September 7, 2012 (Investorideas.com Mining stocks newswire) Precious metals, as well as other asset markets ended the day higher on Thursday, courtesy of the ECB. The exception was crude oil which turned sharply lower to end under its 200-DMA, and near $94.60, after first touching $97.25 per barrel. Spot market dealings ended at $1,701.30 in gold (+$7.90) and at $32.71 in silver (+$0.44).
The yellow metal then dipped to under the pivotal round figure shortly after electronic trading reopened for business at 6:00PM NY time. As the night wore one, gold touched lows in the upper $1,680s more than undoing the day's gains and silver broke to under the $32 level. Platinum and palladium also enjoyed a buoyant session but it was also clear that they were still being assisted by on-going labor difficulties down in South Africa. The former finished at $1,578 (+$10) and the latter at $643 (+1.00) per ounce.
The "risk-on" inducing after-effects of Thursday's ECB news conference were also credited with the 244-point rise in the Dow, and with the S&P 500 hitting a four-year high. Easing-related sentiments outweighed the lessened odds of a Fed QE next week given the labor market data that came into the markets during the trading day. More on both of these topics follows in detail, below.
The tandem rise in normally counter-trending assets (gold and stocks) was not lost on veteran market observers. Sadly, however, the parallel gain may have been lost on trend-obsessed small retail gold investors. Germany's Commerzbank reports receiving "mixed signals" from the physical gold market. Coin, bar, and jewellery demand by the global retail public is muted at best, while holdings in ETFs are swelling courtesy of hedge funds and spec players with large wallets. The dichotomy prompted one long-time bullion dealer to quip: "Ah, gold; suddenly, the darling investment of the one percent!"
This morning's opening in New York brought with it some additional modest selling by participants ahead of the US Labor Department's August jobs data. The complex lost value despite a notable dip in the US dollar, a 2% gain in copper, and a two-thirds percent advance in crude oil. Spot gold started the final session of this short week at $1,696 and change, while silver was off by 1.1% at $32.35 per ounce. Platinum declined only $1 to the $1,577 mark while palladium was unchanged at $643 the ounce.
Well, we now can all add a new acronym to the burgeoning supply of same that relates to the European debt crisis. As of yesterday, get used to frequent mentions of "OMT" (as in: Outright Monetary Transactions) even if the actual "transactions" do not yet appear to be conducted at all. As Mario Draghi introduced the OMT to the media gathered in Frankfurt am Main yesterday afternoon, he made it clear that, albeit this new step is indeed one of the manifestations of that "everything it takes" approach to saving the EMU, his institution only plans to use it if needed.
In other words, "Super Mario" fired a loud salvo straight across the bow of the good ship "Bond Vigilante" and he is hoping that the bang was convincing enough to put the occupants of that ship on notice that the ECB can indeed aim for the middle of it, if certain market developments warrant. The operative words here (and in Mr. Draghi's approach) are "perceptions" and "expectations." You know; the basic fuel for most market moves.
OMT is something "we want to be perceived as a fully effective backstop. We are in a situation where a large part of the euro area is in a bad equilibrium, where you have self-fulfilling expectations that feed upon themselves and generate very adverse scenarios. There is a case for intervening to break these expectations." Say no more, wink, wink, nudge, nudge, knowwhatahmean?
At any rate, the "europhoria" that was supposed to follow Mr. Draghi's press conference was relatively muted despite the fact that the common currency managed to remain above the $1.26 mark for the rest of the day. The euro however, is still trading under its 200-day moving average at $1.285 at this point. Evidently, the trading crowd had to make do without a first batch of OMT being carried out and with the fact that, at the end of the day (make that the beginning of the day), the ECB left key interest rates unchanged (and so did the Bank of England, by the way).
Thus, all this talk of easing that swirled around the markets on Tuesday was met with...inaction on the actual easing front by two of the central banks under the market's watch. The OMT offer by the ECB should not be seen as "stimulus" and certainly not as some "naked money printing exercise" but as merely another attempt at stabilizing bond yields in that difficult regional market. Success however, is never assured. We fear that those looking for massive bond purchases by Mr. Draghi's institution might come to be disappointed not only with what will be the size of them but their (delayed) timing as well.
