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GOLD

“Gold holds out against the correction and hangs 1.460 dollars an oz.”

After recording a new historical high at 1.576 dollars an oz, in linewith sales that hit the commodities sector, lost more than $100 in 4 sessions, falling around 1.460 dollar an oz.. Since then, price of gold is back above 1.500 USD/Oz and, as we are writing, 1.505 dollars. This temporary collapse has been caused by a mix of reasons connected both with the metal related fundamentals, as to exogenous factors common to the commodities market; primarily due to the temporary correction of the dollar stronger against the euro, after Trichet’s statements and tensions in Greece, the free fall of silver after its mad rush to 50 USD/Oz which dragged gold also, the geopolitical tensions arising from Osama Bin Laden’s death and finally a climate of economic optimism, which shifted the focus back to the equity markets. In our opinion, despite its sharp correction, the underlying trend of gold cannot be considered changed. The favorable attitude towards gold as element of diversification and protection against currency depreciation certainly represents for investors the main motivational driver, as they are worried for public accounts, in some cases, out of control and the risks of present and future inflation, linked to the high prices of commodities and excessively expansionary monetary maneuvers. The latter could possibly score a negative factor for the fate of gold price; it should be reminded that it is some years that governments in the U.S and Europe are pursuing accommodative monetary policies at exceptionally low levels and we could soon face a turnaround - as shows the ECB REPO rate rise by 25 b.p. (currently at 1.25%) of last April. Higher cost of money means to  bear higher costs to finance speculative positions and especially to compete with assets that can provide fixed returns or dividends. Another topic is the role that ETF’s will play on the market, considered a net outflow of about 50 tons (with a peak of 85 tons) since the beginning of theyear and their present and future capacity of attracting new investors. On the contrary, in spite of record prices, some central banks have proved to be active on the acquisition front with Mexico (over 90 tons.) Russia (18,8 tons) and Thailand (9.3 tons), confirming that probably in 2011 the “Official Sector” will record a positive net balance of demand as in 2010 (+73 tons.). Furthermore, we believe that the price corrective phase may not yet be fully completed and thus may expose gold to possible further decreases. In the medium-long term fundamentals still suggest a bullish potential.

SILVER

“Silver: slumps before reaching 50 USD an oz.”

The mad rush of silver has broken before the 50USD/Oz, a kind of déjà-vu of what happened in 1980. Now, as then, are the increases on margins of futures contracts trigging the disastrous fall in prices. On May 5th, the Comex has raised the initial negotiation margin forsilver contracts for “speculators” up to $21,600 (+84%!), 16,000 for the “hedgers”, forcing many players to give up position and triggering thus the fall. This confirms that the increase in industrial demand could not justify alone a rise of more than 180%, from August 2010 up to last week. The run of silver is justified by a mix of causes: strong industrial demand (present and expected), investment (in some cases competing with gold) and, last but not least, speculation. Considering recent events, we believe that in the  hort-medium term, silver will enter a lateralphase, waiting for further developments of directionality, but, in our view, still characterized by high volatility.

EUR/USD

“ BCE raises rates, FED holds on”

Last April, the ECB has raised interest rates by 25 b.p., providing the basis for a change on its monetary policy, mostly aiming at the supervision and control over possible inflationary effects. We shall not forget that the ECB, maneuvering rates, seeks to stabilize the prices more than stimulate or cool the economy, respectively through inputs or withdrawals of cash. The content of the ECB Governor’s latest statements suggest, however, a moderate pace of adoption of monetary operations, so that markets discount a possible new intervention only in July and possibly another couple of operations later this year. The IMF also expects that, considered the  low economic growth in Europe, the ECB should adopt an accommodative approach from the monetary point of view. Additional concerns are coming from the sovereign debts of some Euro zone countries - some days ago Greece has undergone a further downgrade by S&P for the quality of its debt both in the short as in the long-term, lowering it from BB- to B – as well from the growing spreads on interest rates in Portugal and Ireland. The European economic scenario outlines an established growing trend, even if at a moderate pace, although some sectors (such as tertiary) show more vitality. However, from a strictly financial point of view, the gap between peripheral and “more virtuous economies” as France and most of all Germany, tends to  widen given that the latter are rapidly expanding in presence of stricter controls on public spending. Italy as well is “encouraged” by the IMF, which, however, warns of low GDP growth (expected 1.1% in 2011 and estimated at 1,6% in 2014), need for cuts on spending and the  implementation of structural reforms. Also the U.S. is confirming a trend of stable economic growth, although at lower rates than expected; the manufacture sector (major component of U.S. GDP) is going better than the tertiary, where the ISM non-manufacturing index fallssurprisingly of almost 5 points (from 57.3 to 52.8), keeping however above the expansion band. From the point of view of monetary policy, the FED considers the current rise in prices a temporary factor and believes that, on the current market conditions, there is no need of an intervention on rates, which remain low to help the American economy, for an extended period, as confirmed by Ben Bernanke’s own words. In such a context, and in absence of new and destabilizing turmoil in the European peripheral countries, we believe that in the mediumlong term the dollar could potentially return to weaken against the euro, also due to the change in monetary policy undertaken by the ECB.