Practically every news poll conducted over the past few days concluded that Greece and its private creditors might reach an agreement this week (perhaps even today) and that following such a handshake between the parties the country would commence discussions for a second, 145 billion euro-large bailout. Alas, things ran into a bit of trouble on the conceptual side of the bailout issue as Greece flat-out rejected a call for others (read: Germany, mostly) to have a say-so over its budgetary decisions down the road.

Greek officials have termed such control as being tantamount to their country giving up its sovereignty. Thus, the enthusiasm that helped propel gold to a seven-week high late last week and pushed the US dollar lower as investors embraced risk was dealt a bit of a setback this morning. The CFTC reported that hedge funds augmented their bullish bets on commodities to the highest level in sixty days in the wake of the Fed's indication that it might extend low interest rates into 2014. However, after the Fed effect wore off and after Europe showed that all is not yet well, the risk-off sentiment appeared to define the start of the trading week and it helped drag European bank shares lower along with crude oil and base metals as well. Germany's Finance Minister continued the (verbal) Graeco-Teutonic wrestling match with a fresh round of anxiety-inducing statements that basically said that Greece may not be granted a further bailout.

The Sydney Morning Herald's Jessica Irvine sums the European situation up as follows: SO what is going on in Europe? Essentially an experiment by 17 nations to adopt a single currency and single central bank, the European Central Bank, is being sorely tested by the profligate ways of some member countries. When, in 2009, it was revealed that the [Greek] government's annual budget deficit was double what lenders to the government had previously been told, the rot set in. Investors in Greek government bonds - essentially hedge funds, European and Greek banks - began to reassess the riskiness of their investments and became much more reluctant to lend any more. If they did, it was at exorbitant rates. This central cancer in the heart of the euro financial system remains the main focus of efforts to bring about a lasting financial peace.

With risk being relegated to the back shelf, spot precious metals dealings opened solidly lower across the board after gold experienced its largest decline in one month and touched lows just under the $1,715 mark overnight. The initial bid-side quote in New York came in at $1,725 while silver dropped 60 cents to the $33.39 level. Gold bullish percentages had swelled from 8% to over 83% in just a handful of trading sessions as spec funds got very excited about the prospects of a eurozone resolution to the seemingly interminable crisis. Just how excited such players got was evident in the 29 tonnes' worth of new speculative long positions that were added last week in the market according to the latest report by the CFTC.

However, the Aden Forecast, operator of the Gold Charts R Us service noted it its latest missive that Despite continued economic turmoil in Europe, gold continues to move at its own pace. It hasn't been sought out by investors as a safe haven, at least not since its rise to record highs in September when the Greece debacle officially broke out. Since then, gold has been moving as a commodity, a risk asset, and with positive economic news rather than fear. Gold´s double top formed during the August and September highs [around $1,900] will continue to put downward pressure on gold. If gold can break above these levels, we´ll see renewed strength within gold´s mega-bull market. Nonetheless, gold could resist below that level for some time. We´ll be looking to protect profits along the way, but always keep some of our position in case of a breakout.

The same level of speculative enthusiasm as was noted in the CFTC report on gold specs was not quite on display in the silver market's positioning report, where, albeit some growth in longs has occurred over the past month, the overall tenor still reflects an apparent lack of confidence in the ability of the white metal to stage further sharp advances. That situation is of course once again resulting in out-of-touch analysis pointing to a plethora of culprits that includes anything but the silver market's upside-down fundamentals and/or its being dominated by speculative fund activity. The CFTC, GFMS, and the CPM Group have all been taken to task for what ails silver, in a desperate attempt to stoke investor interest in the volatile commodity while misinforming them.

Over in the PGM space, the opening bell for platinum showed it being down $10 at $1,609 per ounce and also indicated palladium losing $7 to slip to $682 the ounce. ETFs stepped in to buy platinum and palladium last week with both metals showing a bit of an improvement in investor sentiment based on the CFTC-reported data. As regards the PGM niche, this morning's Standard Banks (SA) analysis paints the following picture in its positioning and general tenor:

Futures market positioning in PGM remains cautious (although it must be remembered that the data only covers the week ended 24 January, and therefore does not include the rally that occurred in the wake of the FOMC announcement). ETF positioning data on the other hand, which does include the period subsequent to the rally, shows growing investor interest. It remains to be seen whether this will gather momentum. Should ETF buying maintain this momentum, we would view this as a sign that investors are shrugging off their skepticism of the past month.

As for palladium, the SB team notes that ETFs appear much more confident in palladium's prospects, having added 41.800 ounces (the largest increase of the past 12 months) to their holdings, with a return to the levels seen in mid-December 2011. Platinum at $1,500 and palladium at $600 are too low based on cost pressures in the industry and our ZAR forecast (around 8.00 against the dollar). Over the long term, we still favor palladium over platinum.

The bid on rhodium remained at $1,425 while copper lost almost 1%. Crude oil fell half a percent and the US dollar was ahead by 0.66% on the trade-weighted index, reaching the 79.43 level. Stock index futures fell on Monday as the Greek drama kept risk appetite at bay. The Dow opened with a near-100 point decline this morning in New York.

No report these days would be complete if we did not include at least a couple of news bits from China. Over the weekend, that country's National Audit Office sounded an alarm bell that will continue to be heard for some time to come. The NAO said that China faces an unignorable risk owing to its still unbalanced, uncoordinated, corrupt local government and (basically) unsustainable economy. Chinese Premier Wen was quick to rebut the NAO findings with his observation that at present, government debt is generally safe and controllable.

That said, given the delicate situation in which the country currently finds itself in, the market's consensus is that the PBOC will not rush into any major easing policy despite recently slowing economic metrics. Too much of a good thing could bring too much of a rise in inflation. Such a stance was more than reinforced by the reluctance to reduce bank reserve requirements - a gesture that India's central bank recently undertook to keep things economic on the boil...

Until tomorrow, all eyes on the Euro Debt Cup Finals...

  Jon Nadler

Senior Metals Analyst Kitco Metals Inc. North America

Blog: http://www.kitco.com/ind/index.html#nadler