Gold prices fell under renewed liquidation pressure on Wednesday. However, gold was not the only asset to fall during this jittery midweek session; stocks lost 150 points the dollar dropped, silver fell, and oil caved in as well. Tough going for 2009, right out of the starting gates. Deflationary apprehensions and the double-whammy of larger-than-expected job losses and a spike in crude oil inventories dented the US dollar (off by 1.11 to 81.75 on the index) and undermined black gold (down $3.32 to $45 26 per barrel). Gold was unable to benefit from the slump in the greenback as speculative traders obviously paid more attention to cratering energy prices and their disinflationary implications.
President-elect Obama reiterated warnings about the $1.2 trillion deficit he is inheriting from the Bush administration and about the stark reality of possible trillion-dollar-plus deficits for years to come. Such headlines would have normally been carved in Man Lands on Moon -sized font on every newspaper in the country. Today, the topic took up a one-third page space in normal font. Amazing what people will get used to.
The New York gold trading session had bullion down by some $28.00 (to $835.30 per ounce) after participants weighed the amalgam of Fed predictions of worse things to come for the US economy, Mr. Obama's cautionary words, the sharp rise in oil inventories, and the 693,000 jobs that ADP reported to have been lost last month in the US. Silver dropped more than 30 cents and was quoted at $11.13 per ounce. Platinum, the lone standout in today's metals action, rose $20 to $981 as statements that it will survive unless the economy gets worse by GM and fears of platinum mine closures buoyed speculative sentiment for the noble metal. Palladium was marking time at $197.00 per ounce.
Swiss guru Marc Faber (a long-time gold partisan) opined yesterday that he prefers base industrial metals and related company shares over gold bullion at the moment, and until adjustments in prices come about. Because industrial commodities and the shares of industrial commodities and gold mining shares totally imploded last year, and the gold price continued to rise, gold is now very expensive compared with industrial commodities, the highest level in 30 years or more, Faber said. Yesterday's announcement of 13,500 job cuts at giant Alcoa appeared to have little impact on base metal prices and related stocks. Thus far.
In other news, the majority of surveyed millionaires (many of whom lost around 30% of their wealth last year) feel that their investment advisors have let them down - right when it counted most. No surprise there, as conventional wisdom says that the truly worthwhile managers only shows his mettle during market downturns. If you want to call last year's bloodbath a downturn...
A record number of US layoffs during December had already unsettled markets overnight and pulled the dollar lower as well. Coming just 48 hours before the Labor Dept.'s nonfarm payrolls report for the same month, the unofficial survey by the outplacement firm Challenger gives a good hint of where things are headed. About 1.2 million jobs were done away with in 2008, the most since 2003. Expectations are that US unemployment will touch the seven percent mark in the near future. The jobs situation and its effects on the dollar and the markets dominated the trading days' tone. US job cuts have risen four-fold since a year ago, and the situation does not appear to be turning up yet.
Eastern Europe went into shiver mode as Russia turned off all of the gas taps that feed the region via the Ukraine. Consumers found themselves on the short end of the gas stick just as a wintry blast is keeping temperatures way in the negative end of thermometres. Alternate fuels are being warmly suggested by authorities. In stark contrast to the gas situation, the news that oil traders are searching for at least 10 supertankers in which to store crude oil at sea as the IEA said that demand for black gold fell for the first time since 1983. Peak oil: may acquire some new meanings shortly.
Something else that may be under observation as well, and is somewhat feared, will be the term Commodity Index Rebalancing Financial Times.com/Alphaville blogger Izabella Kaminska observes that:
The major commodity indices rebalance their respective asset weightings once a year (or occasionally more) — and with that comes a mass dose of buying and selling. The 2009 rebalancing is expected to start sometime this week.
Luckily, JP Morgan has produced its best guess of how the 2009 reweightings of the DJ AIGCI and the S&P GSCI indices will impact the market.
The weightings for both indices are released ahead of time, but begin to kick in the first few working days of the new year. In the case of the DJ-AIGCI — which JP Morgan estimates has $25bn in funds tracking it — the new weightings come into force during the roll period that begins January 9th. The S&P GSCI index weightings kick-in after its January roll which commences January 8th. JP Morgan estimates about $50 bn of investment into that index.
As the DJ weighting multipliers account for changes in US dollar-denominated values there is generally more potential for large changes there than in the GSCI, whose weightings are set in terms of ounces/tonnes (on the basis of liquidity and are weighted by their respective world production quantities).
Accordingly, JP Morgan see the most significant change coming in the DJ-AIGCI rebalance. Here the market weight of crude oil is expected to increase from 9.6 per cent to 13.8 per cent, gold from 10.8 per cent to 7.9 per cent, copper (COMEX) from 4.5 per cent to 7.3 per cent, live cattle from 6.4 per cent to 4.3 per cent and sugar from 4.7 per cent to 3.0 per cent. Meanwhile, S&P GSCI crude oil weight will go from 32 per cent to 33.8 per cent. Their analysis:
In financial terms, we expect the rebalancing to have the greatest impact in gold, COMEX copper, crude oil, gold, and live cattle. We estimate that the rebalancing of the two indices is expected to result in $877 million of selling in gold, $699 million of buying in COMEX copper, $528 million of selling in live cattle, and $523 million of buying in crude oil.
While this could partially account for gold's difficulties, it does little to account for oil's trouble (at least today). But, the re-weighting is a watch-list item, to be sure. Who knows what funds at play will bring in '09. Naturally, JPM will be pounced upon for merely mentioning percentages and specific commodities. By the usual suspects.
Speaking of Keyser Soze, it turns out that one can call the markets quite closely and still receive the scorn of rabid bullion bugs. Coming in with a 5% margin of error for the 2008 lows in gold (and about 9% for the highs) was good enough to earn this writer a place in a certain MOTY Hall of Fame. Not that there is anything wrong with the illustrious company on the Top Ten List. Mind you, I think Dennis Gartman will not/ought not stand for such a slap. Not when he publicly (on Bloomberg) mentioned buying some bullion coins as insurance during last fall's turmoil. Oh well, it just goes to show that the Commies were right in their If you are not with us, you are against us motto.
Hopefully, the award comes with a cheque, and a plaque. Unless we can find another prognosticator who was even closer to these price calls and is the one truly deserving of the prestigious MOTY and MOTY Hall of Fame Award. Someone still needs to get a day job. Sadly, it is becoming more and more difficult to do so these days...