The sheer carnage that took place in the metals markets on Wednesday managed to surprise even some veteran market-makers and seasoned traders in this niche. The incessant selling and demolition of one previous support after another gave almost no one a chance to come up for air as it took no prisoners.
However, the freefall failed to ignite Indian appetites for gold overnight and albeit corrective bounces from now oversold conditions are to be expected in coming hours, there are still likely pockets of badly wounded longs whose margin call alarms are probably still ringing away and whose speculative pocketbooks have slimmed down to a point where this game might just not be worth it.
At least some of the millions coming out of the gold and silver markets made a u-turn towards and into money market funds recently. Research firm iMoneyNet has now tallied six non-stop weeks’ worth of funds flowing heavily into such instruments. "Heavy" in this case, amounts to $85 billion. More than 14 billion of those dollars flew the [commodity and equity] coops towards the shelter of money markets in the week ending December 13.
The firm says that "one explanation for gold’s nearly 5% dive on Wednesday is that money managers are cashing out of gold and shifting into money-market funds, where yields are zilch and performance is flat, but the chances of getting taken to the cleaners are slim."
Someone who potentially got taken to the "Martinizing" establishment recently is fund manager John Paulson. After he was already set to record his poorest year of fund performance, Mr. Paulson also appears set to tabulate additional losses in the portfolio in the wake of gold’s meltdown this week. Earlier this year, the gold component of the Paulson pie helped offset losses resulting from certain bets [BofA comes to mind] gone wrong. As the largest GLD shareholder, Mr. Paulson could be chalking up some $672 million in [paper] losses arising from the declines in GLD and eight gold stocks being held in his fund.
Some of this new "normal" is confounding a large and growing number of rookie as well as seasoned traders out there.
Bloomberg reports that "traders who used to profit from price swings are struggling as record stock market volatility shows no signs of abating. Hedge funds are on track to post their second-worst year on record, with managers such as John Paulson seeing bets undermined by Europe’s two-year sovereign-debt crisis and concerns over the U.S. economic recovery. U.S. mutual funds are headed for their weakest year in two decades and the top Wall Street banks posted their worst quarter in trading and investment banking since the depths of the 2008 financial crisis."
The commodities’ space shows similar signs of disorientation. Just one week ago Bloomberg noted that gold traders were at their most bullish in one month and that retail investors were piling into gold due to the debt crisis. As of this morning, we know how part of such betting…panned out. As for Europe, well, it is still standing but its woes are making many a trader seek total safety, even at the expense of any returns. For the moment, we have France being threatened with the loss of its coveted AAA rating and ECB head Mr. Draghi stating that an economic contraction (short-term) in the Old World should be baked into the equation for investors.
Reuters reported that "the euro held steady on Thursday, but still hovered near an 11-month low hit the previous day as signs the European debt crisis was far from over prompted investors to sell risky assets and bolstered demand for the dollar."
"We need something to get us through the next six to 12 months,"one market observer stated.
Mr. Draghi, meanwhile, stated that there are no ‘external’ saviors for the governments up to their eyeballs in debt in Europe and that such countries must save themselves. If you think the common currency has scope for rallying on the back of such ‘reassurances’ then please, think again…
As such, further liquidations are quite possible and capitulation is not a syndrome anyone has yet noted as being on the scene; certainly not if one parses the rabid gold bug forums and doomsday-oriented newsletters where defiance rules the day and denial is the favorite flavor of the moment. Standard Bank analysts in their daily market missive see support for the yellow metal at the $1,510 to $1,560 zone but also note resistance north of the $1,590 figure. They also opined that platinum and palladium "from a cost-of-production perspective, are too low" and that platinum should be [at least] $100 higher these days.
Silver, however, is another story. Unconfirmed rumors that the Shanghai Gold Exchange was contemplating hiking silver margin requirements to 18% elicited additional liquidations of the already badly hurt white metal. Yesterday’s close below $29 now makes the level to have to overcome on the upside the October high of $35.71 and the fresh downside target that has emerged is the (at least) $22 level, according to EW market analysis.
This morning’s opening tally in New York contained gold rising $12 to the $1,588 mark on the bid side, silver advancing 9 cents to $29.05 and a mixed price bag in noble metals. Platinum scraped along a two-year low watermark near $1,410 (losing $9) and palladium recovered to the tune of $7 to climb to $622 per ounce. No change in rhodium; the metal was bid at $1,425 this morning. The complex fell into the ‘red zone" by shortly after the 10 o’clock hour in New York as additional mini-waves of selling buffeted the market.
Last night’s Elliott Wave transmission underscored the fact that "on a monthly, weekly, and daily basis, gold is ripping through support lines and channels that clearly helped guide it higher through September."
Market specialist Stephen Leeb issued a special "sell" recommendation to his readers and awaits $1,300 gold (i.e. a 33% correction from the $1,920 per ounce high if the year).
The next EW target now becomes the $1,532 Wave 1 low and if that figure falls then the next major long-term objective is the area around the $1,300 mark. Commerzbank and VRTrader analysts, on the other hand, have offered the possibility of gold at or under $1,500 and $1,270 per ounce respectively and the timeframe for such ‘achievement’ extends from just weeks to several months. Meanwhile, don’t look now but the final tally of 2011 could well (and it does as of right now) show that US Treasuries have gained 20% on the year, making them the single best asset class to have been parked in — if returns were your objective.
Background readings in related markets that matter showed copper recovering by nearly 1% and crude oil trying to do the same. Most of the triage of the dead and wounded came on the heels of a modest pullback in the greenback; it eased to 80.23 in the index in the wake of what could now be considered an overbought paradigm and as the euro finally clawed its way to the $1.30 level and tried to desperately hang on to it during a moment of calm on the European news front. On the US news front, however, the morning headline flow brought some more encouraging economic statistical findings.
Initial jobless claims fell further this past week, dropping to 366,000 filings — that makes this the lowest such claims filing level since May of 2008. Economists had anticipated a rise in same to perhaps the 390,000 mark. Adding a bit more to the ‘risk-on" gambit this morning, the Empire State’s manufacturing index this month climbed to its highest watermark in seven months. Wall Street indicators were flashing a better day ahead in the making in the wake of these positive metrics. There was one rather tepid reading in this morning’s statistical soup; it was the one related to a 0.2% drop in industrial production.
Until tomorrow,
Jon Nadler
Senior Metals Analyst — Kitco Metals
Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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