By Jon Nadler
A break to higher levels for the greenback against the yen was just one of the manifestation of a possible turn in sentiment among speculators early on Monday. Overnight trading (albeit without Japanese participation -as locals were out on holiday) saw a marked rise in the 'jitter factor' related to just how overbought commodities and oversold the dollar have become ahead of what might prove to be an important week, and not only in terms of jawboning by officials.
Gold opened the new week with a $9.50 per ounce decline, quoted at $997.00 as player selling brought the metal close to the $1K mark during the overnight hours and the tilt pointed lower as the bell rang at 8:20 this Monday. On the trade-weighted index, the greenback was last seen at 77.01 (up 0.56) and at $1.463 against the euro, while crude oil fell $1.86 to $70.18 per barrel, a victim of dollar strength. Options to protect against a more sizeable decline in black gold would cost one dearly today...In any case, watch the 77 index mark, the 1.46 euro level, and 70 oil. They have all played into the four-digit mark achievement for gold.
Silver fell 34 cents at the start of Monday's session, trading at $16.64 per ounce, while platinum sank $15 to $1313 and palladium dropped in sympathy, opening at $296.00 the troy ounce. The longs could still be seen trying to keep things aloft in this market, but the dollar will call the shots at the end of the day. And coming days, as well. Dissecting the market up to the 15th of the month, our friends at GoldEssential.com find the COT situation to offer...more of the same as seen in the preceding several weeks. Namely, that "NSL to OI (net speculative length to open interest ratio) has hit a fresh record high, with absolute net speculative length now also in record-high territory.
Given price action is still seen hovering around the $1,000 an ounce area without making fresh record highs (yet), we believe that the over-extended long positioning poses a very real risk for prices to make a U-turn and head back to significantly lower levels. We reiterate that there – apart from the dollar decline – are little fundamental reasons to believe that gold should trade at or above current levels from a sustainability-point of view."
This is borne out of some of our own internal studies, as well. The nearly decade-long surge in gold prices is twice as large a story if you apply the dollar lens to the telescope (210%) as opposed to the lens that amalgamates other major currencies (112%). Where would we be today, when that bias is removed from the price equation? Nearer $771 to be exact. More on this, later.
As regards dollar decline and dollar recovery, in short order, the FOMC meeting, scheduled for mid-week, has dollar sellers worried that the signals coming from the central bank will contain not only the seeds for removing the hitherto ample stimulus, but a timetable and/or outline of 'how to' steps that will be part of the discussion. This, despite conditions in the US that reveal a shrinkage in credit for the past half a year. In addition, fears of similar course-change actions being mentioned in the upcoming G-20 meeting, as well as the fact that the summit could yield tighter capital market regulation and divert players from overbought risk-laden assets had the trade on the defensive this morning.
Finally, on Friday, the Executive Board of the International Monetary Fund announced that it had approved the long-talked-about sale of 1/8th of its holdings, in "a volume strictly limited to 403.3 metric tons, with these sales to be conducted under modalities that safeguard against disruption of the gold market." Reports (see Mineweb) indicate that such sales could commence by September's end.
Perma-bulls jumped all over the news and in an effort to keep the gold rally aloft for a while longer, declared China to be the undisputed taker of the institution's gold, despite China's indications that if such purchases were to take place, they need to be 'significantly under the market.' Therein lies the rub. The IMF's own parametres clearly indicate that the selling is to be done 'at market prices.' So, here we have the case of the seller coming to market at nearly a record level, whilst a buyer (and not just the Chinese) are facing a value proposition that leaves them wondering, to say the least.
Mind you, even if Beijing were to give the nod to such an acquisition, it would barely bring its gold holdings in line with the target of 2% of reserves it has set for itself. In that sense, with current holdings at barely 1.6% of that total, the purchase should go a long ways towards achieving the mission. It's about price, at the end of the day however.
The question also is, if it took the central bank several years of semi-clandestine or virtually unnoticed forays into the gold market to acquire the last 400+ tonnes in its coffers, then why -suddenly-rush out and offer the plate in a public fashion? For the moment, discussion/speculation about the entire matter remains in the hands/mouths of the usual suspects: unnamed sources in China (academicians et alii) and starry-eyed newsletter scribes. We will leave it to post-G20 "saysay" (as opposed to hearsay) to learn any such facts and bring them to you as they occur, and if so. Thus, let's postpone the guessing and second-guessing until then.
Something else that appears to have been placed on possibly terminal hold, is TEOTWAWKI. None other that Nobel laureate Paul Krugman opines so. However, stepping back from the abyss still leaves the economic world on some jagged, threatening cliffs which will require the most careful of steps if the trek is to get back to solid ground.
