman & Co.

As for the euro, The Sydney Morning Herald informs that: "This year, if Greece can’t persuade investors to buy €53 billion ($A83.5 billion) of its government debt, it may have to seek a bailout from its European Union brethren or the International Monetary Fund – or, worse, default. The stakes are high, not just for Greece but for the entire euro zone, where efforts to forge a common economic identity are threatened. Last week, the panic spread to Portugal and Spain, and the cost of insuring their debt against a default soared to record levels as investors bet that, like Greece, governments in those countries won’t be able to rein in bloated budgets. Over the past decade, Greece took full advantage of a strong euro and rock-bottom interest rates to fuel a debt binge by its consumers and government.

”The risk of contagion is a real one,” said Scott Thiel, head of European fixed income at the asset management firm BlackRock in London. ”Investor sentiment is now focused on countries like Spain and Portugal, where fundamentals are weakest.” The euro, which has become one of the world’s strongest currencies since its introduction over a decade ago, is down 5 per cent against the US dollar this year."

Adding to convictions that the euro could continue to be threatened (existentially speaking) but that it at least could come under further fire in the trading markets, are perceptions that attempts at curing that which ails Greece, or other countries on the PIIGS list (and beyond) could prove extremely difficult given the very culture of Europe. Agence France Presse finds that: "The swelling public deficits in Portugal, Spain and Greece have plunged the eurozone into the biggest crisis in its 11-year life, presaging years of belt-tightening, analysts warn. It is a vicious financial circle; the more fears over deficits and debts grow, the harder it becomes for the troubled eurozone nations to borrow money to stay afloat."

The problem is that the measures aimed at righting this listing ship are being met with strong opposition by Europeans used to being taken care of by the state. The SMH thus observes that: "on a continent where the culture and legitimacy of the mother state are so deeply ingrained – and now in some cases unaffordable – a question remains: can the European Commission say ”no more” to prodigal nations like Greece and, to a lesser extent, Spain and Portugal? And how will the countries themselves confront the political fallout of economic distress?

”People view these welfare polices as acquired rights,” said Jordi Gal, an economist who leads the Centre for Research in International Economics in Barcelona. ”If the Spanish government were to stop paying the fees for students at universities or any move in that direction, there would be a major social uprising.”

Greece, for example, most recently promised certain corrective measures aimed at solving the crisis. They include a public salary freeze, an increase in petrol taxes, and a hike in the retirement age. However the moves have upset the labour unions more than they have assuaged market sentiment. How seriously upset are workers and certain groups in the affected countries? Well, never mind the potentially raging Spanish students; now, even the prostitutes of Greece have taken to…strike action as Greece grapples with its debt.

Remain on dollar-watch, and watch for Chinese bank lending data for January (a potential barometre of imminent or on-going tightening within the country). For the moment, these are the most important blips on the commodities’ markets radar.

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

Check out other site market resources at Bullion Prices, US Silver Coins Values and the US Inflation Calculator which easily finds how the buying power of the dollar has changed from 1913-2009.