Pay As You Exit


By Jon Nadler

Feb 11 2010 9:48AM


Good Morning,

The deal that was expected to be reached regarding the fate of Greece’s debt problems was indeed reached early this morning. EU President Jose Barroso lifted many a weight off of many a shoulder on Thursday, as he announced that the EU came to an accord on the crisis. "It's not about gifts of money or subsidies, but about loans with interest that can be extended quickly to help a country as quickly as possible so that it doesn't come to turmoil on the financial markets, and to a crisis that no one can control anymore," Austrian Chancellor Werner Faymann said in a televised interview.

What then followed was also what was largely to be expected in various markets; Greek bond yields fell further, the euro climbed a tad, European shares rose mildly higher, and the dollar slipped marginally on the trade-weighted index. Among the first beneficiaries of the EU decision were bank shares. Marketwatch reported that:

"What seems to have galvanized minds is the realization that much of European banking is heavily exposed to southern Europe and Greece in particular. French and German banks are between them carrying around 85 billion euros of exposure to Greece and over 600 billion euros to southern Europe more generally," said economists from French bank Societe Generale in a note to clients Thursday.

None of this means that Greek labour action is coming to a halt any time soon, or that the country will scrap its austerity plans. The going will remain tough, albeit the markets’ focus now shifts to the problems in Spain, Portugal, and other “Club Med” countries.

All of the above factors conspired to bring gold back up towards the $1080 level and erase Wednesday’s $7 loss from the boards. New York spot markets opened Thursday’s session with gains across those boards, as the US dollar hovered just under the 80-mark (79.96) on the index and the euro rose to 1.370 following the Greek deal announcement.

Spot gold climbed $6.60 to start at $1077.30 per ounce, while silver added 15 cents to open at $15.31 an ounce. Platinum gained $4 to rise to $1513 and palladium gained $5 to touch $417. Rhodium was unchanged at $2330 following yesterday’s $40 per ounce rise.

The technical picture as seen through the lens over at offers hope for the bulls so long as the yellow metal is successful at closing above the $1084 level, albeit a convincing break of more overhead resistance at $1110-$1117 is required to get this market back on the fully bullish track. Breaching the $1062 area on the other hand, could usher in tests down near the $1044 area –a level that must hold lest gold will then possibly aim for $1030 or lower.

Elliott Wave analysis sees some potential hope for the bulls as well. It notes that the 10-day Daily Sentiment Index ( has fallen to 20.1% bulls, which is lower than it was in September and November of 2008. While EW analysts do not “expect a rise of the magnitude that followed the October 2008 low, one potential is that gold might be set to rise back to the January 11 high  near $1162 in order to complete the corrective pattern.

They conclude that “as long as spot prices do not close above $1085 we will maintain our top count shown on the chart. This means gold is in wave (3) down and should be on the verge of falling hard, declining to the $950-$970 area, near the apex of the wave (B) triangle.”

Interestingly, that same $950 number appears elsewhere as well, and in a place where one might not expect it at all; in the words of Marc Faber. Having declared not too long ago that gold will “never fall to under $1000 an ounce again” we find it curious to read on Bloomberg this morning that the Swiss guru (who sees America GDP as consisting of only beer and prostitutes anymore) now says that he: “won’t rule out that gold will go down to $950 or $1,000, but I don’t expect more downside.” Nobody expected the Spanish Inquisition, either, but, which will it be; $950 or $1,000? (Depends on one’s definition of ‘never,’ presumably).

The Khaleej Times relays the contents of a Reuters article this morning, one which opined that such a possibility can come about as the US starts to raise interest rates following a period of extremely loose monetary policy aimed at curing that which ailed its economy.

“Gold’s decade-long bull run may plateau in the medium term as a rise in US interest rates from record lows makes prices vulnerable to a dollar recovery and weaker investment demand. While ongoing fears over the stability of paper currencies and inflation may keep gold at high levels, it will struggle to maintain the soaring investment flows that took it to an all-time high of $1,226.10 an ounce in December, analysts say. In the short term, gold’s underlying fundamentals look fragile as jewellery demand languishes and miners lift supply.

Gold’s bull run since early 2001 has gone hand-in-hand with dollar weakness, but the U.S. unit has firmed since December as fears over rising euro zone debt levels knocked the euro. But moves in U.S. interest rates from current record lows will be the main driver of the dollar, and consequently gold. A Reuters poll released earlier this week showed primary dealers believe the U.S. Federal Reserve will start lifting rates in the fourth quarter of 2010.

While gold may be able to shrug off a rebound in the dollar if other factors emerge, analysts are skeptical it will make significant new gains in such an environment. “You can be a gold bull and still believe in rising interest rates if you believe in inflation, which a lot of gold bulls do,” said Daniel Sacks, a portfolio manager at Investec Asset Management. “We’re not convinced.”

As for the above-mentioned Fed actions, the questions remain: “When?” and “How?” Well, the Wall Street Journal polled a few top economists in the wake of Mr. Bernanke’s Wednesday testimony before the HFSC – one in which he offered the blueprint for the Fed’s exit strategy (albeit not the calendar that some thought might come with it). RBS and Morgan Stanley market experts offered the following descriptions of what the Fed Chief had to say:

  • “Bernanke explicitly throws out the possibility that the Fed will switch its rate tool from the funds rate to the interest on excess reserves rate. Bernanke suggests that the Fed could target the interest on reserves rate coupled with a reserves target (back to Volcker rules!).

  • The Chairman underscores that when the reserves situation gets back to normal, the Fed would return to a funds rate targeting regime. The footnote on this issue explicitly mentions a corridor scheme, with the funds rate bracketed by a discount rate ceiling and an interest on reserves rate floor.   – Stephen Stanley, RBS

  • Bernanke’s testimony contained lots of interesting tidbits and reinforced the notion that the progress toward an eventual Fed exit is underway. We continue to believe that the exit process will unfold fairly quickly during the second half of 2010, spurred by market-based indications of rising inflation expectations as the economic recovery takes hold.  – David Greenlaw, Morgan Stanley

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.