Better perspectives for base metals

The compromise in aid to Greece, the EU leaders have made at their summit in Brussels last Thursday, might lead to a short-term recovery in the euro exchange rate against the US dollar only and thus also the precious metals might profit merely in the short run. However, a permanent shift towards a stronger euro will appear as doubtful in the light of the compromise found. Since the precious metals react more strongly to the US dollar as the industrial metals, this indicates a better performance of non-ferrous metals over the medium-term. In addition, the recent economic data are a further indication of better prospects for industrial metals.

The German press, especially the mass tabloids, celebrated the relentless attitude of Chancellor Merkel in the question of EU assistance to Greece. But the refusing stance of the federal government, determined by internal politics, has proved as a disservice the euro. In particular, it is negative that Greece has to ask for an IMF-loan first. This means that the EU is not able to resolve its own problems without help from the outside (ie, primarily by the US and China). This does not create confidence in a currency some EU politicians have believed that it could replace the US dollar as a global investment and reserve currency. Not unduly, the ECB is concerned that an intervention of the IMF might interfere with its independence, which is also a negative factor for the confidence in the euro. It also appears doubtful whether the IMF under its statutes is allowed to grant Greece a loan as the problem in Greece is not one of balance of payments, but one of financing of the budget deficit. The third point to add is that the States of the euro area have to establish unanimously that Greece receives no credit in the financial markets any more before bilateral loans can be granted. Given the position of Chancellor Merkel, the stance of "no money from German taxpayers for Greece" could again become a stumbling block for a unanimous decision. The recovery of the euro from 1.327 up to 1.341 against the US dollar is likely to be primarily based on short-term profit-taking and replacement purchases of euro short positions and no medium-term trend reversal signal.

The industrial metals react less strongly to the development of the US dollar than the precious metals. In particular, gold is seen as a protection against a weak US dollar. Although base metals benefit from a weak US dollar, the fundamental factors of supply and demand play a greater role. The economic data, released during the preceding week, were better in the US than expected. It is true that GDP growth for the 4th Quarter of 2009 was revised down slightly, but the data for the current quarter indicate a further recovery of the US economy, which is after all the second-largest consumer of industrial metals. The Richmond Fed index rose from 2 to 6 points, while the consensus expected only a rise to 5 points. The orders for durable goods increased by +0.9% in the core rate, more than the consensus of economists had forecasted. In the euro zone purchasing managers' indices could also increase strongly from 54.1 to 56.3. In Germany, the Ifo index rose from 95.2 to 98.1 and thus has not only recouped the slight decline of the previous month again, but still achieved the highest level since June 2008. Overall, therefore, the economic data point to a further recovery in the economy and thus increasing demand for more raw materials. Therefore, even a less expansionary monetary policy in China would change little of this perspective.

Another important indicator of the economic outlook is the trend in the equity markets. In Europe, key indices reached a new annual high in the previous week and the US indices continued to rise. This suggests all in all that the economic outlook will be judged positively on the stock markets. This should also positively impact on the base metals. They should therefore perform better than the precious metals in the coming weeks.

Greece's problems continue to weigh on Precious Metals

As already stated in this blog, problems of Greece and the fear of state bankruptcy remain a burden on the metals markets for the foreseeable future, particularly for precious metals. The connecting link in this chain is the exchange rate of the euro on foreign exchange markets against the US dollar. But it was less the Greeks or even the infamous hedge fund that put the credit default swaps (CDS) markets under pressure, but politicians in Berlin. Most German officials can not cope with the requirements of solid government and are unable to solve problems adequately. The failure of the Berlin policy has put the euro and therefore the metals markets under pressure again. Also, this problem should not be resolved so quickly.

At the start of last week it looked as if the EU put together a package of measures to assist Greece after Greece took the additional savings measures, which were demanded by the EU and the ECB. At the recent press conference, ECB president Trichet praised Greece for the new budget explicitly. But the markets were disappointed by the EU finance ministers, after the chairman of the Eco-Fin Juncker told the press that there had been agreement on the technical aspects of assistance to Greece. It had been leaked, however, hereafter by EU sources that Germany had blocked more concrete statements on which the markets had been waiting. But then by mid-week, Chancellor Merkel shocked the markets with a u-turn of the German policy. She turned to stubborn and recommends Greece to take a loan assistance of the IMF. Germany would not agree to EU package of measures for Greece at the forthcoming summit of EU heads of state under any circumstances.

