Economic Background
Europe
- The political situation in Italy is getting more and more difficult. Both candidates for the Presidency of Italy, Romano Prodi as well as Franco Marini, failed to achieve the required two-thirds majority votes in the Italian Parliament. Both candidates had been proposed by Pier Luigi Bersani, the leader of Italy’s strongest party (Partito Democratico). Mr. Bersani promised to quit the party leadership immediately after a new President has been elected. This might not represent the ideal confidence building scenario into Italian political affairs.
- Cyprus government officials expect the GDP to shrink possibly by as much as 13 per cent in 2013. This is much higher than the envisaged 3.5 per cent decline, which was projected by the European Commission.
- Mario Draghi, President of the European Central Bank (ECB) commented alongside the G20 meeting in Washington that the economy in the Eurozone has not improved recently. US Rating Agency Fitch has downgraded the UK from AAA to AA+
US
- US consumer price index (CPI) fell by 0.2 per cent in March.
Japan
- The Bank of Japan (BoJ) has not been criticized by other G20 countries for the recent moves of the Yen. The Japanese Central Bank argues that the currency depreciation is simply a side effect (albeit a welcome one) of the huge stimulus programs, in order to achieve their ambitious 2 per cent inflation target as soon as possible.
India
- The Indian Rupee finished the week at 53.94 to the US dollar.
Gold: $1406.50 – down $73.50 from last week
The price for gold is trading now at a discount of $21.50 with the price for platinum.
The situation in Dubai has surely been similar to all over the world, where smallish discounts against loco London prices changed into decent premiums for physical gold. Dubai moved from a discount of $0.50 to a premium of between $2 and $3 per ounce of gold. The Dubai Gold Souk, based on anecdotal evidence, looked more like a busy Central Train station, with buyers clearly in the driving seat.
The other side of the coin is the ongoing liquidation from ETF and other ETP holders. The liquidation seen was magnified by increased margin requirements from various exchanges and the volumes traded on the Exchanges were massive.
The Commodity Exchange (Comex), a division of the CME Group, recorded just over 700,000 contracts traded for the active June Gold contract on Monday (April 15, 2013). This was reduced to 425,000 contracts on Tuesday, with a falling tendency, which culminated last Friday (19 April 2013) with a volume of 189,000 traded contracts. For your guidance, 200,000 contracts represent a very active normal trading day.
Gold prices have been able to recover just over $80 from the lows, but it failed to close above the $1400 level on Friday during the important Comex session. The settlement price for the active June gold futures contract is $1395.60 per ounce and that does not convince analysts yet that the worst is already over. A confirmed close above $1400 is needed before a more confidence building scenario can be achieved. Volatilities for Gold rallied to levels above 30 per cent early in the week, in order to close the week in the low twenties.
Last week’s trading span has been huge with ranges between $50 and $100 being the norm, during the trading day. Next week promises to be equally busy and it will be key to note if the physical markets can still rise to the challenge and take up the slack, which will keep coming from the derivative markets.
Lastly, a significant amount of gold mining companies will start seeing negative cash flow scenarios, if prices do establish themselves around or even under the $1300 level. This would lead over the medium term to production curtailments and should be supportive to the market. There have been several comments from the official sector that they will look positively towards increasing their purchases of gold and take advantage of the current price level.
It does come as a bit of surprise how quickly a lot of people suddenly see no reason to hold gold any longer, and to invest heavily into equities. The economic numbers which analysts look at, especially from the US, are better than some time ago, but they are by no means convincing and clear cut.
The latest Commitment of Traders Report (COTR) (end of business day 16 April 2013), shows a large decrease of long gold positions, while short positions have also decreased. This appears odd, after the price action seen, but this could be the result of spread trading instead of outright futures sales.
Silver: $23.30 – down $2.60 from last week
Silver has seen a bad situation getting worse. Silver prices are down 22.2 per cent since the beginning of the year, and last week’s loss represents a 10 per cent move down. The problem with Silver is that there has not been any major physical buying coming to the market, which could save the day and repair some of the very damaged sentiment.
The option volatilities rose early last week towards 45 per cent, only to finish the week still in the lower thirties levels. There has hardly been a bounce and silver traded down towards the next major support level at $22, only to be rescued by the unprecedented buying in physical gold, which stabilized the precious metal markets.
It is important to notice that ETF redemptions have been kept to a minimum so far, and that would indicate that there are still very strong long term investors around, who could see this as an opportunity to raise their stakes in the silver market. This would obviously be the preferred scenario but some confidence building actions are needed.
The latest COTR (end of business day 16 April 2013), shows that the short positions have decreased, while long positions have also decreased, but only in small numbers.
Platinum: $1427 – down $53 from last week
The price for platinum is now at a premium of $21.50 with the price for gold.
Platinum prices moved lower, broadly in sympathy with the action coming from the gold market. The fact that platinum trades in a premium to gold is not a reflection of the strength of the platinum market, but a clear sign that the week’s proceedings were heavily influenced by the collapse of the gold price, seen last Monday.
The lofty highs from November 2012 of $1730 for platinum seem to be a long way away, as platinum prices are in danger to fall below the $1400 levels, last seen before the tensions and fatalities in South African mines took place, last August 2012. It was clear at that time that these prices of sub $1400 level would not be sustainable for the South African mining industry and this picture has clearly deteriorated with the rises in wages agreed to finish these wildcat strikes at the time. The only help for the corporates could come from a massive depreciation of the South African Rand in order to increase competitiveness this way, but that might only be wishful thinking.
Next month will be Platinum week in London, and I am sure that these issues will be widely discussed among global participants of the industry during these meeting opportunities.
There have been some minor, rather small liquidations seen in the number of ETF holdings and even the volatilities in Platinum have hardly changed since last week. The latest COTR (end of business day 16 April 2013), shows that the long positions have decreased, and short positions have increased.
Palladium: $675 – down $30 from last week
Palladium has, again, sold off in sympathy with gold. The price for palladium is currently where it was exactly one year ago ($672). It’s a shame that all the gains, which had built-up nicely, have been surrendered, but palladium cannot be judged completely on its own, without taking all precious metals into consideration. Palladium prices have done extremely well in this context, as the prices for gold, silver and platinum were $1642, $31.65 and $1575 respectively.
This does show the strength and is fundamentally a good story, which palladium can put into the battlefield, and it appears that palladium prices could be the first major beneficiary, if precious metal prices can stabilize on current or higher levels.
There has hardly been any redemption on the ETF front and the option volatilities are also largely unchanged (a little higher in the nearby month).
The latest COTR (end of business day 16 April 2013), shows that the long positions have decreased, and short positions have increased.
