Tuesday, April 19, 2011

Silver and Gold Find Headwinds In The Headlines

A vortex of relevant headlines met the financial markets upon their openings this week.  Silver and Gold found themselves on the defensive early in Asia and Europe on news related to Oil supplies, Chinese bank lending, and European debt.  Both found support from a "negative outlook" of US Debt by S&P.  Mysteriously, the US Dollar caught a bid this morning and surprisingly held onto it throughout the day. 

But first...  What if the G20 held a meeting, and nobody cared?

What happened at the G20, IMF meetings in Washington
(Reuters) - Finance chiefs from the Group of 20 nations and the 187-country International Monetary Fund met from Thursday to Sunday.

Following is a summary of the outcome of the meetings:

Leading economies edged forward with a complex plan for monitoring national policies to try to avoid a repeat of the 2007-09 financial crisis.

The United States faced heavy criticism from IMF member countries for its massive debts and budget deficit, including from some rich countries.

Policymakers did little to narrow disagreements over what to do about the huge flows of speculative cash pouring into the high-yielding markets of developing nations.

Greek Finance Minister George Papaconstantinou adamantly denied Athens was considering a debt restructuring, comments buttressed by a chorus of similar remarks from top IMF and European officials.

Egypt said it was seeking $10 billion in funding from global lenders and rich nations, but secured no public commitments.

Today's headlines market moving headlines:

Oil Declines in New York After Saudi Arabia Says Market Is `Oversupplied'
Oil declined for the first time in four days in New York after Saudi Arabia, the world’s biggest exporter, said the global market has adequate crude supplies.

“You don’t see a major supplier of crude make comments like that unless there’s a genuine feeling to get prices lower,” Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, said by telephone.

Falling Oil prices could be seen as a negative for commodities in general and be a drag on Silver and Gold prices.  Any strength in the US Dollar could accelerate a decline in Oil prices because of over supply.

Beijing Seeks to Cool Prices By Reining In Bank Lending
BEIJING—China announced an increase in the share of deposits banks must hold in reserve, its fourth such move this year, a fresh step in its battle against inflation that came after data showed consumer prices rising at their fastest clip in nearly three years in March.

The People's Bank of China said Sunday that it will raise banks' reserve requirement ratio by a half percentage point, effective from Thursday. It is the tenth time since the start of last year that it has raised the ratio, which the central bank is using to try to slow issuance of new credit into its inflation-rattled economy.

"Beijing did not take long to respond to the strong inflation number on Friday," Royal Bank of Canada economist Brian Jackson said in a note. "Today's move suggests that another increase in interest rates is on the way soon."

This news was expected, but adds to fears that the global economic recovery may be threatened by a forced slowdown in Chinese growth.  A slowdown in Chines growth could threaten the commodities markets,  potentially becoming a drag of the precious metals.  This increase should add a bid to the Chinese Yuan, and pressure the US Dollar relative to the Yuan.

Euro Routed As Europe Debt Woes Trump US Warning
NEW YORK (Dow Jones)--Investors roiled by global sovereign debt concerns took their frustrations out on the euro Monday, which suffered its largest one-day drop in nearly five months as the euro zone's simmering debt crisis was only momentarily outweighed by Standard & Poor's warning about the United States' fiscal challenges.

For months, the euro has rallied strongly on the basis of expected higher interest rates. But the single currency finally succumbed to gravity as worries over Greece--one of the 17-nation currency bloc's most financially troubled economies--sparked widespread speculation that the country would be forced to restructure its debt.

Fears about Europe's debt overhang were also reflected in the weekend's election in Finland, which resulted in the rise of a populist party opposed to bailouts of distressed euro zone countries. But uncertainty about the U.S.'s own fiscal problems was crystallized after Standard & Poor's took the dramatic and unprecedented step of cutting its outlook on U.S. government debt.

For a few hours in the New York trading day, however, attention shifted to the alarming prospect of the U.S. government losing its AAA credit rating as Standard & Poor's took the dramatic and unprecedented step of cutting its outlook on that rating.

