Precious metals are near unchanged this morning, after big gains yesterday. A quick blip up at the COMEX open failed to flush out any new buy stops, and gold quickly settled back to previous levels. Both gold and silver are set to record the 6th weekly gain in a row,
Yesterday’s big gains were made on double the normal volume, discounting any theory that it was a blip caused by a large order in a thin market. Another encouraging sign was the fact that yesterday’s gold rally also occurred after the Indian government announced that it was keeping gold import taxes at 10%. This may actually increase gold demand in India, as many people were waiting to see if the tax would be decreased. One thing is certain, gold smuggling in India continues to grow, with seizures hitting an all-time high. Customs officials estimate that only 10% of smuggling operations are caught.
Stock markets are calmer today after seeing large outflows over fears of a banking crisis in Europe. The parent company of Portugal’s second-largest bank missed a bond payment, sparking alarm over the possibility of a “European Lehman moment,” where one failed bank pulls others down with it. Italy saw good demand for its bond sale today, which is seen as evidence that investors feel like Portugal’s banking crisis won’t spread.
The dollar is up slightly against the euro and pound, but still weak versus the yen. The yen has been stronger due to safe haven demand, and has put a slight drag on Japanese stocks. Wall St. opened positive, but immediately dipped into the red in what promises to be a volatile start to the session. Analysts are pondering whether this week’s sell-offs have been profit taking, or whether the stock market has peaked.
A growing worry among mom and pop investors is the increasing correlation between stocks and bonds. Bonds have lost most of their ability to hedge against equity losses, as the two assets are more closely following one another. Ideally, an equity hedge has a negative correlation, but bonds now have a positive .60 correlation, and rising. This is another reason gold is seeing attention this week, as stocks seem to be increasing in volatility.
Markets are mostly ignoring what might unfortunately be called “fighting in the usual places.” Israel has increased the call-up of army reserves from 20,000 to 33,000, as Hamas rockets continue to land in Israel. Expect a ground offensive and house to house fighting in the Gaza Strip soon. The Ukrainian government has surrounded the major city of Donetsk, where pro-Russian separatist groups have fled to make a last stand, using citizens as human shields. Right now, the government seems content to cut off supplies to the city while rival rebel factions kill each other.
While we don’t normally cover copper on the blog, developments in that sector are having an effect on global gold supply. The Indonesian government has imposed a large tax on exports of copper and nickel ore concentrates, demanding that the ore be refined in-country. However, the smelting capacity in Indonesia, which is one of the world’s largest copper and nickel exporters, is almost nil. This has led to an announcement by mining companies that the Batu Hijau and Grasberg mines will be shut down, as they no longer have room to store concentrate awaiting smelting. Since gold and silver are major by-products of copper mining, hundreds of thousands of ounces of gold will remain in the ground instead of entering the market.