Be careful for what you wish for! After an extended period of low volatility global markets have been shaken up thanks to an escalation in the Greek saga and China’s announcement of a wave of new measures in an attempt to halt the collapse of the Chinese stock markets. Traders love volatility, until they’re actually faced with it.
The dominant story has been how the Greece ‘No’ vote is going to play out. The situation looks messy to say the least and we look to be in for several weeks of market turbulence as the Europeans and the Greeks try and resolve their differences. European Creditors don’t seem to realise that the current approach has not worked, and are demanding more spending cuts and tax hikes that will see the economy shrink further. On the flipside, the Greeks turned up to last night’s Eurogroup meeting without any new proposal, and with the attitude that a No referendum vote was somehow a victory for their bailout negotiations.
Against this backdrop of uncertainty and speculation in Europe, Chinese stock markets have been plunging 30% in the past three weeks. Yet there’s been a distinct lack of safe haven buying. Sure a strengthening USD is a headway for commodities, but I believe the real issue is ‘Greek fatigue’. For too long this story has promised so much, for the bullion investor, and for so long there’s been a 11 hour concession. Many still believe some sort of interim compromise will be reached to keep Greece limping along.
Last night’s capitulation in precious metals, which saw Silver and Palladium plunge over 5% at one point, was based on frustration, but shouldn’t have come as any surprise to technical traders. Prices been languishing so perilously close to major support levels, that any minor setback in prices would trigger a bulk of pre-set sell orders just below recent support. My view is that last night’s capitulation is an opportunity. Bullion prices priced NZD have risen and benefitted from a recent fall in our currency. Now, following this clean out of the nervous bullion investors, an opportunity has arisen to benefit from undervalued metal prices.
Hi all, Gold had another wait and see week, treading water around US$1182 per oz. awaiting news on another Greek deadline due this Thursday. Today also marks the beginning of the FOMC’s two day meeting. The US central bank isn’t expected to raise interest rates, however many in the market are now factoring in a likely increase later in the year, with most punters picking September. Speculation has therefore favoured the USD, edging higher, and in turn weighing on commodities and commodity currencies such as the Kiwi. The good news for Gold traders is that the Kiwi has fallen faster and further than Gold and Silver, pushing up Bullion prices in NZ terms.
In uncertain times you can be sure of one thing… volatility!. With talks having stalled ahead of the technical deadline for an agreement on Thursday, the likelihood of a deal being reached is now almost non-existent. The Euro group finance ministers meeting is still scheduled to decide the “fate” of Greece, but there have been so many of these meetings it is hard to see this one producing anything concrete. It also looks like the market has become complacent, anticipating another last minute deal to be reached, so hence traders aren’t jumping into Gold… yet.
While Gold has had the benefit of safe haven support, the rest of the precious metal complex have struggled. Platinum and Palladium both are being dragged lower by a risk off sentiment swirling around the stock markets. Already this month Palladium has lost 6% to now trade at US$1,080 per ounce and Platinum has dropped approximately 3% to $732.45 per ounce.
I’m not a betting man, but I can’t see the benefits of selling precious metals at current levels, especially this close to major technical support and with such large event risk looming. Buying Call options appears best strategy ahead of tomorrow’s announcements.
Last week I noted Gold’s test of the resistances just over US$1200, now we’ve seen long held support come under pressure this week. This all stemmed from last Fridays much watched US employment numbers which exceeded estimates, driving up expectations that the Fed would move sooner rather than later to increase interest rates. The resulting speculative jump in US dollar saw Gold fall below long held support around US$1175, which in turn triggered protective Sell stops placed just below this key level, spiking prices to US$1162 lows. Gold had declined in four of the five sessions last week as US data gradually confirmed the Federal Reserve recent minutes, which said declining first quarter growth was due to temporary factors like the unseasonably harsh winter. The Fed removed all calendar references in its forward guidance and said that recent economic weakness might be “transitory” in nature. This means that bank is now entirely dependent on data so a rate increase could happen at any future meeting.
Meanwhile in Greece, the country delayed last Fridays 300-million-euro repayment to the IMF until the end of June, increasing the risk of a Greek exit from the bloc. Concern over this situation however has failed to propel interest in gold. With investor sentiment for gold so weak, gold prices may well continue lower but I feel this is leading to a better buying opportunity. And given developments in Greece and with the potential for corrections in other asset classes, it may not be too long before the markets start looking for a safe haven again.
As for Silver, this has dropped below the $16 mark for the first time since May 1 and has struggled to regain and hold this level. Currently we’re sitting just below that at US$15.968 per oz. Technical charts indicate that we’re sitting on an ascending support line, which originated in March of this year. Silver should be viewed as oversold and therefore valuable to a corrective bounce. I’m a buyer of Silver at these levels with a protective Stops at 16.87.
Silver again out-shined with a 3% gain, Palladium + 2%, while both Gold and Platinum traded 1.5% higher from the same time last week.
Trading hasn’t been without some trepidations, bullion traders once again closing positions into the weekend. Fridays have now become renowned for this mass exodus of risk. Gold sinking to six week lows, breaking below $1,170 per oz. before clawing back slightly into the close. Even a falling US dollar and generally poor US data didn’t support Friday’s metal prices. Recognising this trend allows us to identify opportunities and eliminate panic decisions. Monday saw safe-haven buyers back in the market after developments in the Middle East over the weekend and bargain hunters restore last week’s Gold losses. Though the recovery did pick up steam following last night’s US data miss, temporarily reaching key psychological $1,200 level, to currently settle just below at $1,195.
Fundamentals are slowly moving back in the favour of holding precious metals. Physical demand in Asia appears to be picking up again at the currently lower prices. While US data fails to deliver promised growth. Overnight, US trade deficit of $51.4 billion was much larger than the expected $41.2 billion and the worst reading since October 2008. This highlights the dollar’s strong headwind effect on US manufacturing, eroding the country’s global competitiveness. How long can the US dollar maintain present strength?
Looking ahead, most participants should remain cautious ahead of Friday’s blockbuster US non-farm payroll data, which is forecast at 231,000 in April, after an unusually weak reading of 126,000 in March. Following some soft US numbers and the central bank’s shift to a data-dependent stance of monetary policy, the data could provide clues on when the Federal Reserve will raise interest rates, and therefore the direction of precious metals dominate pricing factor, the US dollar.