A surging US dollar-driven sell-off took a hefty amount of shine off the precious metals complex overnight. The better than 0.6% gain in the greenback pushed gold values to their lowest levels this month, to under $935 per ounce - this, before the NY market opened for the new week.
The dive in prices was sparked by a significant, near 6% fall in China's equity market - its largest percentage decline of 2009. One vividly recalls the 10% cave-in in Shanghai, back in February of 2007 - it was the clarion call for the two and a half years of sheer global economic chaos and pain that have followed.
Risk aversion remains the fastest and most obvious choice for participants when such potholes are hit. So is the favourable nod they give the dollar and the yen under such circumstances. This morning, therefore, it was not a Shanghai Surprise (after all, it was not as if speculators were unaware of tightening bank lending and lukewarm Chinese economic data), it was a Shanghai Shocker.
For those who had built a speculative house of cards on little more than statistical smoke and complacent mirrors lately, this will not be a pleasant Monday. More like a manic Monday. Behold copper, nickel, and other industrial metals losing between 2.2 and 3.5 percent off Friday's values. Dow futures were indicating a less than happy start to equities trading in NY.
Some market gurus (Peter Eliades at the forefront) feel that the Dow and the S&P have been living on borrowed time, supported by the species of bull that has given commodities their latest shine as well. A greedy, way-too-forward-looking bull who turns out to be easy to scare and be made to pull its horns in when confronted by news such as today's. So, to some, the Chinese as well as the US bull - well, he's a she. A bit more placid, and shy. Surprise.
Thus, it did not take long for the ebullient commodity niche players who were swarming all over the place (and the trading floors) last week, to pull in not only their antennae, but also to pull quite a few wads of cash off the market table. Suddenly, it became once again fashionable to hold dollars while the storm rolls on. The trade-weighted index showed the US currency at 79.46 (up 0.57) at last check.
As expected, a sizeable decline was unfolding in the oil pits as a result of all this. Black gold sank to $66 per barrel as worries about a glut of same spread among the longs. Japan's Nikkei was unable to celebrate the country's emergence from a year-long recession -as shown in its GDP Q2 GDP gain- and lost 329 points instead.
New York spot metals trading opened solidly in the red zone. Gold started off with a $14.80 per ounce loss on Monday, quoted at $932.80 bid. Where this stops, that's a good question. We had been neutral on the price for the coming week, but - hey, they don't call it a Shanghai Surprise for nothing, do they? First supports ought to manifest themselves near $920 and Indian buyers could become tempted. Much depends on how deep the gloom turns after today's session.
Gold's 1.56% drop paled in comparison to the 4.8% (!) fall in the price of silver, which led the metals fire sales parade. Outperformance by silver? Sure, so long as one acknowledges that is works in either direction on the price scale. It opened with a 68-cent slide, and was selling for $14.03 per ounce. Platinum was off $26 per ounce, opening at $1231.00 while palladium was down $4 at $270.00 an ounce.
So, what's behind the new fondness for dollars? Surely, it could not be the perception that they are literally worth more than previously estimated, due to the presence of cocaine traces on nearly 90% of all US banknotes. Bank of Tokyo opines that the US is set for the strongest economic recovery since the 1980's and feels that the dollar is set for a rally of sizeable proportions.
Something else that is making the dollar the choice of the moment, is China's mounting set of problems. Why, we got headlines from the country that rabid dollar morticians and down-on-the-US newsletter scribes can only dream of when it comes to America: news from the Chinese government that foreign direct investment in July fell 35.7% to $5.36 billion. That's ten months in a row of falling FDI. The July figure is far worse than the 6.76% drop in June and the worst FDI number since last November, when the world was in the worst of the post-Lehman panic. said Business Week this morning.
We will be back with a post-mortem on today's action by 4 PM NY time. Stay tuned.