Further falls in precious metals were seen during the overnight hours, albeit the dollar's gains were moderate, at best. While the greenback added 0.20 on the trade-weighted index, rising to 76.38, declines in the Nikkei, emerging market equities, and a seventh session drop in the MSCI World Index all conspired to push commodities lower. Oil and gold were, of course, the standouts, having recently risen to levels significantly beyond their fundamentals. We once again have a fairly clear case of tandem action in gold and equities. Not the normal order in the market universe, but what has been 'normal' over the past 24 months?
The perception that governments are getting the economic house in order and getting ready to remove the stimuli from the scene -after having spent $12 trillion to right the badly listing global boat- have players in various markets spooked that the easy getting is behind them. Free money ain't free forever. Noises from Norway, following recent action by Australia are adding to interest rate-oriented apprehensions among speculators.
Such background developments have had a not unexpected effect on several previous dollar morticians. No, not Mr. Faber, who still waves the skull and bones over the US currency. Mr. Rogers a visible dollar bear this spring, has shifted his stance and is now arguing for a dollar rally that might show some longevity. 'Cycles change, and you have to take the other side of the trade.' is what he basically told his viewers to recognize, on a Bloomberg video clip this morning.
Gold prices dipped to under the $1030 level ahead of the opening of the NY midweek session, as falling oil, a rising dollar, and the aforementioned drops in various equity markets added to the ranks of those who decided to call it quits for now. Trimming of long positions by 2% in the week ended Oct. 20th is not what we would call a correction, however. However, the holdings in the SPDR Gold Trust -static even during the planting of the flag at the $1070 pinnacle-declined another 1.22 tonnes as of two sessions ago. Over in India, buyers started to show more signs of life, but were probably wishing the calendar could do a quick rewind to Dhanteras and still show today's prices...
This morning's action in precious metals was shaping up as follows: Gold opening at $1032.40 spot bid, off by $7.20 an ounce, following its slide to three-week lows (longest since August). Silver, 'outperforming' this morning, down by 32 cents at $16.37 the ounce. Platinum falling by $5 to $1308.00, and palladium dropping $3 to $323.00 per ounce. Declines were seen in crude oil, which was hovering just under the $79 per barrel mark. The breach of the $1030 area could usher in tests in the lower $1020s for gold, while a solid close above $1044 might show a path towards an interim recovery period. The weight-at the moment-continues to come from equities, but only in the sense that they themselves, are on dollar-watch as well.
Meanwhile, top-calling and bottom-picking remain favourite occupations in financial guru land. We heard from a few more notable names yesterday, and they echo a similar tune:
Over at Marketwatch, Bill Gross, managing director at fixed-income giant Pimco, called the top of the recent rally in stocks and other risky assets (insert your favourite one here) on Tuesday. The six-month rally in risk assets -- while still continuously supported by Fed and Treasury policymakers -- is likely at its pinnacle, Gross wrote in his monthly market commentary.
From Bloomberg's collection of notable quotables, another zinger from Nouriel Roubini: We have the mother of all carry trades, Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. Everybody's playing the same game and this game is becoming dangerous. No kidding. But try and call bubbles and then wait for screams of disbelief from the zealots.
The fact remains -as Bloomberg puts it- that the US currency has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Mr. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Mr. Roubini said the dollar will eventually bottom out as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and rush to the exit, he said. As of Monday, you might be witnessing said bottoming out. Give it a few weeks so that perspective can build
Examples of bubbles and quasi-bubbles are not all that hard to find. The MSCI World Index of advanced-nation equities has surged 65 percent from this year's low on March 9, while the MSCI Emerging Markets Index has jumped 96 percent. The Reuters/Jefferies CRB Index of 19 commodities has added 33 percent.
Gold is up some 18% from the first session in January, and near 39% on a year-on-year (date-to-date). Roubini also said he sees a bubble in emerging-market equities and that gains in some developing-nation currencies are becoming excessive. The rally in oil is not justified by the fundamentals, he said. That said, an asset bust may not occur for another year or two as a wall of liquidity pushes prices higher, Roubini said.
