EU Deal: A Treat Or Trick?

Gold, silver, and the noble metals traded lower this morning as profit taking prior to the weekend emerged and players took chips off the market tables in the wake of a very good week indeed. Gold traded between $1,730 and $1,750 while silver oscillated between the $34.75 and $35.75 mileposts. Pre-weekend rallies are not to be excluded from the realm of possibilities even as book-squaring plays out in coming hours. Bull costumes have been very popular this week.

The explanation that gold gained this week on the back of perceptions that the crisis was going to be finally resolved was swiftly replaced this morning with the one that attributed this morning’s decline to the fact that the same crisis is not yet actually resolved and that Italy is the next “bogey” this Halloween while European economic growth remains at risk. Well, near-instant sentiment changes are something that one had better become accustomed to, it turns out.

 

Platinum slipped to $1,630 and palladium retreated to $660 the ounce. There was no change reported in rhodium at last check; $1,625 was the bid-side indication in New York. Gold had a very good week indeed; good timing for the announcement that 75+ gold ATMs will be plopped down all over India to dole out all sorts of golden products, silver trinkets, and yes, even diamonds. Wow.

The noble metals continue to attract investor interest and analysts continue to note cost pressures in the complex and deem them as supportive. The team at Standard Bank (SA) for example, feels that the perception of value in the PGM group should be based on the costs required to produce these metals. Such costs have spiked sharply higher for some producers this year. Take Aquarius, for example; its cash costs have experienced a rise of anywhere from 25 to 60 percent at its various operations.

Standard Bank’s analysts estimate that perhaps as much as 30% of that firm’s output is achieved at or near cash costs. The team also computes the cost to produce an ounce of aggregate PGM metal to be very near $1,300 the ounce. In light of the current speculative market positioning in the platinum/palladium sector, the expectation is that-based on the fact that they are not “overstretched”- further price gains could well be in the cards as longs join the crowd. Standard Bank sees value in platinum near $1,550 and palladium near $600 per ounce.

The recently-gone-into-hyper-drive gold market has engendered all kinds of phenomena; some never before seen ones (gold mining firm CEOs predicting prices of that which they produce) and some very familiar ones to you (if you were around in 1980). The “value” that some operators in the gold business were telling their victims was to be found in gold and silver investing was, apparently, non-existent. About $30 million was taken from hundreds of victims in Florida by Gold Bullion Exchange’s boiler-room telemarketers who urged them to place their funds into a “sure thing.” Chalk it up to…history repeating itself, 1980-style. The head of the scheme will be sentenced next month.

Now, before you jump to conclusions however, and feel that you might be immune from such happenings as we will describe below, consider the fact that the majority of the people who lost huge sums in the scam were not your average retired old grandmother. They were mostly upper-middle-class business folks who fell for the “end-of-the-world” and “you cannot lose” scenarios we are all too familiar with when it comes to the promoting of bullion investments. In this case, there was only the promoting and no bullion. Live and learn.

Copper prices declined more substantially this morning, losing 2.4% while crude oil gave back 1.5% as the US dollar regained its composure and climbed 0.25% higher on the trade-weighted index. As regards the orange metal, well, anyone can see that the past week has meant some rotund profits having been booked by the speculators out there. However, there are traders and market observers opine, the best rally in the metal since 1986 will probably come to an end, and possibly soon.

Here is another case (just as with gold and silver) where output exceeds demand (by more than 300,000 tonnes) and where (just as with oil and certain industrial metals) the possibility of a contraction in the European economy plus the slowing in China could mean price difficulties down the (near-term) road. 

Goldman Sachs tempered its 2012 projections for copper by 18%. So did UBS, but only by 5.4 percent.

When it comes to China in particular, copper players will need to keep a keen eye on developments in that country’s real estate “market” (we did not want to resort to “bubble” again) as we go forward. Last month, for example, home prices gained in less than half of the urban areas being tracked by the Chinese government. Now there’s a switch; property prices showing signs of wobbling in a place that was thought to be immune to such a phenomenon (heard that one before, somewhere else?).

One aptly named hedge fund –Kynikos Associates- via its founder Jim Chanos- believes that China may be on “a bigger and faster treadmill.” This is not the treadmill you read about in every propagandist commodity and hard money newsletter; no, the treadmill in question is –in Mr. Chanos’ words’- the one “to hell.” The overreliance by China on property development for economic growth has Mr. Chanos questioning how the emergent and evident slowdown will be resolved. Real estate transactions in so-called Tier I, II, and III cities are down by an estimated 40 to 60 percent this year. You do (hopefully) remember our recent story about the Chinese crab-fishing village whose folks’ garages are filled with automobile exotica such as Ferraris.

The trading week was characterized by the single focus on the EU meeting while US economic data played nothing more than second fiddle with the investing audience. Now, it is back to reality and ascertaining how the decisions made in Brussels will play out in the near-to-medium term. To say that the “all-clear” signal has been given by the midweek marathon meeting is not only likely premature, but perhaps also ill fated. Thus, at least some of Thursday’s Europhoria wore off a bit overnight as commodity and equity market bulls took not only a profit-taking breather but stock of just what the EU plan actually means and how it might or might not solve the core issues at hand.

The deal that Chancellor Merkel arm-wrestled Europe’s bankers into yesterday is thought to fall short of being a lasting fix and might not do more than buy time for Greece while slightly improving the health of the region’s financial institutions. Thus, one could possibly look forward to yet another eventual “this is it” kind of summit down the road in Brussels. Be that as it may, the US stock market for one, just had its best October since…ever. October? Major rally? Based on historical patterns?

Anyway, as things stand right now, Europe’s leaders are quite relieved to hear that their efforts to send money in the direction of Athens will probably be bolstered by…China. Make no mistake; if China does choose to invest some money into the Old World at this point, it will very likely ensure that it places such funds only into the ‘safest” segments of the bowl of debt it is being offered. On the other hand, the benefits to the country (higher levels of influence in world trade, and the continuing possibility of exporting to a market that did not go into recession) are apparently quite worth the effort to jump in and “assist.”

 

Until next week, have a fun Halloween weekend and be safe (and that includes your money).

Jon Nadler
Senior Metals Analyst – Kitco Metals