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Jon Nadler

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You're Breaking Up

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 29 2010 9:01AM

Good Morning,

Wednesday’s Fed’s announcement that it would not yet move on interest rates was about as much of a surprise to the news flows as was Sandra Bullock’s divorce filing. The afternoon markets greeted the decision with nary a twitch as all eyes remained focused on the dominoes that are apparently falling over in Europe. The US dollar headed lower this morning, shown at 81.96 on the trade-weighted index (down 0.27) but it was said to be down mainly on account of the euro climbing back above 1.325 following soothing words courtesy of the IMF.

With Greece going viral and ratings agencies falling all over themselves to rearrange the rating alphabet soup for other countries as well (Spain was yesterday’s victim), investors are bailing out of the European common currency at a fast and furious pace –one about as intense as what was seen back in the days of the Lehman Bros. collapse. In that memorable asset cratering during the second half of 2008 the euro lost some 25% of its value against the US dollar, oil prices fell from $147 to the low $30s, and gold retreated to under $700 from its ‘Bear Stearns Peak’ of $1035 the ounce.

No surprise then that all eyes remain on the Greek situation for yet another day and another week. Gold fund managers at Phoenix boldly proclaim (also no surprise) that gold’s moon-shot to ‘over $1,500’ is just around the corner, and just on this issue. Unless, of course, a collapse of this type once again ignites an asset liquidation frenzy that could make the 2008 garage sale turn into an estate sale. This radar remains in the ‘on’ position for such frequent pronouncements by fund managers and mining firm executives.

NYU Prof. Nouriel Roubini goes one step further on the topic of Greece and feels that the potential snowballing of the Greek situation into a full-blown sovereign debt crisis has the possible making of a complete derailment of the nascent global economic recovery. The Professor opines that Greece was simply not ready to join the EU (a view which certainly brings into question the exposure to Greece and eventual fate of some other ‘PIIGlets’ such as Romania, Bulgaria, and Hungary) and that –at this juncture- it may only reflect the tip of an iceberg of potential defaults.

Contrarian traders, on the other hand, view the current opportunity to pick up fire-sale priced debt (such as Greece’s) as a once-in-a-lifetime chance. The feeling is that once a European version of TARP (EARP? TEARP?) is eventually unveiled (and, mind you, it would be bigger than the US version ever was) the armies of specs who have shorted Greek (and other debt) will be breaking down the trading room doors trying to switch sides.

As for the euro, well, the bets are still piling up for an eventual $1.10 to $1.20 figure while Armageddonists have actually already sung its obituary. Hey, if it’s not the dollar, we’ll bash the next logical candidate (except the little detail that dollar is still around and doing rather well –zombie, or not). Meanwhile, Morgan Stanley analysts are currently pondering the odds of a break-up after a decade during which almost everyone on the institutional side had factored such odd right out of any of the euro’s pricing equations. The ‘Father of the Euro’ –economist and Columbia Prof. Robert Mundell opined that the current problem is not a euro problem but a ‘debt and deficit problem.’ In other words, a problem that does have solutions –provided people are willing to make sacrifices in various countries.

Against this still murky euro and ‘extended period’ language-flavored US dollar, background, precious metals and crude oil prices opened firmer, albeit base metals values were unable to climb (and some headed lower) as concerns about a possible imminent tightening move by China. Beijing also announced that it will soon reveal a revamp of its current taxation system as applicable to natural resources.

Gold spot prices traded $1.90 higher on the open, quoted at $1166.90 per ounce as participants awaited the US unemployment filings number (due 10 min. after the open) and as longs were massing for a probable further assault on the $1175 resistance area that was touched on Wednesday. The yellow metal did not encounter many willing takers in the Indian markets overnight as locals held out hope for the possibility of purchase orders beneath the $1150 level to be filled.

The latest dispatch from EW analysts –for those of you who follow price action from that angle- indicates that ‘a diagonal pattern typically ends with a brief surge above the upper trend-line, which crosses $1185 tomorrow and $1186 on Friday. A reversal back under the trend-line indicates the pattern is complete. Since wave (iii) is shorter than wave (i), wave (v) must be shorter than wave (iii). This means that gold cannot rise above $1210.48, otherwise the diagonal pattern will be negated and gold will obtain more bullish potential, including a new price high.?

Further, “A break of the wave (ii) low at $1084.90 will signal that wave 3 (or C) down was already underway. It should lead to a very steep decline.? If this is all Greek to you, it means that prices might go up, then down (and then, eventually, up again)…and make everyone happy (or not). It’s all about when – a factor that has reliably been proven as unknowable by anyone, no matter what font size or dollar figures they use for their newsletter titles.

Silver started Thursday’s session with a 7-cent gain, with spot bid quoted at $18.13 per ounce. Modest (by recent standards) gains were noted in platinum and palladium, with the former opening at $1711.00 (up $3) and the latter at $545.00 (up $6). Rhodium remained at $2800.00 following its recent fall-back of $100.00 per troy ounce.

Carry traders may wait until today’s job(less) figures and developments on the euro front before throwing more money at risk assets. However, expected positive US corporate earnings data from heavy-hitters such as Exxon Mobil, P &G, Motorola and others, coupled with a fresh IMF promise to boost Greece’s aid package by a possible whopping 75 billion euro have already rekindled the appetite for risk among speculators to a decent extent this morning. Any hint of a slackening of Chinese demand has metals traders still on-edge as the country has been the engine of commodities demand ( and price spikes) of late.

Finally, for something completely…different: an erratum to report. In yesterday’s article it was mistakenly reported that Spain sits on 523 tonnes of gold reserves. The culprit was a too-fast glance at a long-term central bank holdings table courtesy of the World Gold Council. The actual figure is 281.6 tonnes and now stands corrected.

Happy Trading and Parsing

This just in: jobless claims filing came in exactly as expected, down 11,000 on the week. Buon risk appetito!

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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.