For precious metals, the worst may be yet to come

Your top financial and economic news for Nov. 3


Former U.S. Treasury and International Monetary Fund economist Mark Dow suggests that precious metals will continue to lose their shine:

The bottom line is that a pre-crisis boom in commodities lifted gold and silver—even with Fed funds at five per cent. Post-crisis monetary policy then turbo-charged it, as people feared rapid inflation, renewed systemic crisis, a dollar crash, and bond vigilantes. Macro tourists lined up to pile in. Big name guys wearing money halos. ETFs and electronic futures trading for the masses poured the gasoline.

In short, they built a bubble. A bubble replete with charlatans hawking it on every medium. Just look at the chart of silver over the past 10 years…

Why did the bubble pop? People progressively suspected there was a recovery, inflation wasn’t materializing, and a dollar wasn’t really going anywhere. Then, when prices started to fall, the real sellers came out. QE3 couldn’t even stop it. This was the first leg of the bubble unwind, roughly late 2012 to June 2013.

Since then we’ve been consolidating, with successive bounces of lower amplitude, each time finding footing between 1,200-1,250. This is what technicians call a descending triangle. Odds massively favour descending triangles resolving themselves to the downside.

On the homefront

The TSX had another positive week but failed to match gains made by U.S. indices, which closed at record highs. The expansion of stimulus by the Bank of Japan gave a boost to equities globally, but weighed on gold in particular. The shiny metal fell about $70 per ounce to hit its lowest level in more than four years. Mercifully, the precious metals segment accounts for about five per cent of the TSX; at the start of 2013, its weighting was roughly twice that level. TSX 60 futures are moving higher ahead of the open.


Gold’s plunge is causing collars at the world’s largest producer to tighten. Five-year credit defaults swaps tied to the debt of Barrick Gold (ABX) rose 11 basis points to 1.99 per cent on Friday, just short of their 2014 high, writes Bloomberg’s Gerrit De Vynck. Ratings agencies may downgrade Barrick and other names in the space should the shiny metal linger below $1,100 for a prolonged period of time.


The loonie suffered its biggest intraday decline since the end of 2011 on Friday following a report from Statistics Canada indicating that the economy unexpectedly contracted in August. The Canadian dollar tumbled more than a cent against the greenback before retracing about 40 per cent of its losses. The pair is hovering around 0.886 this morning.


A check-up on the Canadian manufacturing sector. The RBC Canadian Manufacturing Purchasing Managers’ Index is slated to be released at 9:00 a.m. (EST). In September, this index fell from a nine-month high to a still-solid 53.5, suggesting that the manufacturing sector continue to expand, though less vigourously. New export orders stagnated, however, which may translate into less output in this reading. Sales figures from this segment have been rather choppy as of late, hitting a record high in July and proceeding to crater in August.


Governor Poloz steps up to the podium. Just before 1:00 p.m., Bank of Canada governor Stephen Poloz will deliver a speech to the Canadian Council for Public-Private Partnerships in Toronto, which will be followed by a press conference. Don’t expect much new information from the governor; the previous round of speeches from members of the governing council in late September was quite illuminating, and we’re just coming off the publication of a monetary policy report. Given the topic of the speech (the legacy of the financial crisis), Poloz will likely emphasize the extent of the damage attributable to the recession and stress that this recovery requires the continuation of stimulative monetary policy. The central bank has begun to draw more attention to labour market slack in their speeches and communiqués; we’ll see if this trend continues when the governor’s remarks are published this afternoon.


West-to-east mega-pipeline no sure thing. The one pipeline Canada’s three major federal parties support — TransCanada’s (TRP) Energy East — is facing stiff opposition in Quebec, writes the Globe and Mail’s Nicolas Van Praet. Local politicians and businesspeople near the St. Lawrence River fear the project may cripple tourism if an incident were to occur.

Daily dispatches

The segments that fared particularly well on Friday suggest that sentiment is firmly positive. “The bulls will be happy with a new all-time closing high in the S&P, with really strong performances from small caps and semiconductors (the barometer of the feel-good factor),” writes IG chief market strategist Chris Weston.


China’s manufacturing indices diverging, but tell the same story. In October, the CFLP or official Manufacturing PMI came in at 50.8, below what economists were calling for and levels seen in the previous reading. Meanwhile, the HSBC Manufacturing PMI rose modestly to 50.4. The former measure — sitting at a five-month low — gives a sense of sentiment amongst large, state-owned enterprises, while the latter — running at a three-month high — focuses on small to mid-sized companies. Any reading above 50 suggests expansion in the sector, so in the end, both indicate that China’s manufacturing sector is growing, albeit at a rather tepid rate.


Eurozone PMIs were mixed but showed rather meagre growth on the whole. Germany’s print perked up to a two-month high of 51.4 while France lingered in contractionary territory for the sixth consecutive reading and Italy slumped to a 17-month low. “Perhaps most worrying is the trend in new orders, a key bellwether of future output growth, which declined for the second month running,” writes Rob Dobson, senior economist at Markit. “It is hard to see any significant near-term boost to performance while market demand remains insipid and beset by lacklustre domestic conditions, slowing export growth and ongoing economic uncertainties.”


A trio of U.S. economic releases are on the docket. Both the Markit Manufacturing and ISM Manufacturing PMIs are expected to moderate from levels seen in September to 56.1 and 56, respectively. Construction spending is expected to rise 0.7 per cent month-over-month in September.

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