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Germany To Extinguish Greece Fire - Film at Eleven

By Jon Nadler       Printer Friendly Version Bookmark and Share
Feb 10 2010 9:36AM

Good Morning,

The US dollar found some firmer footing on the eve of a European summit at which the central theme will be a foregone conclusion. That said, the euro did not give up too much ground overnight, as more concrete statements emerged from Germany as regards the bailing out of Greece. Germany’s Finance Minister alluded to the extension of “more than just loan guarantees? to the troubled country and with those few intimations, drove Greek bond yields sharply lower –in fact, by the most since the euro landed on the scene.

Meanwhile, Greek labour unions successfully unrolled their first offensive against the debt-ridden country’s proposed austerity plans. Indications are that this crisis is coming to some kind of head in the next few days, even as George Soros expresses confidence that Greece will remain within the euro system and that it will succeed in finding financing for its bonds. Eventually. In the meantime, the US dollar pushed the euro back to 1.376 and climbed to 79.97 on the trade-weighted index, at last check.

Over in the USA, all ears are once again upon Fed Chairman Bernanke, who is set to appear before the HFSC this morning, in order to calmly explain his institution’s exit strategy from the stimulus programmes which have given so much cannon fodder to financial writers over the past three years. Expectations are that Mr. Bernanke will be playing this appearance with the dark shades and cryptic words that are usually on display at a Vegas high-stakes poker game.

In other words, no revelations about precise withdrawal timelines, but still, enough cautionary language to prepare the markets for the inevitable weaning that is to come- some say, as early as September. The first salvo will likely be the mopping up of excess liquidity, by –for example-boosting the interest rate the Fed pays to banks in order to keep their deposits at the Fed. Anyway, we will let Mr. B explain (more or less) precisely what his intentions are. Certainly, some US lawmakers are all too eager to hear that something will be done to assuage inflationary fears out there.

Against this anticipatory (of the EU and Fed events) set of conditions, the metals markets opened on a mixed note this morning, held back by the US dollar’s minor recovery, but helped by still rising optimism that the PIIGS situation will no head for a…trough. Gold opened at $1076.90 an ounce, showing a decline of $0.70 in New York. What the impending blizzard might do to market schedules later today, remains as unknown as is the eventual reaction to the Fed Chairman’s speech. Silver started with a gain of a nickel this morning, opening at $15.50 per ounce.

“The market is choppy and it’s coming off volatile movements in the currency market?, said Matthias Detremmerie, founder of “Traders are looking for clues on what and if there will be a EU intervention in Greece’s debt issues, ahead of tomorrow’s EU economic summit. Rumors are causing volatile movements in a thin market.

Mr. Detremmerie however said that: “the Euro remains vulnerable to further downside, which is likely to see gold following swiftly. It [gold] has managed to keep afloat above $1,075, but it’s failure to move much above $1,080-$1,084 has made it vulnerable to fresh speculative selling?.

Platinum added $15 to climb to $1515 an ounce. Palladium was unchanged at $418, as was rhodium at $2290.00 per troy ounce. Toyota and now Honda are busy recalling numerous vehicles on braking, acceleration (of the unintended variety) and airbag problems. White metal ETFs continue to feed off physical supplies at apparently more intense a schedule than a neonate, and at a faster pace than carmakers lately.

Something that is not attracting the interest that was anticipated to be manifest is John Paulson’s much-touted (by the perma-bulls) gold fund. Never mind the 14% loss that the fund showed in its first month of existence. The trouble-thus far-has been a relatively lukewarm reception by would-be investors. Whether or not investors are not sold on Mr. Paulson’s ability to lend a Midas touch to the fund, or are just not convinced that gold itself may have that same touch in coming months, is unclear. What is clear, is that, according to the New York Times:

“When news broke that Mr. Paulson’s firm, Paulson & Company, planned to start a fund to capitalize on the gold rush, some gold traders were betting that Mr. Paulson would be able raise billions of dollars for the venture and that the fund might even push gold higher, The Wall Street Journal said.

But after months of investor meetings, Mr. Paulson has raised just around $90 million for the gold fund, The Journal said, citing people close to the matter. The Journal noted that investors have been shying away despite Mr. Paulson having injected $250 million of his own money into the fund.?

We outlined the cautionary commodity strategy report recently produced by Citi analysts for you in our Tuesday article. Today, we bring you the highlights from the same research paper, as regards price-supportive and/or bullish factors for gold going forward.

In essence, the Citi analysis proposes that: “The key bull arguments for gold are continued USD weakness, and a possible escalation of inflationary concerns. What’s new is the re-emergence of asset price inflation and negative real rates in China. We view China as the most important source of future demand growth and in 2009 demand increased 10% with particularly strong retail investment demand.

Retail investment into gold bullion in China has been “growing rapidly, and is the largest source of retail investment demand growth.?  However, the Citi team also warns that “the recent tightening of monetary policy in China could curtail this trade.?

Another “important long-term plank of support? for gold –as seen by the Citi team is: “reduced central bank selling – central banks may actually become net buyers in the next 2-3 years.?  On the topic of reduced central bank selling, the Citi analysts have the following to say: “Reduced central bank selling is, together increased investment inflows and increased produce hedge buy backs, one of the important bull factors for the gold market.

“Potentially, central banks will turn net buyers over the next 3 years or so — an important bull point. However, effectively the flows may be a simple transfer from the IMF and European central banks to China and India in off market transfers (as has been the case recently).?

Finally, the Citi report also allows for on-going de-hedging by mines to continue to offer price supports to gold –at least for the current year. We might disagree a bit, as we see an end to the de-hedging process sooner than later, and a resumption of hedging also sooner rather than later (albeit the report also sees net hedging of about 100 tonnes per annum by mines as soon next year).

On the above topic, Citi says that: “The world gold hedge book now stands at around 300t, following the reduction in the Barrick Gold hedge position. AngloGold Ashanti how has the largest hedge position, and a buyback of some form is possible in 2010, although we natural expiry will result in the company being hedge free by 2014.?

The Citi study concludes with estimates of net implied global gold market disinvestment (based on the difference between total supply and total demand) growing from just 6 tonnes in 2012 to 163 tonnes by 2014.

Now switching to C-Span and The Weather Channel. Stay warm and dry.

Happy Trading.

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.