Global Factors Hitting Gold and Silver

Despite having a rather stable performance last week, gold and silver are declining sharply Monday.  Gold fell below a key support level at $1,680, while silver dipped below $31.  There are several global factors contributing to the decline in precious metals today.

A European summit deal to tighten fiscal rules in the eurozone failed to restore financial market confidence after Britain blocked a major treaty change, forcing eurozone countries to negotiate a fiscal accord outside the Union without the support of Europe’s second-largest economy.  As a result, Moody’s said on Monday that because the summit did not produce any decisive initiatives and left the euro prone to further shocks,  it will revisit the ratings of EU nations in the first quarter of 2012.  Ratings agency Standard & Poor’s also added pressure.  “Let’s not raise expectations too high, there will be more summits,” said credit ratings agency Standard & Poor’s chief European economist Jean-Michel Six. “Time is running out and action is needed on both sides of the equation, on the fiscal and monetary side.”  These announcements sent the euro lower and the US dollar higher.

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In China, inflation concerns appear to be easing.  Consumer prices in China increased by 4.2%, which represents a 14-month low.  Inflation may average about 4% next year, Zheng Jingping, the statistics bureau’s chief engineer, explained last week. Consumer price increases hit a three-year high of 6.5% in July, and have exceeded the government’s full-year target of 4% every month this year.  “Curbing inflation is a good thing, but the reason why inflation is slowing is because the global economy is slowing,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo.  Although inflation cooling is bearish for gold and silver in the short-term, it provides a buffer for central banks to offer more stimulus to give the global economy a boost.  Recently, China reduced its bank-reserve requirements for the first time in nearly three years.  The move essentially frees up banks to lend additional money.  With inflation decreasing, and growth concerns increasing, China may provide more monetary easing in the near future.  Such a move, would be bullish for precious metals.

India, the world’s largest consumer of gold, has problems of their own.  According to a new report, India’s industrial production decreased in October for the first time in over two years.  Output at factories, utilities and mines decreased 5.1% from last year.  It was the first decline since 2009 and below the median estimate of a 0.7% drop in a Bloomberg News survey of 24 economists.  India’s inflation rate has held above 9% for every month this year.  However, once inflation weakens, many expect more monetary easing from India’s central bank.  “The only policy authority that we are going to see responding to boost growth will be the central bank,” Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG, said before the report. “Once the RBI is content with inflation and is sufficiently worried about growth, we will see it cut interest rates.”

While central banks around the world are itching to provide even more monetary easing,  they do not have the political environment to do so.  However, history has shown us that central banks see monetary easing as a viable solution to economic problems.  When recently asked if he is buying commodities, Jim Rogers explained, “Well, not at the moment, but I’m seriously considering it given what’s happening in the world.  The central banks are going to loosen up even more on money.  That’s not good for the world, not good at all, but that’s all they know how to do.  So, I’m contemplating, being forced to buy more real assets.”

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