Gold, Silver, Metal Prices Commentary for Nov. 12, 2010

by Jon Nadler, Kitco Metals Inc. on November 12, 2010 · 0 comments

Bullion Bars

The hitherto "easy going" in precious metals got tougher all of a sudden last night as the realization that China’s first baby step on interest rates may soon turn into a full-on march sank in amid speculative players in commodities.

The Chinese "strategy" is really quite simple. It is the same one that will sooner or later be resorted to by the ECB and then the US Fed as well. Clearly, markets have grown uber-complacent about the near-zero interest rate environment and have been supporting over-the-top gains in many a commodity up to now.

Not that China finds itself anywhere near nil rates or such, however, the clear and present danger that inflation is posing to the country’s policymakers is apparently taking priority on the ‘to do’ list at this juncture. The precious metals (and most of the commodity complex) fell despite an easing in the US dollar early this morning (to near 78 on the index). Crude oil and copper each lost over 2% during the night.

The pledge made by the G-20 in Seoul to merely "monitor" on-purpose devaluation attempts by particular nations was met with a yawn by currency traders. "Indicative guidelines to be measured" is about as mild a "strategy" statement as can be made, and, albeit the leaders at the summit did acknowledge that imbalances are out there, and that competitive devaluations (aka the ‘race to the bottom’) are more likely to harm everyone than they are to help individual nations over the long-run, this is all they were able to produce in Seoul.

South Korea’s President, perhaps trying to save face for having hosted what is being increasingly perceived as a ‘non-event’ proclaimed that "there has been big progress" made during the Seoul talks however. See you next year, in some other posh location. For, perhaps, more meaningful ‘big progress.’

Some see the Chinese rate hike as a veiled boost to the value of the yuan, while others opine that the greenback is picking up steam on the prospects for an Irish debt default (an event that would certainly not benefit the euro). The euro also has to factor in the potential fallout from the finding this morning that the rate of economic growth in Europe eroded in Q3 due to various emergent austerity programs. German GDP slowed (to 0.7% in Q3) from its previous record pace but is still seen as robust by local economists.

At any rate, the common news thread says this morning that the Chinese rate-related apprehensions were sufficient to make for a $31 drop in gold during the overnight hours. Thus the yellow metal found itself back to roughly last week’s post-Fed announcement levels. More substantial support for prices may be found nearer to the $1,315.00 value zone, which, if broken, might change the game somewhat.

Other ‘games’ might change as well however, as many other assets have been basking in the post-Fed and Chinese growth hopes. See stock index futures for example; they were sharply lower this morning on the same fears. Commodities in China including copper, zinc, cotton, sugar, rubber, corn and soybean prices fell by the daily limits on concern another rate hike and additional sales from reserves would damp demand.

Silver fared poorly as well, losing $1.1 at one point in the overseas session. Still, such losses in value, coming on the heels of some lofty price achievements hardly appear as the larger (perhaps at least 10%) correction that is still so much overdue and was largely expected to materialize from a simple loss of bullish momentum and certain chart resistance points, as opposed to fears about something that has not yet taken place (Chinese rate hikes) in earnest.

New York spot dealings opened Friday’s session with assorted losses across the price boards. Spot gold bullion traded at $1,384.80 per ounce, down $24.10, as against the small losses in the US dollar on the index. In fact, the predominant selling (see the Kitco Gold Index) would have made for a $28-sized loss in the metal were it not for the USD index slipping lower.

Book-squaring ahead of the weekend and the possibility of an over-the-weekend rate hike by Beijing is certain to add to today’s volatile conditions in a market that was already turning nervous following its most recent, post-Fed, mania-like marathon. Consumer sentiment figures (though to have improved a tad) might only add to the flammable brew.

Silver prices opened with an 82-cent loss (2.9%) as players in that niche skimmed profits off the gaming table and pushed the white metal to an opening quote of $26.88 on the spot bid-side. Platinum shed $48 to start at $1,706.00 the ounce, while palladium fell $19 to open at $692.00 the troy ounce. Another $50 was added to rhodium’s value as that noble metal reached $2,400 on the bid this morning, and was still marching to its own tune.

Meanwhile, ill-informed ‘gurus’ continue to extol the virtues of a return to some kind of full or hybrid type of gold standard, in the wake of recent statement (mostly misinterpreted) by World Bank President Zoellick. Fanning the flames of investors’ hopes with representations that the world is about to make amends with that which it abandoned in the late 60’s, is one thing. Asserting that this WILL happen and that it CAN work, is, unfortunately, quite disingenuous.

Such starry-eyed dreamers will attack anything that does not conform to the strict "Austrian" paradigm and will dismiss anyone who tries to open the eyes of investors to the reality that gold cannot/will not make a comeback in the global currency system, and for good reasons. May we suggest a basic primer on global economics and currency regimes might be in order?

"Mercury poisoning," is the answer from Barry Ritholtz, the very outspoken CEO and director of equity research at Fusion IQ, when asked where Zoellick’s idea might have come from. Writing about the issue, Marketwatch’s Nick Godt found that Mr. Zoellick’s "suggestion might have served as the perfect idea to, if nothing else, short-circuit the saber-rattling from all sides with a nonsensical idea. The Fed’s easing measures were taken in order to stave off a grave threat of deflation in the U.S., in an economy which is still licking its wounds from the Great Recession.

"The last thing that the world economy needs right now is another source of deflation in a financial crisis," said Brad DeLong, chair of the political economy department at Berkeley and a former Treasury official in the Clinton administration. "Attaching the world economy’s price level to an anchor that central banks cannot augment at need is another source of deflation — we learned that in the 15 years after World War I," DeLong wrote on his blog."

As for what America needs right now, it is apparently a dose of imported austerity (something which has been fashionable from Athens to Paris, of late). At least, that’s the upshot of last week’s turbulent elections, in the opinion of some. Proposals for nearly $4 trillion in spending cuts made by a Presidential commission have now surfaced. Chances of these ideas being implemented (circa 2012) in their current guise? Slim, to none. However, it is a start.

The plan calls for slashing expenditures in hitherto sacrosanct entitlement programs such as Medicare, Social Security, farm subsidies, and such (never mind that more than 50% of the ‘problem’ has its origins in defense spending by the US).Curiously, the applause is missing from the scene. Isn’t this what was wanted by angry voters? Isn’t this what responsible fiscal and monetary policy entails — at least in part?

Have a responsible weekend.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and
Article: May We Live in Interest (ing) Times

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