Although the dollar saw a bout of knee-jerk selling amid questions about its status as the world's most widely-held reserve currency, the euro dropped further against its U.S. counterpart, losing almost three cents on the day at its lowest point. Analysts said it was a reflection of the immediacy of Europe's problems, while the U.S. as a longer - albeit limited - window of opportunity to rectify its deteriorating fiscal position.

"When you get these periods when Ireland, Portugal and Greece are in the headlines, you wonder what happens if contagion spreads to Spain," said David Watt, senior currency strategist in Toronto at RBC Capital Markets.

Eurozone debt fears, and a falling Euro, were the single biggest factor in the US Dollar catching and maintaining a bid today.  It was that bid in the Dollar that pressured Silver and Gold early in the day.  That is until the US Debt markets received an early morning wakeup call from ratings agency Standard & Poor's brilliant debt rating experts.

S&P Affirms US AAA Rating, Cuts Outlook to Negative
Standard & Poor's on Monday downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

"Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," the agency said in a statement.

In an interview with CNBC, David Beers, S&P's global head of sovereign ratings, said the agency has been "struck increasingly by the difference in how other governments are dealing with fiscal consolidation."

"The U.S. to us looks to be an increasing outlier in that context," Beers added.

It is noteworthy that S & P only lowered their "outlook" on the US Debt markets, and did NOT lower the US' credit rating.  Lowering their outlook on US debt is nothing shocking.  If you didn't already know that the US had a debt problem, you've been living under a rock.  The knee jerk reaction to this "news" was for Gold and Silver to relaunch higher after succumbing to the potentially near-term negatives offered in headlines earlier overseas.

Gold raced towards $1500 on the negative outlook news for US debt, and Silver revisted the rarified air above $43.  The news had little effect on the rising US Dollar at the time as it's bid strengthened on the growing weakness in the Euro.  One began to wonder how much the currency markets were discussed "behind the scenes" at the weekend G20 meetings.  Will an effort be forthcoming by the G20 to stop the US Dollars decent here?  Good luck with that, but an announcement by the Fed following next weeks FOMC meeting that QE2 will officially end on June 30 would certaily put a pep in the Dollars step in the near-term.  The cessation of QE2 would certainly address the concerns that S & P expressed today regarding US Debt.

End of QE2 has some investors fearing fall in June
NEW YORK (AP) — Could the financial markets be heading for a June swoon?

The answer likely hinges on what happens after the Federal Reserve's $600 billion effort to boost the economy expires. Some investors warn that the end of the program, known as QE2, will upend the stock market and push other markets in unexpected directions.

Under QE2, the Fed buys Treasurys from investors who can then put the money in stocks and other investments. Economists call it quantitative easing, and it is the second time the Fed has used the tactic.

Since last August, when Fed Chairman Ben Bernanke outlined the plan, the Standard & Poor's 500 index has gained 26 percent. Many also say it's partly to blame for rising commodity prices on everything from silver to cotton.

"It's the most important factor that explains markets the way they are now," says David Rolley, co-head of global fixed income at the fund manager Loomis Sayles. "So the most important question is what happens when QE2 stops?"

Fed to signal end of monetary easing
An end to global monetary policy easing is on the horizon, with the US Federal Reserve set to signal it will cease asset purchases at the end of June.

When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn “quantitative easing” programme – or “QE2” – that is due to finish by the end of the second quarter.

Fed officials, however, know that announcing more asset purchases at the last minute would disrupt markets. Silence on a follow-up “QE3” at next week’s meeting would therefore signal that their current intention is to complete the $600bn QE2 programme and then stop.

The next weeks FOMC meeting could prove to be a pivitol "turning point" for the financial markets over the near-term, and into the 3rd quarter.  Today's vortex of news that swept across the headlines like a southern tornado may only be a preliminary assault on the equity and commodity markets.  The US Dollar today broke above a downtrend line going back to a bear market rally double top in January at 81 on the USDX.  The "potential" for a near-term Dollar rally has been building for the past few weeks.  It should suprise no one if indeed it does mount a rally into the end of June.  As always, only time will tell.

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