Metals close mostly higher, but mixed moves in markets

The precious metals and with the exception of lead and zinc also the base metals ended the week higher. However, it was a very mixed development for both segments of the markets for metals. While the industrial metals traded higher during the first half of the week, gold and silver only managed to close the week in the black due to a rally last Friday.

For the base metals, the development was similar to the movements of the stock markets. Also the S&P 500 index rose during the first half of the week and ended in the red due to the plunge following the release of the US labor market report. Earlier last week, the stock market even shrugged off the deteriorating consumer confidence index, which dropped from 59.2 to 44.5 - far stronger than the consensus of economists expected.

There is one striking point to notice among various economic data releases during the past two weeks in the US. The sentiment or expectation based date came in lower than the decline, which economists had already predicted. However, data based on hard figures tended to surprise on the upside. This was also the case with the Chicago PMI and the nationwide ISM manufacturing PMI, which remained above the crucial 50 level being regarded as the threshold between expansion and contraction of the economy. The factory orders increased 2.4% on the month, which was also far above the consensus forecast.

From this observation, we conclude that the plunge of international stock markets following the last minute compromise to lift the US debt ceiling and the politically motivated downgrade of US Treasury paper by Standard & Poor’s has massively damaged the economic sentiment. It has increased the fear that the world’s leading economy might head towards a recession. However, the activity data on order flow, industrial production and consumer spending has held far better and does not yet point to a recession in the US. But it still has to be seen, whether the plunge of stock markets had a negative impact on economic activity. While we still regard a modestly growing US economy as the most likely scenario, it can not be ruled out that the fear of a recession eventually leads to a recession. But in the case that real activity data continues to come in better than expected, the sentiment in stock markets could improve. This would be positive for the industrial metals and negative for gold and silver.

In China, the official manufacturing PMI also remained above the 50 mark and the HSBC manufacturing PMI increased to 49.9 and therefore also provided a positive indication. Thus, it appears as likely that the Chinese GDP will grow with a rate above 8% this year. The Chinese PMI data has also been supportive for the base metals. In Europe, however, the final PMI was revised further down to 49.0. The drop of the eurozone PMI was mainly a result of the strongest plunge of foreign orders in two years, with especially export orders in Germany posting the strongest drop. The German government has already damaged the GDP growth with the u-turn in the energy policy. Now, the hesitation to agree on measures to solve the eurozone debt crisis, which also impress the financial markets, is firing back. Germany needs expanding foreign economies to prosper from its export oriented industry.

The lift for gold and silver to a positive close on the week came from the US labor market report, which on the other hand reduced the plus of base metals. The US economy is not growing sufficiently to create enough jobs in order to reduce the unemployment rate. This is no news. However, the situation is not as bleak as the labor market report suggests on a first glance. Given the constraints on state budgets, the government sector is cutting jobs for some time now. The August labor market report now suggests that the private sector only created jobs just enough to compensate for the losses in the public sector. However, the August report is distorted by a strike at Verizon, which led to a loss of 45,000 jobs. Once this strike is over, those jobs will be added again to the payrolls. A neutral treatment of the Verizon strike would have shown a positive new jobs figure at this magnitude. Nevertheless, this is not enough that the Fed would not have to react on its second duty. Therefore, the Fed is likely to announce additional stimulus measures at the next FOMC meeting later this month. However, the Fed could not solve the problem of insufficient job creation alone. Also the fiscal policy has to contribute its share.

Additional measures by the Fed to stimulate the economy would be positive for the stock market. If the Fed decides to buy more long-term US Treasury notes and bonds, it would also the support the long end of the US bond market and the real yield on US T-Notes could fall even further. This would be positive for gold and silver. However, an improved outlook for the stock market could trigger a stronger shift in asset allocations out of the save havens into the more risky assets. In this case, the impact on gold and silver could be negative.

Another factor, which is crucial for the save haven flows into gold and silver is the development of the eurozone debt crisis. Italy’s PM Berlusconi appears to have only bunga bunga (a common name in Italy for wild sex parties of the PM with young girls) on his mind. His coalition partner from the Northern League is more interested in politics, but is also narrow minded and does not understand that the fate of Europe has also an impact on the regions in the north of Italy. After proposing a package of measures to balance the budget by 2013, which was the basis for the ECB to support Italy by buying its bonds in the secondary market and thus pushing yields from above 6% down by a full percentage point, the Italian government now announced to step back from implementing some of the measures announced. This has increased the fear in financial markets that the debt crisis is escalating again. Rumors were also swirling around after the members of inspection team from the IMF, EU and ECB left Greece and talks were suspended. As long as the media is interested in spreading around false rumors and politicians are unable to implement necessary measures, the financial markets will not calm down. Thus, concerns about the eurozone debt situation will remain alive for quite some time. This is not good for the economic outlook of the eurozone, but all the better for holders of gold and silver.