Today's action in precious metals was a tale of two times and two places. Much of what was seen prior to the NY session in the markets was not at all the case once Tuesday rolled around to the Big Apple's market floors. Overseas gold prices fell overnight, as the metal's four-day winning streak was interrupted by local profit-takers cashing in some very attractive chips at the Asian redemption windows.
Perceptions that bullion had once again gotten ahead of the equilibrium curve of the market's current background conditions brought gold back near $950 an ounce during the wee hours, and participants had to keep rooting for further hefty declines in the US dollar in order to make a push beyond $965 not only materialize, but also hold intact. The fact that such an advance did take place on Tuesday turns the compass towards –you guessed it- spec funds once again.
As a small reminder, the greenback already fell to its lowest point since the Lehman collapse last fall just yesterday, but it failed to bring about a corresponding fresh peak in the price of gold. Traders we polled this morning indicated that players were aware of the risks of scrap gold flooding markets once again, and that of Indian buyers becoming an endangered species, in the wake of higher than $935 an ounce gold. Thus, they felt that a decisive break towards $975 may have to wait until other factors play a positive role and translate into confident buying near seven-week highs. Then again, traders are not the funds. Recall that traders opined this would be a bearish/corrective week in gold – as illustrated by the 6:13 ratio in the Bloomberg price survey
As we said, the picture changed as the trading day unfolded in NYC. After a first tentative push to $965 and a brief mid-morning pause, funds came back into the picture. They did so with a healthy dose of bravado, and pushed bullion to a high near $971 despite a dollar index showing a 0.18 gain and an oil price that appeared stalled at $71.30 with minor losses.
Equity markets were seen as trading in lockstep with bullion overnight, as did other commodities. The four-day rally was truncated for the short period overnight, but it is also worth noting that stocks had risen globally for 14 out of 16 sessions. Mass euphoria linked tosecond quarter earnings reports is still being seen as...euphoria, rather than a solid confidence level based on real macroeconomic conditions.
That the global economy is putatively climbing out of the subprime cave is one thing; that it remains extremely fragile given what has transpired, is another story altogether. At the same time, concern that China will turn the off the easy money spigots, and that its commodity stockpiles are beyond adequate, made their way back into the markets - as seen by a1.3% fall in copper, and by crude oil speculators denting black gold by nearly 2% this morning, on perceptions that -perhaps- a 13% gain over three trading sessions was a bit...rich. No, really?
Something else that appears a bit on the rich side – although the news is being interpreted as a tell-tale sign of some kind of impending gold mania- is the surge in production at Britain's Royal Mint. Surely, it is nice to hear that a doubling in output at the facility comes on the heels of rising retail investment demand.
The nagging question in this Bloomberg story is one of simple consumer math in nature. The U.K. mint makes coins including the 22-carat 2009 Gold Proof Sovereign, weighing 7.99 grams (0.26 ounce) and costing 299 pounds ($503), according to the [government] agency's website. When the buyer of $1958.00 per ounce gold in the form of such coins will ever break even (let alone make a buck) is the question to ask here. It's your money.
As the dollar and the yen regained some lost footing, the scene was set for this morning's opening in precious metals, energy, and base metals. Gold started the NY session with a $4 loss at $952.50 per ounce, but the profit-takinghad not yet appeared toturn into anything of significant size as participants watched narrowing losses in the oil pits and a dollar that made fairly small progress to the upside.
Bullion turned slightly positive within the first 20 minutes of trading, and, based on the dollar/oil tango, we wrote this morning that “it could yet make another attempt at clearing the $960+ hurdle.” It did, and then some. Back to overbought territory and all. At last check, gold was ahead by $8.20 and quoted at $964.70 an ounce.
We do not buy the argument that yesterday's central bank sales analysis was the cause for today's move. We also remain cautious on pronouncements of guaranteed breakouts in gold being imminent on some kind of Zimbabwe-flavoured hyperinflation scenario, and ask that you consider the sources of such declarations. They do not take into account a few little basics that make up this market, basics such as scrap flows, fabrication demand, and the like.
Also ignored in these sugar-plum visions, are the behavior patterns of momentum funds and the virtual absence of the big gold ETF from this recent bullion party. This is why we normally end up with suppression theories when corrections materialize. This is why we end up with many small buyers chasing near-record values.
Two other 'declarations' –this time from government officialdom failed to lift the US currency in a meaningful way earlier this morning. The first, from Mr. Geithner, who sees no more funds needed for bank bailouts and sees no chance of a financial collapse. The second statement comes from Larry Summers - he sees an American economy that is no longer in a “free-fall.” Nice opinions, both. Let's see how much value the markets place upon them. US stock futures looked set to follow the easing in values seen in Asia and in Europe overnight.
Silver started off unchanged, quoted at $14.21 per ounce, but ended up with a 36 cent gain to $14.57 an ounce. Platinum lost $6 on the open, but turned that into a $28 gain by the time of this writing and was trading at $1263 an ounce. A $6 positive change was reported in palladium, at $276 per ounce. Today's automotive sector news reveals Toyota and BMW as having beaten analyst estimates - by reporting a narrower Q2 loss than expected (Toyota) and by showing a 76% decline in Q2 profits (BMW). Some positive surprises, eh?
