Another day of sideways-to-lower price action was beginning to take shape in certain precious metals as banks continued to siphon US dollars ($50 billion since last week and counting) from the ECB amid the on-going liquidity crunch in Europe. The greenback climbed to 78.68 on the trade-weighted index while gold fell back to the $1,720 area in early Wednesday dealings.
Albeit the costs of dollar funding were eased with last week's concerted central bank action some financial institutions in the eurozone still appear to have difficulties finding dollar funding. The situation places that much more pressure on the EU to try to come up with a grand solution or a conclusive set of proposals to mitigate the crisis with when its two-day meeting ends before the weekend.
Monsieur Sarkozy promises a powerful deal to be the result of the aforementioned summit even as certain German officials expressed skepticism about the efficacy of such an eventual blueprint for financial peace in Europe. Such pessimism originates in the sheer number of required changes and to-be-implemented action items on various fronts by banks and eurozone nations; there are simply too many of them for an instant paradigm shift to take place with just one stroke of one pen.
US Treasury Secretary Geither is on a pep talk tour of Europe and is hoping to see the Merkozy plan become reality. France's President has quite a bit riding on the outcome of the meeting; France's AAA rating among the items at risk. He is seen here reassuring a worried-looking Mr. Geithner about having it all under control.
Spot metals dealings opened with losses in all but palladium once again this morning. Gold dropped $9 to the $1720.50 mark while silver declined 50 cents to $32.27 per ounce. Platinum fell $10 to the $1,512 bid level. Market participants are in the midst of the traditional year-end book-squaring/window-dressing/portfolio reshuffling frenzy and some will thus take some profitable gold chips off the table. Thus, apart from news headlines-induced counterintuitive rallies or sell-offs, the volatility that such year-end preparations bring about will be amply on display for a couple more weeks. Still, the current behavior of gold appears to have even the pros publicly declaring that they are a tad baffled.
Others are reluctant to unwind positions before the EU summit draws to a close and have been pinning gold rally hopes on a positive outcome from that gathering. For the time being, the yellow metal is thought to be confined to the $1.650-$1.750 channel, the top end of which has drawn out sellers from their bunkers and the bottom end of which might revive waning physical demand (esp. from India). While it may be too early to draw conclusions about the EU summit -and we won't- there is one school of trading thought (over ad DailyFX.com) that envisions the dollar resuming its uptrend in the wake of what could be a let-down of a summit in terms the amount of 'comprehensive solutions' it might offer.
DailyFX's currency strategist Ilya Spivak opines that On balance, the stage seems set for disappointment. A joint Franco-German proposal that emerged on Monday and is likely to serve as the basis for negotiations appears deeply flawed. Its automatic sanctions for countries violating deficit limits have a loophole allowing violators to escape unscathed if a majority Eurozone vote decides as much, institutionalizing the kind of political haggling the markets loathe. Its balanced-budget legislation requirement for every Eurozone member may see some states leave, stoking instability.
Finally, its pledge to finish the permanent ESM bailout fund in 2012 is meaningless given its size is hardly a game-changer from the existing EFSF. The markets are unlikely to be impressed unless the Franco-German framework is materially strengthened, otherwise clearing the way for the safe-haven US Dollar to rise anew against its leading counterparts.
Something else that is rising anew is palladium. The metal continued its seemingly non-stop rally and advanced $5 to the $675 per ounce figure, which is within striking distance of what is thought to be more significant upside resistance near $685 per ounce. As good as the rally in the noble metal has been there is a school of thought that-for the time being, and based on real-world automotive demand, sees the metal's near-term value as possibly being capped around the $750 area.
However, the upcoming exhaustion of Russian state-owned palladium stockpiles (perhaps by 2013) is still at the core of speculative preoccupation at the moment and at the core of medium-term price projections as well... Market analysts are actively engaged in head-scratching about just who, if anyone, might fill the eventual 750,000 ounce shortfall that will arise in the market when Russian sales come to a screeching halt.
Something else that appears to be slowing down considerably, at least in the gold coin space, is the level of American Eagle sales. Yes, the item somehow 'escaped' the news radar this week, but fear not; we are here to bring you the unvarnished truth. The report indicates that total sales of the American Gold Eagle bullion coins literally plunged last month. This, according to production figures obtained from the U.S. Mint and sales figures from its website. Gold Eagle sales fell by 63.4% in November versus the same month last year.
When you consider the level of intensity of the European crisis and the malaise in the equity markets this quarter, the tally is somewhat of a shocker. It appears that the incessant pleas of newsletter-based doomsayers for the public to get physical as Armageddon is nigh are falling on deaf ears. It cannot be that every safe-haven seeker has suddenly had an epiphany about ETFs, since those vehicles are the favorite plaything of hedge funds and similar specs.
However and perhaps even more telling of a potentially developing trend is the fact that sales of the U.S. Mint's gold bullion coins have fallen by nearly 20% on a year-to-date basis through the end of last month. A total of 41,000 gold coin ounces were sold in November 2011 compared to sales of 112,000 ounces in November 2010. YTD sales through November amounted to 934,500 ounces as compared to the 2011's eleven-month tally of 1,160,500 ounces.
Moreover, consider the present sales figure in comparison to the 1,435,000 ounces that the Mint sold in 2009 -its record-breaking year. One metals-oriented blog asks the question: Have Americans given up on gold? Perhaps they have not, but perhaps when they have considered the fact that, after all of the time that has elapsed since the first promises of the death of the dollar were issued, the greenback is in fact not pushing up the daisies, and the American economy is equally far from its grave, they have decided that either the price tags are too high or that they had bought enough for the time being.
Until tomorrow (and until the weekend) it's all about Europe, once again...
Jon Nadler Senior Metals Analyst
Kitco Metals Inc. North America
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