Precious metals, crude oil, equity markets, and certain currencies spent the first trading days of this week basically treading water and fast-forwarding to the last three days of sessions; days from which market participants are hoping to be able to extract some benefit if — but only if — central bankers are willing to play along.
While gold prices held above the $1,600 pivot level the action in either direction was anything but orderly and it often did not take more than the mere hint of a delay in easing actions by the Fed or the ECB to send enthusiasm withering. Once again, the situation underscored to what a large extent the price action to the upside in late July was owed to the rise of cyclical — and by now predictable — "Fedspectations."
Thus, it was once again a time to read headlines such as "Oil Falls on Speculation Fed To Forgo Stimulus" and "Gold Modestly Higher as Central Bank Actions Awaited" followed by "Gold Down After Housing and Income Reports." At the end of the day, indecision reigned supreme and traders went home without their favorite asset being able to chart a clear course into a higher or lower direction. Gold finished near $1,610 per ounce, silver settled right at $28 and the Dow fell 64 points. The US dollar remained near the 82.70 level on the index while the euro showed signs of strain holding the $1.23 level in the wake of German hardline posturing regarding the ESM and the possibility of its being granted a banking license.
In fact, the Merkel coalition government flat-out rejected the issuance of such a permit to European Stability Mechanism with one of its members calling it a "wealth-destroying weapon" that would lead to a inflationary path. Another Merkel coalition official warned that the ESM ought not become the ECB’s "bad bank" at any cost. Such verbal turmoil of course managed to temper a great deal of the post-Draghi statement euphoria to which we alluded in last Friday’s commentary.
Suddenly "we will do anything it takes" when it comes to the euro and the crisis started to sound like "wemight do anything that Germany allows us to do without jeopardizing the entire union." Little wonder then that the IMF came to the conclusion yesterday that the Eurozone crisis will not see a quick resolution (let alone an easy or cheap one) and that it still threatens global financial stability. Estimates for solving the turmoil range from at least half a year to several years but for now we have to settle for a visit by US Treasury Secretary Geithner with Europe’s Who’s Who and his call that they act "more forcefully… to calm the financial pressures that are doing so much damage to growth."
The week in gold trading started off against a number of background news items that still merit the attention of current and would-be gold holders. Notably, CFTC’s market positioning reports once again indicated that speculators in the yellow metal have turned away from the bullishness they had exhibited during the preceding reporting period. Net-long gold positions showed a decline of 17,535 contracts and the market positioning saw the addition of 607 gross short positions. Hedge funds, money managers and other speculators are currently the least bullish on gold since 2008.
On the physical side of the gold market, India was once again in the headlines with a fresh estimate that the country’s July imports may have fallen by as much as 35% owing to near-record prices for the yellow metal. The July gold import tally by India may only come to 40 or 50 tonnes. Demand for gold in India’s rural areas remains very poor at the moment and the weak monsoon (below normal for the first time in three years) could further depress the final 2012 import figures for the country.
The World Gold Council has projected that India’s gold demand will fall for a second year and it has also trimmed its 2012 Chinese gold demand estimate to 870 tonnes from a previous 1,000 tonne estimate. Moreover, market analysts at FXStreet.com note that the US Mint reported its weakest American Eagle gold coins sales level in July in 5 years (only 30,500 coins were moved in July — a 49% drop from June) and the year-to-date tally is lower by 42% than that in 2011. They also noted that the largest gold-backed exchange-traded fund, the SPDR Gold Trust (GLD), also recorded the biggest monthly gold tonnage outflow of the year last month. Their short and medium-term forecast remains "bearish" so long as the $1,630-$1,640 resistance zone is not overcome.
When it comes to the matter of short and medium-term price forecasts, the gold market certainly isn’t lacking in a good supply of them. Of course, the Fed’s statement today, the ECB’s communiqué tomorrow and the jobs data due on Friday will likely yield some fireworks worth watching (be they rising or falling displays). On the chart-based prognostication side, EW alerts indicate that gold could either turn sharply lower from $1,630 and finally take out the support that resides at $1,527 or that it could first aim as high as $1,690 before declining to a new low beneath the aforementioned support figure.
