Gold and Silver Report - Greek Drama & Icelandic Saga

   on February 21 2012 11:27 AM

The long-awaited Eurogroup rescue package for Greece was finally agreed to in Brussels this morning and European equity markets promptly headed...lower (?!) in the wake of the news. The EU/ECB/IMF trio is into the Greek rescue by almost a half a trillion dollars at this point, and the latest life-preserver contains what is being labeled as a 'significant contribution' by the IMF. This was another, fairly typical display of selling the news and it prompted one Commerzbank strategist to wax poetic and remind that sometimes it's better to travel than to arrive. Others opined that the Eurogroup simply kicked the proverbial tin can down the road with this operation and that Greece's odds of going belly-up debt-wise remain as good as ever.

In a powerful Wall Street Journal Agenda piece, author Simon Nixon sums up the current but mainly future EU situation by cautioning that the euro zone needs to acknowledge that there can be no solution to the euro crisis until the fate of its banking system is separated from that of its sovereigns. That will require the creation of pan-European deposit insurance and ultimately euro bonds to provide banks with an alternative risk-free asset. Unless this is what euro zone finance ministers have in mind as they sit down on Monday, they should have no business signing the deal. To go ahead with a flawed Greek bailout without a plan to accelerate euro-zone integration and create a functional monetary union would be an act of calculated cynicism that would simply deepen Greek-and European-agony.

For weeks on end now, the markets witnessed the ebb and flow of optimism and related risk-taking or avoidance in connection with news about Greece's rescue Part Two. However, there was also a pattern of stocks and the euro (along with commodities) initially rising on positive news related to this deadline or that, and of their retracing their advances when actual deadlines came and went. This morning as well, the euro first advanced almost half a percent against the US dollar, only to ease back after doubts arose as to the long-term efficacy of the latest monetary package that was sent to Athens.

Now that the red wax seal is drying on the 130 billion euro package and the many strings that are attached to it, the markets can focus on the remaining troublesome items- banking sector problems and Greece's own inability to avoid coming back to knock on the EU's door for more assistance, at a later date. There appears to be little doubt that in order for the country to bring debt down to 120% of GDP such further help will be necessary. As things stand right now, if Greece is lucky, that ratio might get down to 129% by...2020 or so.

If one is to take something away from the on-going Greek and European debt saga, one (some would advise us) might wish to take a page from a place not too distant from Europe. We are talking about Iceland and how that country came back from a virtual point of no return. In the end, Iceland has not been reduced to having to sell Icelandic honey in order to survive and turn away from an economic contraction that neared 7% once not that long ago.

Drastic -some say unthinkable - measures? You bet. Placing the needs of the population ahead of the markets and/or the banks? You betcha. Bad bankers going to solitary confinement? Very likely. A credit repair job well-worth it? Affirmative. Iceland a failed Socialist utopia? Not by a very, very long shot. Ironically, practically every lamenter of the Obama Regime would like to send more than a handful of US banksters up the proverbial justice river if they had their way...

Most commodities gained this morning however, as lingering optimism related to future demand was still manifest in the wake of China's easing of bank reserve requirements and following perceptions that the European deal with Greece will be good for the sector in the near-term. As regards China, consider this little statistical fact when trying to divine why authorities may have decided to scale back on the country's banks' reserve requirements over the weekend: no (as in: zero) new homes were sold in Beijing during the recent week of the Lunar New Year and recent home price data shows prices slumping in 48 out of 70 tracked cities in the country.

Marketwatch reports that still, other analysts saw the central bank's move as evidence of a more serious slowdown in China. The economy appeared to be decelerating following a winding down of the government-directed stimulus that helped shield the country from recession after the global collapse of 2008. Capital Economics analysts said Monday that January credit growth was very weak, even allowing for distortions created by the Chinese New Year holiday.

Continuing tensions with Iran also added to higher bids, especially in crude oil, which rose to near $105 per barrel this morning. Iran has reportedly threatened to broaden its oil embargo beyond just the UK and France after it cautioned other European nations on what it calls 'hostile acts' against its interest. Black gold's near nine-month high is prompting something else, aside from jubilation among the speculative longs; namely the rising concern that too-high a price for the commodity could derail the fragile economic recoveries in certain parts of the world while increasing the duration and/or severity of contractions present in other regions (say, Europe).

Precious metals opened firmer across the board after a day of respite in New York on Monday. Gold traded around $1,745 showing a gain of about $12 while silver climbed a quarter dollar to near $33.90 per ounce. The big mover on the day thus far was platinum, which added $32 to touch $1,680 on the offered side of spot quotes. The loss of more than 80,000 ounces of platinum production at Impala's Rustenburg mine is not going unnoticed in the relatively small PGM niche.

A second striking miner has lost his life in the labor action over the past week. Meanwhile, you can read a quite in-depth study on the broader and potentially watershed topic of the nationalization of South Africa's mines as published by the ANC at this link. The eventual handing over of such mineral assets and their production facilities remains a potentially market-shaking issue in this sector.

The Standard Bank commodities' team however does note that China's platinum imports for 2012 were off to a weak start. The country imported only 149,000 ounces during the month. This is 94,660 ounces less than the import number in December and 87,800 ounces less than the amount imported in January 2011, and adds that we believe that the Chinese customs data is consistent with our view that weak industrial demand will make it difficult for platinum and palladium to rally sustainably beyond $1,650 and $700 respectively. We also continue to look at platinum and palladium from a cost-push perspective, and believe that platinum and palladium below $1,500 and $600 respectively are too low.

In any case, with this morning's rally, the current discount of the noble metal to gold has now narrowed to about $70 from a previous near-$200 differential. Palladium was also a strong gainer this morning, rising $13 to the $710 level. Rhodium showed no change at $1,475 the ounce. In the background, the US dollar did not give up too much on the trade-weighted index, slipping only 0.02 to trade at 79.12, at last check.

CFTC positioning reports covering the latest period indicate that gold has experienced a net decline in speculative length and that, according to Standard Bank (SA) analysis, such a contraction affirms the view that the aggressive moves at the end of January were largely the result of overexcitement after the Fed's dovish [rate policy] announcement. A similar scaling back of speculative optimism was noted in silver- the ETFs turned into net sellers and unloaded 106.2 tonnes of the white metal in the process. The Standard Bank team notes that uncertainties remain manifest among gold and silver speculators despite the recent gains in prices.

On the other hand, veteran market analyst Ned Schmidt, who also remarks that current markets for precious metals are more like simple market exhaustion from an overly exuberant run, does advise that while gold is the only financial insurance to protect an investor from the ostrich mentality in Washington, we still should recognize the obvious trends in the market. Gold, like silver, is in a bear market. Investors should only buy gold when deeply oversold, not when the small children at hedge funds are playing in the futures market. Mr. Schmidt, in his latest Gold Thoughts places the odds of bear markets in gold and in silver at 70 and 99 percent, respectively with cycle lows that might occur in either April of August (in gold's case).

Until tomorrow,

PS- I was extremely saddened by the news of the untimely passing of a friend to us all, Mr. David Coffin. On the many occasions that I had to share ideas with him at various industry events, I found him to be a consummate professional, a very knowledgeable source of true facts and figures, and above all, a kind and gentle man, and a welcome breath of fresh air in an otherwise testosterone-laden boisterous group that sometimes unfortunately places hype above integrity. David, you will be sorely missed.

Jon Nadler

Senior Metals Analyst Kitco Metals Inc. North America

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

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