Inflation Jitters? Bring Your Vuvuzelas – Thursday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on February 3, 2011 · 0 comments

Bullion Bars

Selling resumed in the precious metals complex overnight as the US dollar added to yesterday afternoon’s gains and despite a fresh rise in crude oil, copper, and the commodities’ complex overall.

In fact, during January — a month when gold lost over 8% in value — commodities turned in their best performance in over two years’ time. Copper, rubber, and cotton recorded new all-time highs, and other raw materials did not do to poorly either. Sugar comes to mind; it rose to a three-decade high due to Aussie weather concerns yesterday. Gold, meanwhile, chose to march to a different drumbeat, for the time being, in lieu of reaching fresh price pinnacles of its own.

This morning, the ECB left interest rates parked where they were (at 1%) but its President, Mr. Trichet, who did not leave reporters bereft of a supply of anti-inflation flavored words as recently as the middle of last month, was still seen as making price rises his top priority (after ensuring that growth remains on track in the region). Mr. Trichet reaffirmed his institution’s commitment to fight inflation (he roiled the markets with a threat to hike rates sooner rather than later) and underscored the ECB’s ability to stave it off during that news conference.

Clearly, the man does not want to be perceived as being ‘behind the curve‘ on this issue. What followed was one of the best rallies in the euro witnessed by currency traders in recent years. Mr. T’s words did a lot more than Ms. Merkel or Mr. Sarkozy’s remarks made in Davos regarding the permanent status of the common currency, which were clearly intended to undermine skeptics (read: euro-shorters) all over the place. However, at the end of the (trading) day, investors regard such a possible lifting of interest rates as a ‘policy mistake’ — go figure.

Spot gold bullion dealing fell by over $9.00 an ounce well ahead of the New York open (so much for the 9 o’clock ‘whack’ apparently), once again failing to respond to the continuing (and worsening) street fights in Cairo, and the apparent spreading of the unrest over to Yemen‘s streets as well. The Thursday opening had the yellow metal quoted at $1,327.70 an ounce on the bid side (down $7.30), mainly on account of the rise in the greenback.

ETF outflows and the ebbing (make that: concluded) of New Year’s related Chinese physical demand continue to hamper gold’s ability to stage a notable rebound (such as the one seen last Friday when Egypt prompted the trade not to want to go home empty-handed for the weekend) from its recent lows near $1,300. Contradicting those who attempted to "shape" the news on India’s 2010 gold imports, the Bombay Bullion Association noted that the country’s inflows of the yellow metal actually declined last year.

The total provisional 201 BBA tally indicates that 332.9 tonnes of gold (not some the 700+ tonnes that were mentioned in various online stories) were imported into what has traditionally been the world’s top consumer of the metal. A good portion of the obviously low (within historical contexts) level of gold imports must be due to the price-sensitivity of Indian buyers, while another could be reflecting shifting consumer preferences among young(er) Indian potential buyers.

Gold dealers and various hard money newsletters are now almost ‘abandoning’ India as a bullish topic with which to raise investor/subscriber morale and are actively "plugging" China as the demand source which will all but ensure the metal’s bright future. Meanwhile, January‘s Indian gold imports stood at 40 tonnes — a nice improvement, but one that is to be viewed as an early inventory build-up, within the context of an upcoming gold-buying-auspicious ‘mini-season’ for weddings to take place later in February.

Meanwhile market technicians continue to point to the "Maginot Line" that gold needs to stay above ($1,280 to $1,300 and the critical $1,254 mark underneath that range) in order not to spark a much more sizeable sell-off (risking the potential for $840 to $970 area to be visited), and for the moment see the precious metal as caught in an area of indecision and uncertainty. The recent counter-trend action to the rest of the commodity complex does not offer a whole lot of confidence to the bulls.

Silver prices opened with a 12-cent loss this morning, trading at the $28.23 per ounce bid level, and once again showing quite a narrow overnight trading range ($28.18 to $28.41). Platinum was down by $9 at the $1,822.00 mark and palladium lost $7 to start the session at $805.00 per ounce. No change was noted in rhodium, trading at $2,450.00 the ounce. In the background, the US dollar was up 0.27 on the trade-weighted index (at 77.32) while crude oil climbed 62-cents to the 91.48 per barrel mark. The euro traded at $1.375 against the US currency (wait; wasn’t it supposed to have collapsed by now?).

On tap for the markets’ "breakfast fare" this morning were the most up-to-date figures from the US Labor Department. The agency said that US jobless claims applications fell by 42,000 to the 415,000 level. In doing so, the filings basically negated last week’s bump in same. Continuing claims for benefits also declined (by 84,000 filings) to the 3.93 million mark.

The jobless claims filings news lifted the US dollar somewhat further (to 77.61) on the index and subsequently dragged gold to lows near $1,324.00 per ounce. In other US economic news, the productivity level of American workers increased during the last quarter of 2010, and it did so at a rate that was largely unexpected by economists. Such gains took place amid falling labor costs in the US. The focus now shifts to tomorrow’s jobs data, within which analysts believe they will learn of an addition of 140,000 jobs to US payrolls in January.

Continuing on our recently posted topics on inflation, hyperinflation, deficits, and the markets –important subjects one and all- we now bring you Globe and Mail-reported reality of a…corroborating kind; namely, the G&M’s intrepid reporter, Martin Mittelstaedt’s article posted last Friday. Writes Martin:

"If inflation were a credible threat to the future value of money, bond prices would be cratering, and interest rates rising sharply. That’s why many market watchers believe the current jitters over inflation may be a giant, economic version of a head fake. These pundits believe the chances of anything resembling the last inflationary blowout in the 1970s — when years of double-digit hikes in consumer prices created a worldwide wage-price spiral — are remote. Some analysts are even warning that inflation should be the least of our worries. They believe the most dangerous long-term problem is the high risk of inflation’s scarier and opposite "number" — deflation."

The article cites economist Lacy Hunt (whose Texas firm, Hoisington Investment Management Co., is apparently the holder of a very successful track record in the bond market) as one who:

"believes the U.S. Federal Reserve, through its program of printing money known as quantitative easing, has caused massive flows of funds into commodities, emerging markets and other speculative investments. The quantitative easing program is set to expire in June, and Mr. Hunt doesn’t think it will be renewed, suggesting the price distortions it caused will be reversed."

None of the above, of course, has even remotely decreased or stopped the incessant flow of bubble-dismissal cheerleading talk from coming at you. Last night’s e-mail inbox contained at least nine urgings to load up on commodities and to take cover against events that will make next year’s Mayan calendar TEOTWAWKI date a mere picnic on the grass. As always, there is ample room for both camps to offer up their case. The question is: at what point do investors begin to realize that a good degree of confirmation bias is at work here, as opposed to cogent parsing of "on-the-ground" reality. Wish we had that answer.

Until tomorrow,


Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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