Metals Thoughts: Far-Reaching Fortnight Edition

With the GOP convention dominating headlines, I’d like to focus elsewhere, especially since I’m not convinced that financial markets care. Forgive me for skipping the prose this week, but here is what does matter, after a slow and relatively unremarkable summer, the next 15 days will provide much fodder:

  • This morning: GDP growth for Q2 was revised up from 1.5% to 1.7%. If this number had hit 2.0%, QE3 would likely be dead in the water. A slight revision makes it less likely.
  • Also today: Merkel declared that the current EU treaties do not support granting the ESM a bank license. More on this in a second.
  • Friday 8/31: Bernanke will speak from Jackson Hole. With a Fed meeting only two weeks away and several players bowing out(notably Draghi), market expectations for action are rapidly declining.
  • Thursday 9/6: Draghi’s first opportunity to detail the previously-alluded-to bond buying program. Likely to wait until the second opportunity 9/12
  • Friday 9/7: Employment Situation Report. This will be the last major piece of econ news before the fed meeting 9/12-9/13. Market reaction to a big number either way will be severe.
  • Wednesday 9/12: German constitutional court will rule whether the ESM violates Germany’s fundamental laws (“Grundgesetz.” I love the German language).
  • Wednesday 9/12 (part deux): Draghi will likely make a follow-on announcement after the German ruling.
  • Thursday 9/13: Second day of the Fed meeting including an announcement from the FOMC. Bernanke will have a follow-on Q&A session.

Basically, we are going to know a lot more about the shape of the world in two weeks than we do right now. I have zero ground to stand on regarding German constitutional analysis, so I’ll leave it to others.

The Economist did a fantastic analysis of the costs involved in breaking up the Euro. Highly suggested reading. My basic notes:

  • ECB owns €50B in Greek bonds, €130B in bailout loans, €100B of temporary payments. All would be nearly worthless with a revalued drachma.
  • Estimates a total cost of €320B for a Grexit. Germany’s share would be about €110B, which is about 4% of GDP. Not an easy pill to swallow, but doable.
  • Immediately after the Greek punt, speculation would move to the fates of Spain, Ireland, Portugal, and Cyprus. If you include Greece, it would cost €1.5 TRILLION. Germany’s share would be €500B, which is 20% of GDP.
  • An EU-wide banking union and debt-mutualization scheme would cost €300-€400B and probably raises Germany’s annual interest payments by €15B. Chump change in particular.
  • None of this even includes the costs of bailing out a banking sector that is highly interconnected and would be put in a very precarious situation with rapid reintroduction and revaluation of local currencies.

Regarding QE3, bear in mind that the Fed has already purchased $2 Trillion in treasury and mortgage bonds and inflation has remained calm by most measures. For a QE3 to have any discernible effect on markets, it would have to be massive. They would likely also have to ratchet up their duration risk to get to the long end of the curve. Given that the 10yr is already around 1.6%, there isn’t much room left to work. And then, what happens when/if the Fed moves to normalize rates and they have massive interest rate risk? If interest rates go higher, that requires lower bond prices. The Fed would, in effect, be self-inflicting massive losses on their balance sheet, unless they hold every purchase to maturity. Even under that scenario, they would have to mark-to-market. Ouch. A more likely scenario to me seems to be a British-style Funding for Lending program to attempt to get all the excess liquidity in markets to be available to individuals and smaller businesses.

To the charts: after a significant breakout, we have resumed choppy trading for the last 3 days while waiting for fundamental direction in almost all risk assets, including metals. I was long-winded earlier, so I’ll try to be “into that whole brevity thing”:

Gold (COMEX Dec), daily tick, with blended (low) trading volume along the bottom. Note that volume on the move higher was significantly above trend:


Silver (Grey, Dec contract), Copper (Maroon), Euro (Blue), Crude (Black) over the last 7 trading days. Crude has given some back on limited demand as refineries have been shut down due to Isaac in the gulf. Cue Jim Cantore.:



Gun to my head: This is getting increasingly problematic for me. I think no QE disappoints for now, but EU crisis and hopes for an announcement at the 9/12 meeting will keep things supported. Call it slightly higher.

Thanks for the feedback so far, I always appreciate it. Feel free to forward this note and be sure to call with trades, troubleshoot markets or to talk college football. Doug has college football lines, so we can talk any spread or over/under. Preseason AP Poll has Honey Badger’s rehab intramural football squad ranked 12th nationally.

- Brad

The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Bradley Yates and may differ from those of other NTR employees and affiliates. This information in no way constitutes NTR research and should not be treated as such. Further, the views expressed herein may differ from that contained in other NTR materials. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness, any pricing referenced is indicative and subject to change.


Bradley S. Yates

Bullion Desk- Senior Trader

NTR Bullion Group, LLC