Tripoli Trouble-Trades Thriving – Wednesday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on March 2, 2011 · 0 comments

Global traders and investors continued to place the Libyan unrest (now a de facto civil war) and crude oil supply-related worries at the centre of their collective focus as the midweek market sessions opened for action this morning.

Bullion BarsReflections of such thought patterns were not difficult to glean; one look at the second day of sizeable losses in the Saudi equity markets (another 4% gone) as well as the spike in the premium insuring Saudi sovereign debt default told the story perhaps even better than the $100+ price tag attached to a barrel of black gold.

The rout in the stock markets certainly was not contained to only Libya’s neighbor(s); prices fell hard in New York on Tuesday (Dow down 1.38%) and in Tokyo (Nikkei down 2.4%) this morning. Meanwhile, the US dollar hovered near a four-month low (@76.58 on the index) as speculators eyed tomorrow’s ECB rate decision (or at least its jawboning) and it did not receive much in the way of -assistance’ from the upside surprise in February private payrolls.

ADP reported more jobs added (217,000) in the US last month than had been forecast by analysts, giving traction to the perception that the American labor market is indeed on a better footing. Friday’s Labor Department jobs scene numbers will come under intense scrutiny, to be sure. Until then, the gyrations in crude and Mr. Bernanke’s second day of testimony in front of the SBC will remain on top of the market agenda. As of yesterday, Mr. Bernanke did not give concrete indications as to what the Fed might do after it completes its bond buying QE2 program; one which followed a $1.7 trillion QE1 process of purchases of mortgage-backed debt and Treasuries.

The ADP report aside however, the latest sharp jump in EU producer prices has fueled speculation that the ECB will move on interest rates, and do so sooner than the Fed — thereby boosting the euro at the expense of the greenback. On a -normal’ day, the ADP data would have been good enough to lift the dollar; however the continuing melt-up in oil prices presented a significant enough obstacle for the US currency.

Said melt-up in black gold has had speculators and newsletter editors abuzz with doom/gloom projections of a cave-in in the world economy, with particular emphasis on the several peripheral nations which were mentioned every hour, on the hour, last summer (the PIIGS). As soon as the trouble in Tripoli became headline material,assurances of $200+ oil and a world of utter stagflation were the topics that most of the numerous newsletters landing in the average reader’s mailbox started to drum about (incessantly).

Of course, not everyone agrees on that kind of Armageddon-ish view of the world, even if they might not sign on to the school of thought that sees the current MENA turmoil as relatively short-lived. For instance, ING Bank’s chief international economist Rob Carnell believes that

"unless we see oil moving substantially higher from here, it’s hard to start thinking about oil-induced recessions or anything like that. If we start getting up to $140 to $150 a barrel, then we can return to those sorts of questions."

Thus, we come to gold (hovering at or just above Tuesday’s fresh record) which continues to receive its share of safe-haven bids and highly speculative interest while market participants of both stripes remain glued to the latest reports of attacks and/or counterattacks coming from Libya. The yellow metal came to within $0.50 of the $1,440.00 (spot offer) mark this morning. Silver certainly did not lag gold’s performance; in fact it rose by about twice as much in percentage terms (0.5%) to come to within 7 pennies of the $35 level.

Platinum and palladium both advanced this morning as well, with the former showing an $8 gain to the $1,849.00 level and the latter rising $6 to reach $821.00 per ounce. Reports that US February auto sales rose by 27%, outperforming even the most bullish forecasts of automotive analysts helped solidify the gains in the noble metals’ complex. The annualized pace of American car sales (based on February’s stellar figures) is now running at 13.4 million units.

Couple that bit of good news from the demand side with the report that Russian palladium shipments are scraping along a 15-year bottom in ounces (half a million in 2010, versus the 20-year average of 1.3 million) and you have the ingredients with which to account for the metal’s rise to such lofty price peaks. Do we hear $900? Going once…

Platinum market fundamentals-oriented conditions appear to also point into the direction of a developing deficit, with projections of a shortfall of from 200 to 300 thousand (in 2012-2014) ounces as offered up by Lonmin Plc CEO Ian Farmer at an industry conference on Tuesday. Indeed, quite the contrasting picture in supply/demand fundamentals that one might find when scrutinizing the metrics of the gold and/or silver markets at the moment. Lavish attention from the world of ETFs has not hurt the noble group metals, either.

When it comes to ETFs, and the fact that they embody a good chunk of what hedge funds are up to, these days, it is certainly worth noting that there is an apparent trend-change underway in the niche. Goldman Sachs’ Hedge Fund Trend Monitor observed that the average hedge fund long portfolio fell 0.7% to 2.2% as at year-end 2010.

The mammoth GLD fund was populated by no less than 121 hedge fund investors (with Paulson and Soros leading the pack) as of the end of last year, and it showed long positions at $8.6 billion versus short ones at $2.2 billion. The IAU (a better performer than the GDX and the GLD) contained 9 hedge fund investors as of 12/31/10 (long ownership at $116 million versus short at $35 million). A continued watchful eye is in order in this sector as such an investor class has undoubtedly been a pivotal factor in the shaping of price charts as well as perceptions among "small" investors.

The above-mentioned sector is certainly set for some intense scrutiny originating from a …different direction; that of US regulators. Coming soon, to a hedge fund "theatre" near you, will be "unprecedented" requirements to disclose, well, everything. On the list: risk exposure metrics, detailed lists of trading counter parties, creditor lists, and so on. Enter the Financial Stability Oversight Council. FSOC Members include Messrs. Bernanke and Geithner (as Chairman) — for starters. In addition to Geithner and Bernanke, the council’s 10 voting members include the chairmen of the Federal Deposit Insurance Corp., the SEC and the Commodity Futures Trading Commission (CFTC).

"The FSOC will be after a lot of information," Amy Friend, managing director of Promontory Financial Group in Washington, said at a Feb. 25 seminar at the U.S. Chamber of Commerce. "The Fed may come knocking on some doors, and people need to know how to talk to the Fed." — Noted Bloomberg this morning."

"So, Mr. Herbert Hedge, tell us about your billion-dollar gold bet…"

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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