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PIGS and Jobs Cause Markets To Sweat Blood
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Good Evening,
Gold prices fell, and fell very heavily, by over 4 percent, on Thursday in New York. This was the worst single-day performance in the yellow metal since December 1 of 2008. The yellow metal was pushed sharply lower by broad-based selling across financial markets on the back of a surge in risk aversion that followed on increasing fears that Greece may be heading to default on parts of its debt, and that Portugal and Spain could be heading in the same direction.
Such rising fears gave rise to extremely aggressive selling across all commodities as well as other asset markets. Oil futures dropped by 5 percent, while U.S. stock market was seen as heading for its lowest closing level of 2010, and with the DJIA nearly touching the key 10,000 point mark. Ultra bullish commentary has chosen (up to today, anyway) to ignore the US dollar’s near-8% rally since November, or gold roughly 13% decline since its peak on December 3rd , chalking them up to ‘aberrations’ and mere ‘corrections’ that were meaningless. Enough said.
COMEX gold futures for April delivery settled $49.0 or nearly 4.5 % lower at $1,063.00 an ounce, dropping further in electronic after-hours dealings to a low of $1,059 an ounce, a level unseen since November 3rd of last year. Volumes in the benchmark contract peaked to an estimated over 200,000 lots, suggesting strong fund selling activity.
“What you see is a clear indicator that gold is currently a high risk trade”, said Matthias Detremmerie, founder of Goldessential.com. “The recovery that we saw over the last few days had signs that something was missing. Investors didn’t step in and most of the rise back above $1,100 an ounce had been seen on the back of short positions getting erased and leading to a rally fueled by nothing more than short-covering.”
Mr. Detremmerie added that “today, we saw the inverse as layer after layer of support was pierced. This was a stop-loss frenzy, and once the market moved below last week’s low of $1,074.40 an ounce the floodgates went open. This move – to some extent seen as “capitulation of the bulls”, in combination with a contraction in open interest that has been seen over the last weeks, has some very bearish implications. $1,000 is now certainly back on the radar”, Mr. Detremmerie concluded.
An announcement that fund BarCap had exited a long gold position as the metal fell through $1,070 an ounce also weighed on sentiment, according to market sources. Technically, gold now looks battered with strong indications that the yellow metal might face further losses over the next few sessions. “There was little to no follow up bargain hunting, with prices hovering only marginally off their intraday lows”, said Carl Johansson, Sr precious metals analyst with Goldessential.com. “If tomorrow’s U.S. payrolls data fails to live up to expectations and comes in weaker than expected, there may be little in the way for a test of at least the $1,050 an ounce support mark”, he added.
As of the last check, gold spot was trading at $1061.90, off $47.40 per ounce, while silver was down by $1.12 an ounce, quoted at $15.25. Platinum lost $63 to $1506 while palladium caved $27 to $409 the troy ounce. Rhodium was still bid at $2400 per ounce, but that could change tomorrow. Carmaker Toyota’s woes are on the rise, as its iconic Prius model is now the possible subject of a braking problem-related recall. Markets appear to be expecting a deep bow of apology from the firm’s top executive, while the falling share values of the company have heavily pressured the Nikkei stock average.
Toyota stock has fallen some $20 over recent weeks and is trading near $72 per share, with some analysts calling for a possible further $10/share loss. The latest check of the trade-weighted index showed the US dollar climbing to 79.58 ( a gain of 0.16) whilst against the euro, the greenback was quoted at 1.383, showing little in the way of signs of slowing, following a couple of sessions of profit-taking.
“The prospect of further gains in the dollar, which would cut gold's appeal as an alternative asset and make dollar-priced commodities more expensive for holders of other currencies, is seen as a risk for precious metals this year.” wrote Reuters’ Jan Harvey this morning.
Currency analysts at Deutsche Bank are “looking at the likelihood of dollar strength this year, primarily based on Fed (monetary policy) tightening, and have a target of 1.35 on the euro/dollar, and that is the reason we are slightly bearish on precious metals," he added. "We are not imagining a significant correction, but this is a dollar story."
