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A One...And A Two...

By Jon Nadler       Printer Friendly Version Bookmark and Share
Mar 3 2010 3:46PM

Good Afternoon,

Computer problems have kept the stream of four-letter words steady this morning. Now, however, all is well…

News that Greece has come up with an additional, near-5 billion euro large austerity plan lifted the euro this morning, while contributing to additional declines in the US dollar. The common currency (which was seen as oversold down near the 1.434 level by some technicians) came back to the 1.3715 figure following the Greek developments.

That said, traders exhibited still fragile confidence levels and refrained from taking large positions in the currency or European equities for the moment, and preferred holding off ahead of tomorrow’s ECB policy meeting, Friday’s US jobs data, and upcoming meetings between the Greek Prime Minister and Germany’s Angela Merkel (on Friday as well) and France’s Nicolas Sarkozy (over the weekend). Thus far, there has only been an apparent ‘snub’ by Ms. Merkel as regards Greece’s plea for aid.

The US dollar was pushed lower on the trade-weighted index not only by the Greek news but also by a slew of risk-appetite inducing US economic data. First out of the gate this morning, the news that payroll firm ADP tallied only 20,000 jobs as lost in February. While the decline represents the 25th consecutive month of attrition in the US jobs market, the figure was in line with economists’ expectations.

Following that bit of positive news, the financial markets learned that the Institute of Supply Management’s index as relating to the US service sector showed a 53 level reading. Anything above the 50-mark is considered to be positive as regards the progress on the US economic front.

The above-mentioned background conditions all converged to lift risk appetite and push the greenback to under the 80-mark on the trade weighted index this morning. At the same time, the euro and precious metals (not to mention oil) enjoyed another day in the sun. The mid-week session in gold started with a $5 rise in gold spot, which was quoted at $1139.50 per ounce.

The yellow metal –according to technical analysts at Commerzbank – might rise towards the $1150 to $1162.00 level if it manages sustained closings above previous resistance at $1135.50 an ounce. The $1150 number represents a 61.8% retracement from December’s $1226 high, and it is of interest to those who are Fibonacci sequence followers, while the $1162 figure harks back to gold’s January high.

Silver also followed through on Tuesday’s gains, opening with a 24 cent gain at $17.17 per ounce. For a more detailed snapshot of silver’s current state of affairs, we revert to Roubini Global Economics, whose analysts feel that “ Although silver's long-term fundamentals point to a life of underperformance versus gold, the metal might well outperform in the short-term.?

Roubini analysts point to technical as well as fundamental drivers –which, in their opinion - have built a case for a silver rally. They also make a case for the fact that “silver's higher price volatility as compared to gold’s price volatility opens up short-term opportunities for higher capital gains.?

We, of course, approach the white metal (as we do gold) mainly from the perspective of fundamentals. Not a bad perspective at the moment, albeit it is still a market in surplus. Roubini observers opine that: “silver is better placed than gold to enjoy the global recovery in industrial production. While non-investment demand accounts for 94% of total demand for silver, non-investment demand accounts for only 62% of total demand for gold.

Silver has several large-scale industrial uses—photography, silverware, solar panels, etc.—whereas the physical use of gold lies mostly in jewelry.  The RGE analysts added that: “Meanwhile, alternative uses for silver have been rising, particularly as demand from the photography industry dwindles due to the shift toward digital cameras. The establishment of new silver exchange-traded funds (ETFs) could also tweak the metal’s price drivers.?

Platinum traded at $1576.00 per ounce, showing a $9 gain at last check, while palladium was up $8 per troy ounce, quoted at $448.00 in New York. No change was shown in rhodium as of this morning. Carmaker Nissan (including some upscale models under its Infiniti nameplate) joined the ever-widening “auto recall club? this morning, trying to corral more than 540,000 vehicles with brake pin and fuel gauge issues into its dealerships for repairs. Ford Motor appeared to benefit the most from last month’s Toyota and now GM’s woes –its sales actually surpassed those of GM; a feat not seen in some 12 years.

Still to be absorbed by the speculative crowd, are the figures from Friday’s closely-watched Labor Department payroll data. The US dollar cannot not take cues from the statistics to be revealed in those releases. For example, today’s Fed Beige Book release helped keep the US dollar on the back foot, as it showed a modestly recovering economy. Nine out of the twelve Fed regional banks have reported improved economic activity last month. Make that, ten –effectively.

The Richmond Fed was under a snow cave. Problems? Why sure. Credit conditions remained not worth mentioning in polite company. Final sales are still an issue in the largely consumer-driven US economy. Bright spots? Also. For example: no wage pressures, and the aforementioned bouncy conditions in the service sector. A rich enough mix of "less-worser" and maybe-even-good to give risk-eaters a new lease on life. Keyword: lease. As in: there is always a time limit on same.

Recovery = risk appetite. Risk appetite = higher commodities. Of late, however, that also implies higher…everything else. A trade, is a trade, is a trade, and, once again, the markets are building up for the last couple of trading days and anticipation as well as manifest bets remain the name of the game.

We close today with a most interesting take on the euro situation. What might that be, you ask? How about having TWO euros?  Seeking Alpha carried an article by Charles Hugh Smith earleir this morning. It should not escape enquiring minds as it is a good read. Charles Darwin might need to chime in on this one. Read on:

The premise: “The euro as presently configured is doomed due to structural imbalances between mercantilist and consumer nations. A "euro1 and euro2" system would allow a face-saving demise to euroland's single currency.?

There is a lot in-between the above and the following conclusion, but do yourself a favour and read the ‘in-between.’ Meanwhile, the conclusion:

“As the structural flaws in the euro and China's mercantilist economy become undeniable, then global capital will flow to the one remaining liquid market: the U.S. dollar. Those calling for the immediate collapse of the dollar might want to switch to a longer-term time frame. If the dollar and euro (1) revert to parity (1 to 1, as in 2002-2003) then those holders of euros who switch out to the dollar now will be handsomely rewarded, while those who cling to the euro fantasy will suffer losses on the order of 35%-40% on the currency swap alone.?

So, take your pick, choose your side: a dead euro, or a two-tier euro. Faites Vos Jeux.

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.