Produce, Spend, Build. Rinse. Repeat. – Tuesday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on February 15, 2011 · 0 comments

Bullion Bars

A smaller than anticipated (but still seventh-in-a-row) gain in US retail sales activity dragged the US dollar marginally lower on the trade-weighted index (down 0.09 at 78.56) this morning, and, that data, coupled with rising inflation news out of the UK and China motivated further speculative activity in gold.

The yellow metal has approached the $1,375- $1,385 resistance area; one from which (if additional fund buyers materialize), it could reattempt an assault on the $1,400.00 price point.

Spot gold prices traded between $1,363 and $1,378 this morning, while spot silver prices oscillated between $30.47 and $30.97 per ounce. Further gains were also recorded in platinum and in palladium, with the former rising as high as $1,852.00 per ounce, and the latter climbing to a high of $853.00 the troy ounce. The precious metals’ complex pared its earlier advances somewhat after the first hour of active trading, following the aforementioned approaches of chart resistance areas.

ABN AMRO notes that:

"since the start of 2011 palladium has continued its uptrend despite gold’s moderate correction. While gold has lost around 4%, palladium has risen by a healthy 3.5%, driven in part by strong investor activity in Nymex futures and in palladium ETFs, which have continued to see record levels in cumulative holdings."

ABN’s analytical team then asks:

"Why has palladium out-done all other precious metals?" and offers that: "the answer probably lies in a combination of two things — solid fundamentals, which have caused investors to take sharp notice of the metal, and its lower price relative to gold. Surging investment activity and improving physical demand has fuelled the metal’s price run-up to a 10-year high in January this year."

Gold ETF activity tallies showed a modest 0.79 tonnes of the yellow metal as having been added to balances on Monday, following a six-session string of tonnage losses. On the 11th of the month, the bullion balances in the ETPs being tracked by Bloomberg showed a cumulative figure of around 2,020 tonnes; the lowest since June of 2010, and almost 100 tonnes beneath a record level of 2,114.6 tonnes that was noted in December of last year.

It was also learned that the Soros Fund Management LLC added some gold to its holdings in Q4, while Paulson & Co. did not. The Soros gold addition was not of the highest order of magnitude, either; it amounted to 77 kilos of gold — more of a "rounding adjustment" than a fresh strategic bid on imminent stratospheric gold prices, apparently.

Clearly helping recent price gains in the noble metals’ sector (aside from lavish, on-going ‘attention’ from ETFs) was the news that Chinese automotive sales continue to show no signs of slowing despite the expiration of government-provided tax incentives and the institution of quotas intended to actually curb car purchases. Beijing, for instance, has officially limited the number of cars that may be purchased each month, and its auto retailers stand to lose more than $9 billion in sales this year. At the end of the day, however, it is deemed kind of important to be able to continue to breathe and to actually get around in said vehicles…

While the UK inflation news revealed that domestic price gains have reached the 4% level (twice the BoE’s target) and that it has been above target for 14 months now, Governor Mervyn King is expected to mount a second defense of the British central bank’s policies that have engendered such statistics, tomorrow, when he presents his quarterly economic outlook to Chancellor Osborne. Rate hikes are still not being overtly talked about, albeit the markets are factoring in a possible adjustment very near year’s end.

That is not quite the situation in China, however. As had been expected, the inflation data from Beijing did reveal price gain trends at work in January (albeit ever so slightly more tempered) that are raising the odds of an imminent and perhaps more aggressive rate hike campaign on the part of the PBOC.

Consumer prices climbed by 4.9% and producer prices rose 6.6% in the world’s second largest economy last month. The extension of credit by Chinese banks also showed no signs of slowing, as lending activity in January basically doubled (to 1.2 trillion yuan) from December’s levels. Lend, baby, lend. Until you are ordered not to, that is.

ANZ Banking Group analysts in Hong Kong confirmed that they expect tighter monetary policy on the part of the PBOC "ahead." Not a question of "if" but of "when," really. To what extent the higher interest rate environment visible in the PBOC’s policy pipeline will affect…everything (including the much-watched commodities’ sector) remains to be seen, but there is little argument about the fact that it will have an impact on current trends and values.

Separately, Japan raised its economic assessment for the first time in nine months today, while over in Europe, finance ministers agreed on an expanded bailout fund by the EU, should it become something to have to resort to. In all, the summit’s outcome was not deemed as having tackled the core issue of the region’s debt situation.

Over in the US, as mentioned, shoppers did their duty while manufacturers…manufactured more. The Empire State’s index of such activity gained steam this month, rising to 15.4 from January’s 11.9 level. Economists anticipate gains in US consumer spending and gains in US manufacturing to both remain relatively strong in 2011, following the pothole that America’s economy had hit back in 2008.

Source: Bloomberg

US consumer spending is anticipated to show a 3.2% gain in the current year; that would be the largest such increase in six years. Manufacturing, on the other hand, is seen as also rising, and it is certainly being watched with interest, as it comprises fully 11% of the USA’s economy. That said, there are remaining issues in the US economy, when it comes to housing and to jobs, even if such ‘issues’ show improvement tendencies.

Bloomberg indicates that:

"a government report tomorrow will show U.S. housing starts rose to an annual rate of 540,000 in January from 529,000 in December. The five-year average is 1.198 million. The U.S. unemployment rate has been 9 percent or higher for 21 months. Thirty-year bonds gained yesterday as yields near the highest level in 10 months bolstered demand and the Obama administration submitted a budget plan that included $1.1 trillion in deficit cuts during 10 years."

In the "macro" background, the sentiment among fund managers around the world should present some reasons for concern among the emerging markets/commodities/risk assets speculative crowd. While evidence of such concern is at present thin, at best, the most recent Marketwatch survey offers some "crunchy" food for (investment) thought as we go forward:

"Fund managers are more bullish towards global equities than at any time in the past decade, according to a survey released Tuesday. Of the 188 fund managers polled around the world, a net 67% say they are overweight global equities, which is the highest reading since the survey began asking the question in April of 2001, according to the Bank of America Merrill Lynch Fund Manager Survey for February.

"The survey also noted an increase in risk appetite with only a net 5% of fund managers overweight global emerging markets equities, down from January’s net 43%. A net 70% of investors now see the Federal Reserve raising rates in the next year, up from 62% a month ago."

Historically speaking, gold is thought to offer protection against weakness in the equity sector of one’s portfolio.

Gold is, also historically speaking, not supposed to fare particularly well in rising and/or positive real interest rate environments. The aforementioned ABN AMRO metals analysis observes that there has been a slight shift in sentiment on the heels of January’s gold correction:

"The [gold] market is starting to position itself to cope with the (outside chance) that interest rates will start to go up in 2011, which would be bearish for gold."

From where this scribe sits, a 70% segment of investors expecting higher rates courtesy of the hitherto extremely generous Fed is hardly an "outside" chance at all, even if the coming weeks could well witness higher interim values. The ABN team projects gold ETF demand in 2011 to total 270 tonnes, as against 2010’s 313 tonnes, and as against 2009’s 576 tonnes. It also only expects 31 tonnes of the yellow metal to be de-hedged in the current year by mines, as against the 205 tonnes de-hedged in 2010, and the 321 tonnes de-hedged in 2009. Meanwhile, the ABN projections call for both a mine supply (2,253 tonnes) and scrap supply (1,501 tonnes) record to flow into the market in 2011. Add it all up. By ABN’s tally, the 2011 surplus in the gold market will total 1,190 tonnes.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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