A dollar story, indeed. As has been the case since at least two years ago, but even more so, since late last summer. However, this is also a Greek odyssey. The EU Commission endorsed the so-called “Greek Stability Program” yesterday. To us, it sounds more like an EU and euro stability blueprint. The proposed Greek plan aims to cut the country’s budget deficit to below 3% of GDP by 2012.
However, the IMF has said that it can still step in and help right the listing Greek ship if needed. Spreading labour protests in Greece threaten to undermine President Papandreou’s implementation of what he himself has labeled as the “painful” measures needed in order to cut spending.
The mainly Greek-flavoured European jitters that were once again seen rising this morning also included plenty of hand-wringing about Portugal, Spain, Hungary, Ireland, and Dubai. As a result, emerging market equities took a hit, and commodities headed lower, while the US dollar once again benefited from an inflow of safe-haven oriented funds.
Yesterday, we brought you contrasting views on gold’s price prospects, as seen by various mining firm executives and market pundits. Today, it is time to let some fund managers speak their mind. Once again, the range of perspectives is as wide and as varied as one might expect it to be at this possible inflection point in the market. Consider the ‘sound bites’ brought to us by the Financial Times Advisers overnight:
“Multi-managers at T Bailey Asset Management have sold some of their gold holdings in its cautious managed fund in favour of soft commodities. The fund held 9.7 per cent in gold and reduced this to 4.7 per cent in December last year. The managers at T Bailey sold some of the gold in favour of commodities such as agriculture.
Philippa Gee, head of sales, marketing and communications for T Bailey, said while fund managers favoured gold in the long-term, because of the stage of the economic cycle there was a move from hard to soft commodities. Ms. Gee said: "In the short-term we have our sold gold in the cautious managed fund. We have gone into soft commodities and bought an agriculture exchange traded fund. This is because of where we are in the cycle, soft commodities are more attractive."
Jason Evans, partner of Bristol-based IFA Kohn Cougar, said gold was not a 'proper' investment. He said: "It is a speculative investment because it does not have an earnings stream. No one can put a proper price on gold. "People perceive gold to be a safe haven and a store of value and when investors are worried about the value of the dollar they pile into gold but no one can determine its proper price."
Bradley George, co-portfolio manager for the Investec Global Gold Fund, said the degree of investment demand for gold was likely to force a peak that is nearer $1300 an ounce over the next six months with $1000 an ounce becoming the long-term floor.”
There you have it, enough variance in views to give any speculative trader an opportunity to fret or get excited, given their take on the opinions expressed above. And then, there is Mike Maloney, author of “Rich Dad’s Guide to Investing in Gold and Silver” who argues that gold's current bull market “will continue to infinity (or, to at least the high five-digits in five years, no less!) as bullion is forced to cover the amount of both base money and outstanding revolving credit.” Not half as good as his forecast for $1000…per ounce (or was it $1500?) silver. Welcome to Harare on the Hudson.
Whether T Bailey’s move, Mr. Maloney’s prophecies, or Investec’s expectations prove to be profitable or well-founded, and within what timeframe, well, that remains to be seen. However, none of this ought to matter to a genuine gold owner. One whose position in the metal is not seen as an ‘investment’ with which to “make more” money, but rather as the taking out of an insurance policy for the one type of risk against which one cannot ever properly hedge against: uncertainty. For practically every other kind of market risk, there are lots of effective tools already available. Most of these hedging vehicles were not on offer back in 1980, to be sure.
Watch for continued volatility and more potential sell-offs as we near the pre-weekend book-squaring ritual and we get the employment figures on Friday. Also, keep an eye on the growing number of days the euro spends under 1.40 (now near 1.37) as PIGS woes continue to impact regional investing psychology. The dollar may not be the most attractive animal on the block, but the safe-haven shade of lipstick it currently wears certainly appears to be doing the trick, when compared to the…other investment beauty pageant candidate.
Cautious 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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