Thursday morning did not suffer from a lack of market-moving news, that's for sure. The world became one strongman shorter this morning as The Colonel -a man who hated to climb more than 35 steps and surrounded himself by an all-female security detail- met his maker over in Libya, following a gunfight. The US State Department was uber-cautious and it did not initially confirm Mr. G's capture or demise, despite photos of a blood-covered man that appeared to be him making the rounds on the Internet already. It all started months ago with the slapping of a hapless fruit vendor in Tunisia...
Whether or not Mr. Gaddafi is now indeed at a higher altitude surrounded by x number of virgins (or female bodyguards) remains unknown, but his countrymen can finally breathe a sigh of relief with the certainty that they will not hear from him again. We will be spared such gems as Were it not for electricity, we would have to watch TV in the dark. Nor, will the rest of us, mercifully. As for the Sgt. Pepper-like military outfit he liked to parade around in, well, there will always be morbid-flavored auctions on eBay...
Over in Europe, just hours after it was reported that France and Germany were basically in accord over the EFSF and such, newer reports indicated that the two major powers are basically in dis-accord over how to tackle Europe's problems. The conflicting stories are surfacing just 48 hours prior to a summit of Old World leaders; one intended to...tackle the continent's debt problems.
The euro bounced around as the push/pull of optimistic/pessimistic news made its presence felt in various trading rooms. The US dollar remained above the 77 mark on the trade-weighted index, while a variety of stock markets fell by various amounts in the midst of the continuing foggy news from Europe. Adding to the confusion is the latest news bulletin; it suggests that Germany is amenable to postponing the weekend summit of European leaders for reasons as yet unknown...
Well, something less than unclear was contained in the news coming from the Economy Ministry in Germany, however. The institution halved (!) its economic growth forecast for the EU's most important country. That kind of news was probably received with trepidation over in China, right about now. Speaking of China, the country's leading bank regulator tried to reassure everyone that the huge and teetering Chinese 'shadow banking system and private lending' must be and will be 'strictly controlled.'
We recently brought you news about how significant the problem has become in China and what tremendous size of the off-the-book lending frenzy has ballooned to (two-thirds of a trillion bucks!). Nightmarish scenarios have been offered in the event that the recent 30% drop in real estate sales in china squeezes developers against the credit wall. According to S&P the credit outlook is increasingly severe. Can we be a bit more...specific?
Gold prices turned significantly weaker overnight and touched lows near $1,605 as waves of fund-based selling pummeled bids in the yellow metal overseas. From a technical perspective, the precious metal has formed a so-called bear flag pattern and it might now be aiming downward on said flag's pole towards the mid-$1,500s in the perhaps not too distant future. From an Elliott Wave angle as well, gold's ascent from the September 26 low (at $1,532) may have come to a close and the breach of the $1,595 level- if and when it occurs-could usher in declines towards a potential $1,300 target.
Major resistance in gold now is probably some $100 higher than current levels. New York spot dealings opened with a loss of $23 at the $1,620 bid level per ounce. Meanwhile, where are the throngs of panicked retail investors who are reputed to be beating down the doors of their nearest friendly bullion purveyor as the sky falls all around them? Well, they are not making much of an appearance on the buying scene, at this time.
The urgings of back up the truck, honey! that virtually exploded in the wake of gold's $400 slide last month did not appear to resonate all that strongly with the American investing public (which now appears a tad uncertain about its favorite metal's near-term price prospects).
To wit: the US Mint managed to sell 35,500 ounces of gold (that's a little more than one tonne) in October thus far. Presuming that the final tally for the month comes in near 57,000 ounces (based on trend extrapolation) then gold Eagle sales might be 40% lower than they were one year ago for the same month. Not quite the stampede being incessantly chatted about in various forums...
Analysts at Standard Bank (SA) are not quite ready to concede that recent correlations and price patterns imply that gold's safe-haven status is totally at risk or that it has been stripped away. The do however point to a risk that gold faces; that of the liquidity squeeze that has risen in the wake of the situation in Europe. In so many words (their words) the situation shapes up as follows:
It is important to note that, like equities, volatility in daily gold returns has increased sharply since the beginning of August. This increased volatility has coincided with tighter conditions in the Eurozone money market-represented by the rising 3-month Euribor/Overnight Swap spread, a proxy for the liquidity premium. These tighter money market conditions have been largely the result of the Eurozone debt crisis and the strain that this is having on the region's banking sector.
Consequently, we feel that as long as these issues remain unresolved, we will continue to see gold exposed to heightened volatility. In addition, as we have highlighted before, should the effects of the sovereign debt crisis and possible contagion to European banks lead to a breakdown in the money market, even if temporary, this would be bearish for both equities and commodities, including gold.
Silver lost 40 cents on the open this morning and traded at $30.92 the ounce after it too visited lower value zones overnight (near the 30.40 area). The white metal did not make much progress in recent session, meandering between $30 and $32 but a drop beneath September's $26 low appears to still remain on the radar of potential odds.
The targets being mentioned involve the $22.45 to $24.55 area. Barclays Capital analyst Suki Cooper opines that silver's fundamentals still look very weak and that the downside still looks much more vulnerable, given that we're not seeing the same strength in industrial demand that we have seen previously, and given that mine supply still looks very healthy. Barclays expects the white metal to average $27 in the current quarter
Platinum and palladium sank this morning as well, as a host of industrial commodities felt the brunt of selling precipitated by economic growth-related jitters among investors. The former lost $27 to trade at $1,486 and the latter declined $10 to be bid at $592 the ounce. Copper lost 2.8% and nickel, zinc, and lead all recorded falls ranging from 2.2 to 3.8 percent. Iron ore suffered its worst price rout in nearly a year and a half as China's economy is manifestly undergoing a slowdown.
US initial unemployment claims fell modestly once again in the latest reporting week, according to the Labor Department. Filings totaled 403,000 (down by 6,000). The four-week running average is...running at 403,000 for now. And now, we too, have to be running...but not before one last news bit for the day: US leading economic indicators climbed 0.2% in September, for the fifth straight month albeit the data contains enough divergent metrics to label the state of the US economy's growth as sluggish.
Jon Nadler Senior Metals Analyst
Kitco Metals Inc. North America
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