What are the reasons for the sea change in German politics? Ultimately, it is likely that the state election in North Rhine-Westphalia and the lack of political leadership by Chancellor Merkel as well as the crash of the FDP in the polls, after Foreign Minister Westerwelle rapidly losing popularity, which resulted in the Berlin chancellery to this u-turn. The CDU/FDP coalition in Berlin has in the few months since taking office lost so rapidly in approval that the Merkel-led CDU is threatened with the loss of power in North Rhine-Westphalia. This would also mean that the majority would be lost for the Berlin government coalition in the Bundesrat, the upper house. Aid for Greece is not popular in Germany and the mass media stir up negative sentiment strongly. For the party strategists it is the easiest way to float on this wave of sentiment, and thus, to alienate the voters, even if the unpopular support for Greece is the overall better alternative. While Greece's government under Prime Minister Papandreou explains to its own population the necessity of saving and convince them, so the government can count on broad support, Chancellor Merkel as so often lacks political leadership.

A support package for Greece does not necessarily imply or require that the money of foreign taxpayers, including the German citizens, has to flow to Greece. After all, the Papandreou government has not asked for any financial support from EU. For the financial markets, it is however important to know that Greece still has funding alternatives and is not facing bankruptcy. Requested from the EU are measures, which illustrate that EU countries support Greece, after the Government would implement the required fiscal restraint. Greece would certainly get an IMF loan, without additional restrictive fiscal measures being required. But the German Finance Minister Schaeuble has far quicker worked into the matter of his new resort than the physicist Merkel understands the laws of financial markets. As Schaeuble pointed out, the course of Greece to Washington for the IMF would send the wrong signal. It would show the world that Europe were not in a position to solve its own problems without the cooperation of the USA and China. Confidence in Europe and the euro could take longer-term damage. It would also signal to hedge funds that they had a free hand to attack the next victim. Once the sharks have tasted blood, they attacked the victims. The Asian crisis in 1997, originated in one country, but other countries were infected by the Asian contagion. Even Hong Kong, which operated a sound policy and its currency was firmly tied to the U.S. dollar in a "currency board" system, came under attack. If the EU can not agree on an aid for Greece and the country must take an IMF loan then Portugal and Spain could be the next victims. The euro is likely to remain under pressure against the U.S. dollar, and the speculation about an end to the monetary union could mount again. For the precious metals that would be first a negative scenario. Only once a flight of investors from the euro zone into gold sets-in, the price of gold in dollars might rise again despite continued euro weakness.

Precious metals might face a correction

The markets for precious metals could face a more significant correction. Although the fundamental factors influencing precious metals were positive in the weekly comparison, the precious metal prices, with the exception of platinum, traded lower. Experience teaches that when a market is not rising on positive news any more, but even declines, a severe correction is usually looming around the corner. In this case, even platinum can not escape the downward pressure.

Striking in the development of the gold price in the previous week was that the price came under strong pressure from the futures markets, when pit trading was opened in the U.S. In the econometric models of QCR Commodity Research Quantitative for gold and silver, the respective net positions of large speculators are one of the explanatory variables. But in the case of gold, the net long position increased by 822 to 208,194 contracts, according to the latest report from the CFTC. In silver, the net-long position even rose sharply by 4107 to 35,165 contracts. Overall, this is seen as positive. However, the CFTC data refer to the preceding Tuesday, thus, a reduction in net long position during the previous week is possible. In the largest gold ETF, the SPDR Gold Trust, a slight decline in the gold holdings took place on Wednesday of last week, but they remained constant in the following days.

In the weekly comparison, the U.S. dollar has depreciated against both the euro and also the trade-weighted index of the 5 most important currencies. The S & P 500 Index has improved slightly. The yield on 10yr U.S. Treasury notes rose as a result of positive U.S. economic data to 3.75%, but that overall, should be favorable for the metal. Only oil prices suffered a slight loss during the week. Overall, however, the fundamental factors were positive for precious metals.

The reason given by dealers for the decline of gold prices was technical factors. In fact, the spot price of gold has found resistance at the upper Bollinger Band already in the preceding week. At the beginning of the previous week, gold then dropped below support at 1130 $/oz and the short-term uptrend line has also been broken to the downside. An attempt to get back above this uptrend line has failed on Friday. Therefore, it seems very doubtful whether the support at the lower Bollinger band and the recent pivot low at 1088$/oz will hold.