European “phase” of the crisis

We had a Greek, Portugal, Irish, Spanish and recently Italian phase of the debt crisis in the euro zone but at a current juncture one should consider the crisis to be simply pan-European. With credit premiums of countries like Belgium, France and Austria hitting dangerous levels it is hard to focus just on one country as markets used to do. Europe needs a broad solution and that solution needs to have serious structural reforms at the core. Instead it is replaced by a discussion about the role of the ECB with the French (once again) wanting the bank to hit the press and Germany (in our view – rightly) resisting such pressure as doing so would only provide a short-term relief unless structural reforms are implemented across Europe. The situation remains tense and the EURUSD remains in a downward channel with the key support at a still distant 1,3145.  

Precious metals down on the WGC report

World Gold Council released statistics on a demand and supply of gold for the third quarter. The report revealed that the demand remained strong as it rose by 6% y/y and caused the gold price… to decline significantly. Why is it so? Because the report is clearly bearish. The demand went up but purely because of investment demand, whose contribution rose from 35% a year ago to 45% currently – massive ten percentage points. On the other hand jewelry demand dived by 10% y/y which means that gold is moving up (in a trend) only because buyers hope to sell it at even higher price. Furthermore we are observing a response from a supply side – it rose both at the mines and (especially) from secondary sources (13% y/y!). That means the multiyear trend on gold is clearly unsustainable and must be in a final phase. Should we see higher interest rates around the corner, a turning point would be obvious. Current uncertainty makes it less obvious but the gold might reverse on both: higher risk appetite and a significant flow to the dollar (in a crisis situation).

While on gold a decline looks like a correction at this point, it might be something more serious in case of silver. The price completed a triangle formation as we saw a downward impulse leading the price from 34 to less the 31,50 USD per ounce. It is likely that a 2-months old correction is finished and we will see a return to a downward trend, which would mean a retest of 26,10 low from September.

Przemysław Kwiecień PhD, Chief Economist

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