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Good Morning,
Bullion values turned lower once again following yesterday's GDP-related and mostly technical bounce. Overnight trading brought prices down to a low of near $906 per ounce, as the US dollar picked up a few notches on the index (@ 73.30) as well against the euro which fell after BMW abandoned sales and profit forecasts due to slumping US sales. Oil gave up nearly one dollar and traded near $123 per barrel as news that Chinese manufacturing showed signs of slowing hit the wires. Copper, zinc and aluminium futures all lost ground on the Shanghai Exchange today. Not helping matters for black gold were yesterday's US GDP figures for Q4 2007 and this morning's $15 billion Q2 2008 loss reported by GM. Demand destruction continues from the assembly line to the gas pump. Americans are evidently refusing to pay more than about $4 per gallon and have began opting for alternatives - including cutting back on traditional summer vacation-related leisure driving. Falling demand is seen as continuing through year-end, according to a heavily-read Marketwatch article by tireless reporter Myra P. Saefong. Such news may continue to impact the noble metals as the week draws to a close and vacation month begins.
New York spot gold opened $3.00 lower at $910.10 as the metal was heading for its third weekly loss as participants awaited non-farm payroll data and its potential effects on equities and the greenback this morning. While stock and currency market watchers expect the jobs numbers to show a seventh consecutive month of shrinkage, they remain optimistic on the potential for an advance in the Dow as oversold conditions are perceived. Dollar traders are also anticipating further strength in the currency as conditions in Europe continue to pressure the euro towards the 1.54 level.
Silver fell 17 cents to 17.54 while the rout in pgm-group metals continued to unfold - platinum lost $68 falling to $1688 and palladium dropped $12 to $367 per ounce. Rhodium fell $100 to $8135 and is now nearing a $2000 loss from its fairly recent peak. Automotive sector news and a brighter supply outlook out of S. Africa continue to present a hurdle to price advances. Gold is itself showing signs of fatigue after a third week of declines that - albeit punctuated by decent-sized isolated rallies- have brought it to the edges of the $900 area once again. Closing above $915 remains desirable at this juncture but the metal will need fresh geopolitical or dollar developments in order to change course significantly, as players are likely unwilling to take on large bets ahead of next week's Fed gathering. Commodity Online offers this technical take on the yellow metal: "Gold staged a 30 dollar bounce off of yesterday’s lows to 925 earlier in the session, but drifted back to 914 in the afternoon. Despite the bounce, the overall price action is bearish while we remain below 935. Downside support is seen at 888 - the 200 day moving average and 76.4% retrenchment."
As the Olympic Games get underway net week, we are all likely to see a shiny, confident, and prospering China on our television sets. Indeed, the country has made miraculous progress on many fronts. But, after a string of white-hot growth years, it appears that the gears in this giant's economic engine are slipping just a tad. Even such relatively minor declines in the Chinese economic rpm present potential difficulties for perpetually starry-eyed commodity super cycle advocates. The myths of an insatiable China and an ever-voracious India are coming under closer scrutiny than your average piece of evidence on CSI. So is the concept of a mania phase that is putatively set to begin in metals.
As China experiences a worsening energy crisis and faces the threat of persistent power shortages over the next 12 months, Purchasing Manager Index data released today confirms that the country's manufacturing sector contracted in July for the first time since 2005. Weaker exports are taking a toll on the economy. As such, sustaining rapid growth is China's primary economic priority now. In a sign of official concern that the economy is slowing too sharply, the central bank has authorised banks to increase their lending by 5 percent.
Whilst some economists have said that factory closures and transport restrictions introduced to improve Beijing's air quality for the Olympics could have affected business sentiment, a parallel survey of purchasing managers conducted for brokerage CLSA pointed to a much more modest slowdown. All of which has caused some observers to question - could the shedding of a few basis points of economic growth justify investors taking some $305bn of commodities bets off the table, does the arithmetic stack up?
Today's Financial Times asks the question and says:
"China’s economy has grown in excess of 10 per cent annually for five years in a row and may yet scrape through for a sixth year – although probably not if slowing official numbers reflect reality. That in itself need not zap commodity demand. Fixed asset investment, around half of economic output, remains strong; government spending – including post-earthquake reconstruction – should take up any slack from the corporate sector. Yet China can still spoil the day for commodity bulls.
The country responded to soaring prices by ramping up domestic commodity production and foraging for alternatives. Take nickel as an example. Stainless steel producers turned to lower grade nickel pig iron, shipped in from south-east Asia and blasted in local furnaces. By the end of last year, Merrill Lynch estimates, this substitute accounted for 7-8 per cent of global nickel supply (the consequent collapse in nickel prices has since shuttered many of these manufacturers). In 2005, China’s copper production rose 42 per cent versus 7 per cent for consumption.
Hopes that power shortages in China will eliminate some of this local production and galvanise imports are wide of the mark. The energy-intensive aluminium industry is particularly hard hit: big producers are cutting production by up to 10 per cent from this month. But inventories are robust and the Chinese industry is not geared towards imports. Slower economic growth will play a part in denting global demand. But more important is China’s unwillingness to pay the very prices it has helped inflate."
July private sector job losses came in at 51,000 against the expected 70,000 + figure. May/June payrolls were revised upward by 26,000. The overall unemployment rates edged higher, coming in at 5.7% - a four year high. The lower-than-expected jobs loss number boosted the dollar as soon as it hit the wires (it rose to 73.46 on the index) and deflated gold further - the metal promptly lost $10 to fall to $903. A close below $900 for the first day of August could develop unless bargain hunting emerges during today's session. Silver lost 35 cents (@17.36) and platinum fell $86 (@$1650). Thus far, the makings of not a sunny day. We will return with the latest, after lunch.
Happy Trading.
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco 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 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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