Market Update: April 17

Gold and silver both are attempting to build a floor today – gold around $1,380, and silver between $23.00 and $23.50. ETFs continue to hemorrhage, while physical demand is hitting almost unprecedented levels. Asian buying especially is off the charts, with the premium on gold bars in Singapore hitting an 18-month high. Distributors world wide are scrambling for any stock at all after two days amazing demand has scooped up nearly everything available. There are truly two worlds in precious metals this week – panic selling in “paper gold” and a “gold rush” of buying in the physical market.

It was an unhappy day in equities today, as European stocks fell again on bad economic news, hitting a four-month low. The continued unease that larger troubled European nations could be coerced to sell central bank gold in order to qualify for a bailout is also weighing on sentiment. European automobile sales dropped for the 18th straight month, by 10.3%. This hit the platinum group metals, as platinum and palladium see major use in catalytic converters. The euro is down after hitting a seven-week high against the dollar.

The IMF has downgraded its global economic forecast for 2013 and 2014, which is another factor is depressing equities world wide.

Wall St. opened lower for the second day on disappointing corporate earnings.  The dollar is solidly higher off yesterday’s close, while oil is down on the IMF forecast and increased inventory in the U.S. These two factors will pressure precious metals.

In Asia, Chinese are slightly lower, as an unconfirmed report that Western banks were shorting Chinese bank stocks drove their financial sector down. Hong Kong stocks fell for a 4th day, but the Nikkei gained, breaking a three-day losing streak on the back of a falling yen.

Physical demand for gold won’t be letting up soon, as many Indians may think that the Friday/Monday crash in gold prices was the answer to their prayers at the start of the spring wedding season. In addition to the wedding season, one of the biggest Hindu holidays of the year is coming up soon. Akshaya Tritiyai occurs on May 13th. Known as ” The Gold Festival,” it is the largest gold-buying occasion of the year in India. Gold imports are equal to 3% of India’s GDP.

Demand in the U.S. is also phenomenal. Buyers Monday found the web sites of several online distributors to be slow or to have crashed completely. (The robust infrastructure of the Gainesville Coins website was able to service the unparalleled demand without a hitch.) Government and private mints are struggling to keep up with the sudden surge in orders. We are hearing reports that the West Point Mint, which produces the silver eagles, is working three shifts, 24/7 in an attempt to meet demand.  U.S. and Canadian bullion isn’t just for the West anymore, either. Asian demand for silver and gold Eagles from the U.S. Mint is off the charts.

(We apologize for the recent delay in market updates and decreased number of blog posts. All efforts are going into caring for clients during this extremely busy time.)

by David Peterson

Morning Market Update: March 27

Gold and silver were softer overnight, but are recovering in New York trading. While the dollar is surging again today (DXY over 83) after hitting another 7.5-month high overnight, stocks have opened lower on Wall St. The bond market is rallying, which may be signalling an impending top to the record-setting stock market run. U.S. pending home sales were down 0.4%, which was blamed on low inventory.  Oil is lower on profit taking, after a 5-week high yesterday.

Not only the dollar, but the yen and German bonds are seeing heavy inflows from investors seeking safe haven from the mess in Europe. These assets will see more attention from short-term safe haven investors than precious metals will.

European consumer and business confidence numbers were reported lower after four months of improvement, and this is from data taken before the Cyprus Shock. Italian bond yields yesterday rose to their highest point since October, as the Five Star Movement rebuffed an offer by Bersani’s center-left coalition to form a government.  European stocks were lower overnight, weighed down by the financial sector, as fears that banks in Greece, Spain or Italy could get the “Cyprus Treatment.” The euro is seeing significant downward pressure, trading below $1.28

In Asia, the Nikkei was up on choppy action, supported by good U.S. economic data and anticipation of the “punch bowl” of quantitative easing the Bank of Japan is preparing. Hong Kong stocks were up to the highest point in eight sessions, while Chinese stocks improved slightly on mixed bank profit reports, and the news that the Chinese government intends to reform price controls on domestic oil.

by David Peterson

Could Italy Default and Leave the Euro?

 

In the recent Italian elections 55% of voters voted for either Beppe Grillo’s populist 5 Star Movement (motto: “They’re all crooks and should be thrown out”) or Berlusconi’s center-right coalition that promises a return to pre-austerity Italy (and a return to power of Berlusconi, who was prime minister before he was run out of office.) What these two antagonistic factions have in common is a belief that the EU has been calling the shots and imposing crippling austerity on an Italy already in an economic depression.

Grillo has outright called for a renegotiation of Italy’s more than € 2 trillion debt, which totals 127% of GDP (second only to Greece,) while Berlusconi campaigned on reversing the austerity measures that the European Central Bank required from Italy before it would help with servicing its debt.  Both have talked about leaving the euro currency, bringing back the lira at a devalued rate, then paying off loans with lira.

Could Italy default on its sovereign debt and leave the euro? The last Eurozone crisis was caused by the possibility that Greece could do just that. Greece accounts for less than 2% of EU GDP, and is the 11th ranked economy in the Euro, yet the thought of Greece leaving the euro and going back to their own currency in order to compete economically led to the other EU nations paying billions of dollars to stop that from happening.

Italy is the third largest economy in the EU, and 8th largest in the world. It also has something that Greece did not have in 2012: a primary budget surplus. What this means is, that if Italy was not paying the billions of euro in debt service each month, it would be running a budget surplus. In fact, it would be running the largest budget surplus in the EU. 60% of Italy’s exports are to non-EU countries, and it runs a trade surplus, so it could conceivably weather European sanctions. The positives certainly seem to be there for an Italy tired of 37% youth unemployment and shrinking disposable income. But could they pull it off? Tim Worstall goes into the details in his recent article at Forbes.

What would the EU look like after an Italian default? Would Italy stay in the EU in a manner similar to the U.K., which retains control over its own currency, yet partakes in many EU functions? Or would this be the final straw for Germany, tired of propping up all the other nations that are dragging it down? The Scandinavian countries, also tired of their citizens going without while Nordic money goes south to help bail out other countries, could form their own economic union if the EU broke up.

Italy make be the bomb that blows up the EU. Unless something very unexpected happens, we may see the euro disappear as a common currency, and the EU devolve into a simple free trade zone.

by David Peterson

Morning Market Update Feb 26

We’re four days away from the “sequester” spending cuts, but it’s Europe coming unglued today. The split election results in Italy has has resulted in a split parliament between Bersani’s center-left coalition and Berlusconi’s center-right coalition. Bersani has control of the lower house, and Berlusconi’s people will control the Senate. Berlusconi campaigned on repealing the taxes the previous government imposed in an attempt to stop the financial collapse of the country. The election results have caused a flight out of the euro and Italian/Spanish bonds and into German and U.S. bonds, the dollar, and gold. Some analysts predict Italy leaving the EU if austerity measures are revoked.  The euro is trading near a 7-week low.

In Japan, the Nikkei index is down over 2% and the yen is up over news of the Italian impasse. Hong Kong markets closed at the lowest point this year, and Chinese stocks gave up early gains to close at the lowest point in a month as well.

On Wall St., stocks are up on the flight out of Europe, and the dollar is trading near the six-month high set yesterday. Oil is weaker, hitting a two-month low overnight. Despite these downward pressures, the fear coming out of Europe helped gold spike to hit briefly hit $1,600 on the London open, and was trending above $1,590 in early U.S. trading.

More eyes are on Fed Chairman Ben Bernanke’s testimony before Congress today than are following the sequester posturing in Washington. If he confirms easy money policy/money printing will continue, worries of currency debasement and future inflation will be bearish for gold.

 

by David Peterson