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The Red and The Black (Plus, a Little Beige)

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jul 29 2009 4:30PM

Good Afternoon,

Wednesday’s price action in precious metals was primarily defined not as much by the US GDP data as by the collapse in oil prices. That, along with a substantial gain in the US dollar, had gold on the retreat once again, and losing more than 1% on the session. Near-term support thought to lie near $932 also gave way today, and bullion saw lows at near $924.50 per ounce – a possible door opening here for tests at lower levels (915 towards 905).

The ‘told you so’ portion of today’s declines clearly applies to crude oil and its cave-in. You do not sustain price action at high levels and try higher still, while inventories keep piling up (and then some). A “gap filled, followed by a spike to $75? was tendered as opinion yesterday. Somehow, we cannot see it.

While the Fed's Beige Book data and the free-fall in crude oil was on practically everyone's mind as the middle of the week trading session unfolded today, investors in China saw nothing but red overnight. Spooked by the prospect of potential government curbs on what has been a de facto casino (up, oh, only…79% this year!), stock market players pulled serious money out of the SGE last night, and pushed it 5% lower by the close. As a result, oil and the commodities complex fell instantly out of favor, and the US dollar got a further boost - one good enough to bring it back well above the 79.50 level on the trade-weighted index today.

We began the Wednesday session in the markets with anticipation. Anticipation that the US GDP numbers might point in a somewhat parallel direction with a few other little green shoots seen of late: home prices on the rise in 20 US markets, stabilization in the rate of jobs losses, calmer waters in the financial sector, etc. At the end of the day, the data shows (according to Marketwatch) that:

“The U.S. economic recession seems to becoming less severe as the summer progresses, according to the Federal Reserve's latest Beige Book report released Wednesday. While still weak, some regions reported that the pace of the downturn had moderated. Other regions said that activity had begun to stabilize.

The Beige Book is designed to give Fed officials a "feel" for conditions on the ground. The report said retail sales remained sluggish, contacts in the factory sector saw a turnaround on the horizon and bank lending was flat or weakening. Perhaps the most significant development is that businesses across the country are finding creative ways to cut wages and benefits. Economists note that as long as wages are under pressure, the threat of deflation remains. Labor market conditions remain slack, the report said.?

New York spot gold dealings opened this morning with a further loss of $2.00 per ounce - quoted at $935.00 against a backdrop of a $1.18 per barrel loss in crude oil values (to $66.05), and a 0.25 gain in the US dollar on the index (to 79.29). The greenback advanced to 1.4107 against the European common currency.

The picture was considerably different by 4 pm NY time, however. Gold was still on its back foot, quoted at $929.00 per ounce (off by $7.50), silver was being dragged by its feet towards $13 (down 44 cents at $13.27) and platinum was swift on its own feet, running hard in the opposite direction than that of recent sessions: a fall of $22 brought it to $1171.00 per ounce. Palladium was limping along with a $5 loss, near $252 per ounce.

Base metals did not look so hot this morning, with copper and nickel leading the loss columns (posting more than 2% drops) as perceptions that Chinese demand will be curtailed as we go forward, and that inventory build-ups have more than peaked.

All of this was highlighted by a $4.28 loss in crude oil, which dove to $62.95 per barrel. Between it, and the dollar, it is ‘case closed’ for the day. Having now taken out supports at $948 and art $942, gold bullion is being promptly tasked with proving that it can attract supporters (no, make that, actual buyers – there are plenty of supporters in print already) at just about this critical $930 level, lest it should ease back towards the previous $905 price from which it did manage the last bounce.

In the interim, nagging drip-drip style leakage continues to be manifest in the gold ETF, as more than 3 tonnes were subtracted from its balances as of last night's close. For the month of July thus far, more than 26 tonnes have slipped away from the holdings of these funds. In some respects, renewed “risk appetite? translates into a “lessened appetite? for holding the asset of last resort that gold is thought to be.

Of course, some myopic scribes continue to see nothing but artifice and smoke/mirror combinations when it comes to the US dollar. Because, you know, it has only one way to go: to its eternal grave. Know what? We've seen that movie, too. It opened in 1980. It is now in re-runs at various drive-ins.

On the positive side, central bank gold sales up to date have been even lower than those we saw a year ago. Some 100 tonnes lower, in fact, for a total, thus far, of only 140 tonnes in the selling period. Speculation about the renewal of the CBGA pact continues to make the rounds among traders. We expect a bit more of a "liberal" framework for the new document, one that factors in the upcoming 403 tonne sale by the IMF. Perhaps one that allows for an extra 100-200 tonnes of annual sales by signatories. All the golden eggs are still in the carton. But, the carton is open. Reuters reports that:

“The International Monetary Fund said on Wednesday it was mobilizing up to $17 billion in new resources to lend to 80 of the world's poorest countries seen most at risk from the global economic crisis. The IMF announcement represented a major overhaul of the fund's previous lending practices as it tries to limit the damage from the global crisis, which seems to be ebbing in industrialized economies, but is still being felt in most of the developing world.

The Washington-based institution said demand for loans from poor countries, mostly in Africa, has exceeded its projections as government revenues have been strained by a sharp decline in global trade and investment as well as volatile commodity prices. The fund said it would substantially increase resources for low-income countries by up to $17 billion over the next six years through 2014. Lending in 2009 and 2010 is likely to hit $8 billion, and will increase between $2 billion and $2.5 billion annually after that.

In the first six months of this year, the IMF has lent or committed about $3 billion, which is more than the last three years combined. Some of the resources used for the scaled-up lending will be raised through the sale of 403 tonnes of IMF gold stocks, which will probably be sold within a new central bank gold sales agreement currently being negotiated.?

If we had to make further guesses on the subject of the IMF, they would gravitate towards the idea that the institution might have to mobilize some additional gold in order to be able to fill all of the current line of outstretched hands waiting outside its doors. It is a question of how much more, and when – of course. But, remember, Radical Extremist Gold Bugs assured us all that the first 403 tonnes will never, ever, see the light of market tables. Harry Reid was going to see to that. Right.

Thus, it is back to the gold-dollar-oil tango for the moment. We would like to bring back the argument that one ought not to bank too much on the gold-dollar relationship (we pointed out last week what the perils of betting on that have been, historically speaking), but we will not. Why? Because, in this summer phase at least, the betting on the close (inverse) relationship has been the safer way to go. Then again, who -before last night- counted on the Shanghai Surprise? It could be the one to bolster the greenback for the next few days, as well as the echoes of the Geithner-China 'framework for cooperation' talks, which will support it a while longer. But, that’s not the same as saying that this is some silly fake scaffolding around the US currency. For that proposition, please consult other sources.

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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