Speculation aside, is there room for further gains in certain sectors of the precious metals niche? We have opined that rhodium is likely such a candidate as we go forward. Perhaps for even a tripling in the annual average price, if the auto industry puts the pedal to the metal eventually. Simple odds-making tells us that, somehow, $600 or $900 palladium and/or $4700 rhodium are more of a potential reality than $3090 per ounce gold or $55 silver in the next half-decade. Just a hunch. But, be that as it may, Miningmx reports that:
Platinum group metals are set to further outstrip gains in gold this year as expectations for a rise in car demand and concern over the supply outlook point to a tighter market balance for the autocatalyst materials. Palladium has made particularly stellar gains -- up 75 percent so far this year against platinum's 48 percent and gold's 20 percent -- amid weak Russian supply and a relatively stronger outlook for U.S. than European car sales. Prices of fellow platinum group metal rhodium have also risen 70 percent this year.
Hope for a sustained global economic recovery are placing the metals on a surer footing, should it materialise, analysts say. With industrial precious metals denominated in dollars, you cover all three bases -- you can have an inflation hedge, a dollar risk (hedge) and you can get the benefit of recovering economic activity boosting prices as well, said David Wilson, an analyst at Societe Generale.
Deutsche Bank expects platinum prices to average $1,394 in 2010, and sees palladium at an average $321, while JPMorgan sees platinum at $1,338 in 2010 and palladium at $306, up from a forecast $250 for 2009. Even though gold prices have hit historic highs, with a promising trajectory for next year, investors are starting to look more favourably at platinum.
Looking at the two relative to each other, I would say over the next year, platinum has a better outlook than gold, said Nicholas Koutsoftas, a portfolio manager at GE Asset Management. Around half of all platinum and palladium produced each year is bought by the car industry for use in catalytic converters. A sharp drop in automotive demand knocked platinum group metals prices in 2008 as the onset of recession hit car buying.
A recovery in car sales throughout this year has largely been attributed to government incentives -- or cash for clunkers -- schemes, but with the economy set for a recovery, analysts are optimistic that real demand will materialise. Auto manufacturers likely used cash for clunkers to clear PGM stock, said JPMorgan.
That said, a metal in which investor interest is absolutely limited -- rhodium -- has increased this year... so there has no doubt been a modest improvement in demand, accentuated by tight supply. Reports suggest car demand from China, the world's biggest automobile growth market, is on the rise. Foreign automakers reported strong sales in the first three quarters of the year in China, largely due to government policy initiatives.
On a global scale, palladium is set to benefit most from a demand recovery. The main market for palladium-heavy autocatalysts -- chiefly used in petrol cars -- is the United States, so signs the U.S. may emerge more strongly from recession than Europe could be good news for the metal.
A lot of people are looking at European versus U.S. demand, said ETF Securities' head of research Nicholas Brooks. Buying of platinum- and palladium-backed exchange-traded funds has also added a key layer of demand. Holdings of ETF Securities' palladium fund have risen 388,000 ounces to record levels this year -- almost matching total investment demand for palladium in 2008.
Its platinum holdings have also doubled this year, and the company is in the process of seeking approval for new platinum and palladium ETFs in the United States. On the other side of the coin, concerns linger over the supply outlook from South Africa, source of four-fifths of the world's platinum and nearly a third of its palladium.
Industrial action continues to rumble over miners' pay. Number three platinum producer Lonmin said after posting a 25 percent fall in fourth-quarter sales that South African precious metals miners are likely to face more tough times. We are seeing wage increases at well above inflation rates, which makes managing costs difficult in a highly labour intensive environment, Chief Executive Ian Farmer told Reuters.
For palladium, there are also concerns over another major source of supply -- Russia. Last year its stockpile sales represented 960,000 ounces of supply, according to metals consultancy Johnson Matthey, pushing the market into a surplus of 460,000 ounces from a deficit of 500,000 ounces. With the size of existing stocks a state secret, how much longer they can keep plugging the supply gap is uncertain. Societe Generale estimated in a September report that Russian exports were down 20 percent in the first seven months of 2009.
The general feeling in the market is that Russia can't be sitting on top of too much in the way of stockpiles any more, says Standard Bank analyst Walter de Wet.Jon Nadler Senior Analyst