The previous $263 billion EU bond-buying scheme known as SMP (Securities Market Program), albeit not as "formal" as the "unlimited" OMT plan, has not had the desired result when it came to Italian and/or Spanish bond yields. On top of that, Bundesbank President Jens Weidmann voted against the OMT, which he views as something that approximates central-bank financing of government deficits. One of the perceived reasons as to why the ECB did not also offer an equally hoped-for quarter-point cut yesterday is the fact that 2013 inflation estimates for the eurozone are already clos(er) to the 2% ECB target.
There is also the question of what happens if indeed the ECB does fire the OMT "bazooka" and it turns out to be ineffective? There is not much else left in the "toolbox" to resort to, for use against the vigilante crowd, you know. But, hey, IMF Chief Christine Lagarde threw her backing for OMT into the ring before the trading day was over.
For now, the remaining question is how long the OMT "glow" will last for the euro and the other markets that rallied in the wake of the announcement. Commerzbank FX strategists noted that the euro's retreat that followed the Draghi remarks illustrated that "If ever there was a case of buying the rumor and selling the fact this is surely it. Draghi delivered exactly what the market expected and investors locked in some profits."
While almost none of what took place on Thursday came as a surprise to those who had taken on long positions in anticipation of just such news coming from the ECB, there are still plenty of misconceptions around about the ECB as well as the Fed when it comes to stimulus. As we mentioned in the last commentary, despite all of the allegations of a massively ballooning Fed balance sheet, facts and (especially) figures point to a different reality.
Now, we are told (mainly by book-talking, long-commodities sources) that the two central banks are cranking the printing presses 24/7 and that they are going to unleash the (hyper)inflation genie out of the proverbial bottle. News flash to the Weimar Club: the OMT that Mr. Draghi unveiled would make bond purchases which would be "sterilized." This implies that they will be done under parameters that will not increase the money supply. The ECB would publish the size of its purchases on a weekly basis.
When it comes to the US central bank, and its QE, The Wall Street Journal reported as far back as March that the" Federal Reserve is prepared to launch a third plan of quantitative easing ("QE3"), but it would explore innovative techniques to inject additional cash without the risk of fueling inflation in the medium term, using reverse repos, according to sources familiar with the matter." Sterilize this, printing press fans.
Finally, there is a teeny little component to all of this OMT hoopla that, somehow, appears to have escaped the joyous reportage of the birth of the program yesterday. It pertains to something Mr. Draghi calls "conditionality" and while it seems to cover picayune details, well, you know where Mr. Devil is normally found...
In a nutshell, in order for there to be any OMT, countries will: first have to agree with EU leaders to keep their economies competitive, first need to control their public debt, they will first have to address the problems that got them into this mess in the first place. Not meeting such conditions means no OMT. Something to ponder quite heavily before concluding that massive amounts of bonds will be bought by the ECB and that OMT purchases are a certainty.
Speaking of certain...certainty, the level of confidence in an imminent QE that was on display late last week appears to now have been dialed back just a tad. Up to today, the specs were expecting that all that is left for Mr. Bernanke to do at next week's post FOMC meeting press conference is to delineate "how much" and "when" as regards QE3. This week however the US economy yielded some numbers that could alter that "how much" and "when" to "if" and "why." Read on:
The American economy's private sector posted a gain of 201,000 positions in August –the largest such addition in five months. The numbers for July were also revised upward by 10,000 positions. ADP reported that the openings that were filled were primarily in the small business and services sectors. The August increase could be sizeable enough to budge the national unemployment level away from 8.3%.
Also on the US labor front, it was reported that announced layoffs declined to 32,000 last month – the lowest figure since December of 2010. As well, weekly claims for jobless benefits fell by 12,000 filings to 365,000 in the period that ended on September 1st. Finally, the ISM said yesterday that its US services index jumped to 53.7 last month and that its gauge of employment climbed to 53.8 –the highest since April.
The pivotal August employment number set showed that the economist-estimated non-farm payrolls at 130,000, private sector jobs at 142,000, and general unemployment at 8.3% were both under and over the actual figures issued by the BLS. The principal take-away number was the decline in US unemployment to 8.1% (something the Obama re-election camp will soon heavily underscore). On the other hand the headline shortfall of some 40,000 jobs in the non-farm sector is likely to be "good" enough to stoke the QE-anticipating bulls to propel gold to possibly near the $1,730 level before profit-taking re-emerges once more.
One media commentator equated the weakness in hiring in recent months with the factor that will now move Mr. Bernanke "over the edge" and prompt him to have the Fed "give" that which everyone in the speculative camp so badly wants it to give. The remaining questions are ones of the QE's size, timing and its' sterilized versus non-sterilized flavor. To be continued.
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