Swiss Bank UBS envisions gold rising to $1,700 around the time of the Jackson Hole Wyoming symposium, and/or the lead-up to the Fed’s September FOMC meeting. No word on what today might bring in connection with gold and the Fed. Meanwhile, French bank Natixis opines that as far as next year is concerned, gold might only average $1,225 per ounce and silver $21.80 per ounce. However, the same financial institution seems to be more positive on platinum and palladium; it projects their average 2013 per ounce price to be $1,700 and $740 respectively. As eminent physicist Niels Bohr once said, "prediction is very difficult, especially when it’s about the future."
That however, does not mean some folks aren’t trying. But, as is sometimes the case that atoms can be split in the world of physics, predictions have become split in the gold market of late. Bloomberg News reported that, as of this time, three of the most accurate gold market prognosticators in recent years have diverged in their opinions as to where the price of gold is headed next.
In fact, Bloomberg’s single most accurate gold price "soothsayer," Justin Smirk of Aussie bank Westpac, believes that gold prices will continue to decline going forward. Mr. Smirk observed that "[Gold] is not the ultimate safe-haven, and the steep fall last year and the performance this year showed that people preferred the dollar. While quantitative easing may bring in some buying, it’s unlikely to go back to earlier highs." For the near-term, Mr. Smirk envisions a possible dip in gold to $1,490 per ounce. This, while his Commerzbank and ANZ colleagues opine that we will see new price records in gold inside of twelve months.
All of the above brings us to… Fedsday. This morning’s ADP private sector payrolls report tallied the addition of 163,000 US jobs in July and the metric could well be the precursor to a Labor Department announcement come Friday that US employers may have added 100,000 positions to payroll rosters last month. While the figure would not be near the desirable job creation level of 200,000 per month, it could certainly constitute an improvement over the June additions of 80,000 positions. The Fed, of course, will have "spoken" by then, so we shall see how the markets will react to that bit of pivotal news.
For now, we can report that gold traded about $20 lower this morning, despite a US dollar that fell by a fraction (-0.10%) on the index, and that spot quotes on the bid-side fell to between $4 and $7 under the psychological round (support) figure at $1,600. Silver lost a hefty 2.7% in early trading and it fell to just a few pennies above the $27.00 per ounce mark. Platinum continued to erode in value, losing about $27 and trading under the $1,400 per ounce level. Palladium was last seen near $580 the ounce showing a loss of $4. Rhodium remained static at the $1,150 per ounce bid quote.
Market background news indicated that China’s manufacturing activity unexpectedly fell to but one-tenth of a percent (okay, two-tenths to be exact) away from a situation in which the "contraction" label could be applied by statisticians. Meanwhile, South Korea’s exports declined by more than twice the level that economists had anticipated. Taiwan did not fare a whole lot better either when it came to the reports on manufacturing activity for July.
The US reported its Markit Final Index for manufacturing at 51.4 for last month. The Institute for Supply Management on the other hand reported the US’ manufacturing gauge for July at 49.8 — up a tad (0.10) form June but still lower than analysts’ estimates and still two-tenths (okay, three tenths) under what is considered as "expansion." With everything out there being as equivocal as all of the above, it would not be very surprising to hear from an equally ambiguous Fed this Fedsday afternoon.
We now hand the mike over to the Fed for what could turn out to be an instant replay of previous policy announcements. Or, not. The FOMC will then pass the electronic baton over to the ECB for tomorrow’s "whatever it takes" spiel by Mr. Draghi. He might act "forcefully" and then again, he might not. Pundits say Super Mario has set the markets up for a letdown with his extremely bold words uttered last week.
Meanwhile, Europe’s August vacation hiatus is just a few hours away. Tick… tick… .tick…
Until Friday,
PS Join me live, tomorrow at 9:15 AM, on Bloomberg’s excellent "Surveillance" morning show where hosts Tom Keene and Ken Prewitt will be sure to ask some very probing questions about all of the above.
Senior Metals Analyst — Kitco Metals
Jon Nadler
Senior Metal Analyst
Kitco Metals Inc.
North America
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