Archive - May 21, 2012 - Story

Gold Has Fallen Due To:

• Gold’s recent weakness is in large part due to a period of recent dollar strength. While gold in dollar terms has fallen by 25% ($1,920 to $1,540), gold in euro terms is only down by 14% (from €1,374/oz to €1,210/oz). 
• Oil weakness – since the end of February, oil has fallen from $111 a barrel to below $95 a barrel (NYMEX) today. Gold and oil are often correlated and many buy gold to hedge inflation that comes from higher oil prices.
• Gold’s weakness may also have been due to wholesale liquidation in all risk markets due another bout of "risk off" which has seen global equities and commodities all come under pressure.
• Physical demand from retail investors in the western world has slowed down as did demand from India in recent weeks due to the increase in taxes on bullion (since removed).
• Much of the selling has been technical in nature – whereby more speculative elements on the COMEX who trade gold on a proprietary basis have been selling gold due to the recent price weakness and the short term trend clearly being down. This has led to speculative longs now having their smallest positions since December 2008.

At the beginning of the week, European equities are seen modestly higher in the major indices with underperformance noted in the peripheral markets. Markets have sought some solace in the G8 summit over the weekend, with leaders agreeing that the optimal scenario would be Greece remaining within the European Monetary Union, and have furtively agreed that further measures may be necessary to return Europe to growth. The disagreements, however, continue to rollover as leaders fail to commit to a specific growth strategy. The tentative risk sentiment is reflected in the fixed income markets, with the German Bund remaining in negative territory for much of the session and 10yr government bond yield spread between the periphery and the German benchmark tighter on the session. Touted bids by domestic accounts helped support BTPs (Italian paper), especially in the short end of the curve, where the spread between the German equivalent is trading tighter by around 3bps. From Tokyo, comments from Fed’s Lockhart have drawn attention, who commented that with the downside risks emerging from the Eurozone, it would be unwise to take QE3 off the table.

• Is Insider Trading Part of the Fabric on Wall Street? (NYT) ... uhm, next question
• Nasdaq Says Glitches Affected Millions of Shares; IPO System to Be Redesigned (WSJ)... it's all the robot's fault... And the weather... And Bush
• Special Report: The algorithmic arms race (Reuters)
• Barclays to Sell Entire BlackRock Stake (WSJ) ... but they don't need the money... and it's not a market top.
• BoE's Posen: some European banks need more capital (Reuters)... some?
• Limbo on Bankia Undermines Confidence in Spain's Handling of Crisis (WSJ)
• JPMorgan CIO Risk Chief Said to Have Trading-Loss History (Bloomberg)... a guy called Goldman, blowing up JPM... the irony
• Pentagon's tone softens on Chinese military growth (China Daily)
• EU summit to raise pressure on Merkel (FT)
• Romney Super PAC raises less, still tops Democrats (Reuters)
• JPMorgan’s Home-Loan Debt in Europe Increases Anxiety: Mortgages (Bloomberg)

In continuing with the 2011 deja vu theme which has become the norm at this point, nearly half way into 2012, the key overnight events driving sentiment and futures higher (if not the EURUSD which despite a record number of shorts appears to have once again decoupled with the US stock market), were a statement following the latest G-8 summit (penned in the brief time when the world leaders were not watching soccer) that Greece should stay in the Eurozone (as opposed to?), and yet another promise from China's Wen Jiabao that the world's fastest growing economy would focus on growth (what a truly radical shift in policy for the country which needs GDP growth over 8% just to avoid riots and civil unrest). And in continuing with the "summit" theme so well exhausted back in 2011, and mocked by David Einhorn (see below), let's recall that there is yet another summit on May 22, this time where the European heads of state will sit down and also decide that, shockingly, they want Greece in Europe, in response to which stocks will surge, then be very confused just why they surged, and promptly tumble. Sadly, by now we have seen it all since 2012 continues to be a carbon copy replica of last year. We can only hope the powers that be infuse at least some originality before we are forced to start recycling headlines from the summer of 2011. In the meantime, futures are green, especially since Dennis Lockhart unleashed the QE bomb hours ago in Tokyo, saying that more easing should not be ruled out amid European risks. Wink wink.

The last time we looked at the Greek tourism industry or what's left of it, ironically so very reliant on German tourists, we observed that receipts from this very critical to Greek tax receipts industry would likely drop to under €10 billion - a big hit to government revenues just when they are most needed. Needless to say, ongoing political chaos, a rise in anti-German sentiment, and a resurgent neo-nazi political power are not helping things. Sure enough Ekathimerini reports that German bookings continue to be in free fall: "German bookings for holidays in Greece have slumped by almost a third so far this year, a German Sunday paper quoted a Thomas Cook executive as saying. "By the beginning of the Summer season, booking numbers for holiday in Greece in the German travel industry have been 30 percent below the year-earlier figures," Euro am Sonntag cited the head of tourism at Thomas Cook's German unit, Michael Tenzer as saying in an excerpt of an article made available to Reuters on Saturday."

Whether or not the European deterioration is real or not, one thing is certain: FX traders aren't sticking around to bet on a rebound. As of Friday, the net non-commercial position in the EUR currency was at -173,869 contracts or the biggest net short in history, surging by 30k contract over the prior week, and by a record 70k contracts in the past two weeks as things in Europe unwound rapidly. The short position is greater than the last such record hit back on January 24, when the net short was -171K, and the LTRO effect was yet expected to take hold. Naturally, with such a massive surge in shorts in a short period of time, this means that the likelihood of major short squeezes is substantial on even the most innocuous of news, such as a G8 summit which promises much but delivers nothing, or China once again saying it will gladly focus on growth (as opposed to what? non-growth?), or some DieBold-inspired leadership change in the Greek pro/anti-bailout polls. Our advice to FX trading readers: be very careful with EURUSD stops: it is very likely that in their pursuit of short covering squeezes, (BIS) algos will take the pair substantially into the offer-side stop limit buffer just to force short hands out, which in turn may initiate short-term covering ramps. Which would be great for Europe - after all what better indication of the viability of the continent than some algos tripping over each other and generating momentum.