By Jon Nadler
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.
Jon Nadler is Senior Analyst, Kitco Metals Inc.
