Perceived strength in the European recovery, growing fear on the part of U.S. investors, and major stock position shift worked together this past week to push gold downward its 8th week in a row. Other precious metals followed closely.
While there is still much debate over the actual strength of the European recovery, expectations were enough this past week to convince investors of a favorable outlook. Spain and Greece’s recent success in selling debt securities has bankers thinking Euro, and not Dollar. This shift was evident by the currency’s recent rise to a six-week high of $1.30, as compared to $1.18.
American sentiment didn’t help things this week either. The U.S. Labor Department reported on July 16 that consumer prices had dropped 0.1 percent in June - the third straight month. Declining consumer prices seems to have had an effect on U.S. attitude as the Thomson Reuters/University of Michigan consumer sentiment index dropped from 76.0 in June to 66.5.
The decline of major U.S. stocks toward the end of the week further exacerbated American pessimism. Citigroup (C), Bank of America (BAC) and JP Morgan Chase (JPM) all performed poorly starting Wednesday the 14th. Bank of America dropped from around $15.50 Wednesday to below $14 on Friday. Similarly, Citigroup tumbled from over $4.25 to $3.90, while JP Morgan Chase fell from over $40.80 to below $39.00. Lackluster performance by these heavy hitters left American market observers shaking their heads.
Each of these major events worked together to drive gold and other precious metals down.
• Gold: Gold continued its downward march all this week to close at $1,193.00. This week’s reports of continued deflation persuaded many “safe haven” buyers to get out of the market. The lack of inflationary expectations convinced many to cash out. Positive European performance attracted capital investment away from precious metals. Furthermore, we saw the decline of the three major U.S. stocks mentioned above, two of which (Bank of America and Citigroup) represent the top two positions of the Paulson & Co. hedge fund. Down nearly $300 million this week as a result of these stock dives, Paulson likely sold gold to recover.
• Silver: Consistent with the evidence from gold prices and dollar performance, silver enjoyed a small boost earlier this week, but closed at $17.86. It’s likely that while they knew they didn’t want any part of a declining gold market, investors didn’t have a better option. The relative stability of silver exhibited earlier in the week was attractive, and as a result, investors bought in.
• Palladium & Platinum: Both palladium and platinum suffered losses this week declining 3.86% and 1.37% (respectively) on July 16 alone. The lesser of the noble metals suffered for “scardy cat” syndrome this week and took the biggest hits.
While confidence in the European recovery seems to be on the rise, it’s not likely to last. According to Leo Isaak, founder of Axios Capital Advisors, Spain may be on the road to recovery, but, “Greece simply does not have the economic ability to pay these debts and will have to restructure.” Even though their budget deficits are declining, they’re still negative. Isaak added “it’s hard to climb out of a hole when you’re still digging it.”