Cash4 Clunkers, now the topic du jour in the US (replacing health-care) and has now de-evolved into a Congressional circus of sorts, with some lawmakers calling for all sorts of 'cash for XXXX' programs to be offered.Good. How about a Cash 4 Replacing Lawmakers WhoDo Not Know What They Are Talking About program? How about if these fellas focus on other little items such as the 1.8% drop in real USdisposable income and the 1.3% drop in personal income (the biggest such fall in four years)?
On other fronts, pending US home sales rose once again in June, for a fifth straight month. Somehow, bit by bit, the US housing market appears to have found some traction in the hitherto soft ground and might offer the first tangible signs that something is finally working. Analysts had long made it a sine qua non case that unsold home inventory must first be cleared before we can collectively talk about any green shoots on the macro scene.
In the final analysis, it is still difficult to see how this recovery will roll on with a notably absent consumer. Such an absence from the party table may already be in the making -especially if today's personal income story starts to snowball. Bloomberg brings us the basic facts, first:
“Household income in the U.S. is weakening as the influence of the government's stimulus plan fades, prompting economists, Federal Reserve officials and a Nobel laureate to warn that consumer spending may stumble.
“Consumers have started to change their behavior and they are going to save more,” said Richard Berner , co-head of global economics at Morgan Stanley in New York and a former researcher at the Fed. “You have pressure on wages, you have employment still declining.”
Wages and salaries , which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released today. The Obama administration's tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.
Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, today's Commerce report shows. Excluding the effects of the stimulus plan, June incomes would have dropped 0.1 percent after no change in May, according to the report. In May, one-time additional payments to Social Security recipients boosted incomes 1.3 percent.
One of every 10 American workers will be without a job by early 2010, economists project, shaking the confidence of those still on payrolls and discouraging spending. It may take as long as 15 years for consumers to fully repair finances battered by the decline in home values, stocks and employment, said Edmund Phelps , winner of the Nobel prize in economics in 2006.
Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year's first quarter, according to figures from the Fed.
“Households are going to have to do an awful lot of rebuilding of their wealth,” Phelps, a professor at Columbia University in New York, said yesterday in an interview on Bloomberg Television. “Even if that rebuilding goes on at a pretty good clip, it will take 12 or 15 years for households to get to the wealth level that they had several years ago. Consumer demand is going to take a long time to rebuild to normal levels.”
In the second half, incomes and spending will be hurt by the loss of transitory factors such as lower fuel prices , decreased tax rates and the one-time payment to retirees, William Dudley , president of the Fed Bank of New York, said in a speech last week.
“Consumer spending is unlikely to rise much faster than income” because of the need to boost savings, he said. “Weak income growth will be an effective constraint on the pace of consumer spending.”
Companies continue to trim expenses, threatening further cuts in pay and benefits. Tenneco Inc. , the world's largest maker of vehicle-exhaust systems, temporarily lowered pay and hours worked to reduce labor costs by 10 percent. Earlier this year, the Lake Forest, Illinois-based company suspended contributions to employees' 401(k) retirement accounts and cut pay for the top 50 executives.
Government assistance such as the “cash-for-clunkers” program will help postpone the inevitable increase in savings and slowdown in spending as more baby boomers approach retirement, said David Rosenberg , chief economist at Gluskin Sheff & Associates Inc. in Toronto.
“Spending is in desperate need of gimmicks like cash-for- clunkers in order to grow on a short-term basis,” he said.
The program, which offers as much as $4,500 for trading in older, less fuel-efficient cars, ran through its $1 billion fund in about a week, and Congress is considering adding $2 billion. Auto industry data yesterday showed sales jumped to an 11.3 million annual pace last month, the highest level since September.
Mounting joblessness is among reasons that economists such as Rosenberg say will prompt Americans to save more. Unemployment, already at a 26-year high of 9.5 percent in June, may top 10 percent by early next year, according to the median estimate of economists surveyed by Bloomberg last month.
Economists estimate that a Labor Department report at the end of the week will show employers cut an additional 328,000 workers from payrolls in July. That would bring the total loss of jobs since the recession began in December 2007 to 6.8 million.
The savings rate in June fell to 4.6 percent as incomes dropped as today's Commerce Department report shows. The rate, which reached a 14-year high of 6.2 percent the previous month, is likely to keep climbing, Rosenberg said. A rate as high as 15 percent can't be ruled out, he said.
“This is a different consumer than we had in the past 20 years,” Rosenberg said. “People are going to increasingly be putting more money into cookie jars, rather than into buying more cookie jars.”
Where in the world one would find logical reason to express immediate and highly inflationary worries, given the above conditions, remains somewhat of a mystery to the rest of us. Where in the world one sees a major commodity boom on the back of the same conditions also remains somewhat obscured – for at least some time to come.