Slip and Fall on Oil Slick – Thursday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on March 10, 2011 · 0 comments

One might as well begin today’s overview by mentioning that crude oil prices fell by $3.00 (to near $101.40) per barrel despite the air strikes that soon-to-be-decommissioned Colonel Gaffadi carried out against oil installations in his own country this morning. No word on how much damage was sustained.

Bullion BarsWhether the selling pressure in oil came from the UN edging closer to the institution of a no-fly zone in Libya, or the fact that a couple of days’ worth of crude stockpile reports indicate that the supply situation is hardly tilted into anything that can be called a ‘shortage‘ remains unclear at the moment.

For instance, the U.S. Energy Information Administration reported a rise of 2.5 million barrels for the week leading up to March the 4th, and that was fully quadruple the 600,000-barrel increase expected by petroleum analysts surveyed by the Dow Jones Newswires service. Underscoring the same reality, we got word that "There is no shortage of oil in the market," according to Mr. Youcef Yousfi, the Algerian Minister of Energy and Mines. "The high price," he said, is a result of the "hardly predictable logic" of "oil traders in the financial markets." Statements of the obvious are, sometimes, very, very useful.

It is quite possible that oil speculators lifted their greedy little feet off the price throttle in crude, now that they have seen a string of Libya’s neighboring countries (such as Saudi Arabia, Yemen, and Morocco) all take "pre-emptive" actions in terms of offering domestic concessions and reforms aimed at averting popular discontent from morphing into popular uprisings. It is also conceivable that France‘s move to become the first nation to ignore Col. Gaddafi and instead recognize the Rebel National Council as "valid interlocutors" (ah, the French have a way with words!) has hastened perceptions that the Colonel will indeed soon join the ranks of the world’s deposed strongmen and become as relevant in terms of stature as he might be by running around amid a throng of NBA players on a court.

The sharp decline in oil, along with an initial 0.61% gain in the US dollar on the trade-weighted index (just when one thought the "end" was nigh) made for a wobbly start in the precious metals’ complex this morning. Gold spot prices opened with a loss of $12.60 per ounce, and were quoted at $1,416.30 on the bid side. The lows came in below the second support level near $1,410.00 after the $1,415.00 zone was pierced. The yellow metal is still likely to continue to trade within the $1,400-$1,450 range but there is a particular school of (Elliott Wave) thought that argues for a "final" push up to as high as the $1,530 area before this cycle draws to a close and prices head substantially lower. Still, one should be on the lookout for the psychological $1,400 mark as it is now very nearly "in play."

Silver opened with an 87-cent drop for Thursday’s session, with a quote at $35.18 (but then touched lows near $34.75 the ounce). The roller-coaster in the white metal remains the defining pattern for the time being as tiring longs continue to duke it out with early profit-takers. Nevertheless, anyone who jumped onto the silver bandwagon in an "am I missing the boat?" panic on Wednesday was facing net losses on the order of 4.0%+ at this morning’s lows near $34.65 per ounce in the metal.

Platinum and palladium fell sharply, as specs took more profits, and did so despite easing oil prices (which should be viewed as beneficial for future automotive sales patterns). Clearly, someone out there saw the complex as having gotten ahead of itself in earlier weeks. Platinum dropped by $30 at the open, (and later by $40) and was quoted at $1,775.00per troy ounce, while palladium lost $25 out of the starting gate this morning, with a bid quoted at $765.00 (approaching support near $750?).

At any rate, as impacts the noble metals complex, there was some mixed news on the automotive front, as German carmakers announced having to add extra shifts in order to keep up with demand for Audis and BMWs, while Chinese car sales plummeted in February. The latter came as no surprise, as various subsidies and incentives were withdrawn in that market from buyers. Will N. America and Europe pick up the slack? Stay tuned.

On the economic statistics front this morning, we had the usual mixed bag of hot and not-so-hot news from various quarters. China announced a hefty drop in exports in February (everyone must have been out partying for the New Year?) and a swing into an unexpected trade deficit situation (the first one since March last year). As well, the country reaffirmed an alarming inflation rate of 5.1% for the year that ended in November. The operative word in China is "tighter, tighter" as the goal is to drag inflation down nearer to the 4% level, and do so as soon as possible.

Over in the USA, the country’s trade deficit expanded by 15.1% in January, according to the Commerce Department. The gap grew wider despite a record level of US exports that showed a 2.7% gain on the month. Something else that grew in the US was the number of claimants for joblessness. The latest reporting period revealed a jump of 26,000 filings for unemployment benefits to a seasonally adjusted figure of 397,000. The more significant four-week average in such claims remains near the 392,000 level which represents a three-year low, and that is good news, indeed.

However, the added jobless claims figure and the trade deficit growth sapped all bullish energy from the Dow this morning. The market fell nearly 200 points on the day after the second anniversary of the best bull market rally (87%!) in equities since 1955. So, for a change (not) everything was falling in concert on Thursday. Once again, not the normal order of the investment universe, but, hey, these are times of "unusual uncertainty" and trying to apply old formulae to them might be hazardous to one’s financial health.

On the other hand, there was something that fell, and fell hard in the States; the number of home foreclosures that is. A staggering (largest on record) 27% year-on-year collapse in the number of foreclosure notices issued to American homeowners in the month of February indicates that the "national nightmare" (as CNN Money puts it) could be drawing to a close here. As mentioned yesterday, employment and housing remain at the front-and-center of US Fed and Obama administration preoccupations.

Perhaps this is why the Fed is "gently" trying to "inform" the investing crowd that it intends to exit stage left from its extraordinarily accommodative stance in coming months. Much to the chagrin of commodity speculators (and, now, also to that of PIMCO, it turns out), the "easy money" party could come to a complete end by the time July 1st rolls around.QE1 ended in March one year ago, and the time is coming to place QE2 into "dry-dock" as well.

Recently, the Fed revealed that it is expanding the number of counter parties for the types of transactions that will help facilitate the drainage of the hot tub of liquidity in which the aforementioned speculators have been having a Marin County-style wild blast for several years now. The man (Mr. B.B.) has a plan. That type of "plan" is most likely at the core of PIMCO‘s Bill Gross decision to exit from any and all exposure to US securities.

Rather than being…"grossed out" by the US deficits and US instruments, he is most likely a pragmatist who became convinced that the Federal Reserve is about to become less "generous" in its monetary policy; a prospect that comes complete with rising interest rates. Under such a scenario, there might be money to be made elsewhere (at least in PIMCO’s thinking). Yesterday at any rate, Treasuries extended their gains after the sale of $21 billion of reopened 10-year notes brought a high yield that was below market expectations, indicating aggressive bidding for the securities.

Until tomorrow, watch that volatility and keep all arms and legs inside the moving roller-coaster cart.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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