Stimulation Acclamation – Thursday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on March 17, 2011 · 0 comments

Precious metals prices opened amid mixed price trends this morning, reflecting on-going uncertainty and unease in all markets in the wake of the emergent Japanese nuclear plant crisis. Spot gold dealings got off to a rocky start, despite a sizeable slide in the US dollar on the trade-weighted index overnight.

Bullion BarsThe fact that gold was struggling just to maintain the $1,400 level at a time when — given such epic crisis events — it would have been expected to be challenging price targets fully $100 higher, did not bode too well for the bulls. At the moment, it appears that the ebb and flow of prices in the equity markets is the dominant price-determining agent for precious metals and other commodities. The US dollar’s movements appear to have taken a back seat in that regard.

The divergence between gold (being sold off along with the greenback) and related metals was manifest in the small gains that silver, platinum, and palladium all recorded at the start of the New York session this morning. Silver climbed 13 cents to $34.40 per ounce on the bid-side at the start of the day. While some market technicians see a potential "bear flag" forming in gold at present, and observe the six-week-long price uptrend as having been cancelled, Wednesday night’s Elliott Wave short-term update has identified the key level for the bearish case in the yellow metal as the $1433.39 mark that was reached during what it calls a "counter-trend rally’ on the 14th of the month.

A similar situation exists in silver, where the key, "not-to-be-overcome" level that would keep the bears energized is now seen as the $36.56 price level. Meanwhile, platinum advanced by $6 to $1,695.00 the ounce, while palladium moved $15 higher to open at $711.00 per troy ounce. In the background, crude oil also staged a "typical" dollar-inverse move to higher values, gaining $1.90 to reach the $99.88 per barrel mark. Black gold was lifted higher by escalating violence in Libya as well. Col. Gaddafi’s offspring has given the rebels but 48 hrs. before which he labels them as being neutralized and the rebellion as having been smothered.

Analysts at Standard Bank (SA) view the platinum and palladium markets as being largely defined by their respective marginal producer cash-costs at present. The research team at the bank opines that if either market tilts into surplus in 2011, the underlying production cash-costs of marginal PGM producers would not be likely to support the price of these metals on a fundamentals-based equation.

At this time, and factoring in the Japanese natural disaster, the supply/demand picture in the two noble metals is turning towards a…delicate condition. Prior to the quake, the SB team had projected a deficit of about 110,000 ounces in platinum for the current year, and a 358,000 ounce shortfall in palladium. If the sale of vehicles in Japan were to decline by, say, an extreme and perhaps not likely 25% this year, due to the terrible events we are currently witnessing, then the platinum deficit might narrow to but 48,000 ounces and the one in palladium could shrink to only 38,000 ounces — almost a balanced paradigm for both.

Overnight, more and more nations urged their nationals to depart Japan as expediently as possible and a rift was seen as growing between the US and Japan as regards the communications and handling of the nuclear emergency at the Fukushima reactor complex. Hardly any official agency in or outside of Japan appears to be in agreement as to whether the Fukushima reactors are melting down or not or as to whether efforts to address the problems have met with success or failure.

The UN is slated to hold an emergency meeting to address the crisis in Japan, however, US authorities are playing it safe (along with a growing list of nations), and have now authorized the evacuation of 600+ Americans who work in Japan while also issuing travel warnings to anyone considering trips to or within the stricken country.

Also overnight, the Japanese yen witnessed a massive inflow of speculative funds, the players behind which are hoping to profit from the potential repatriation of the currency in the wake of reconstruction efforts. Although the concrete evidence of such a coming home of the yen are not yet manifest, and although most analysts see the currency’s gains as transitory at best, currency speculators aggressively sold the US dollar and bought the yen with wild abandon, pushing the latter to record high near 76.25 against the greenback early this morning.

The US dollar buys nearly seven yen fewer today than it did a week ago, prior to the massive quake that started the series of apocalyptic events which are making hourly headlines at this time. Some economists have tendered the projection that Japan’s economy may now head into a brief recession for a couple of quarters and result in a GDP drop of perhaps 1.2 percent in the coming quarter. The upshot of the tragedy could eventually total about 3% of Japanese GDP and while the nation is absolutely able to incur such a cost, the damage to tangible fixed assets, human capital and general wealth will not be insignificant. The timing of the catastrophe could not have been worse as regards the country’s economic conditions.

The fact is that the Japanese economy had been on the mend prior to the devastating tectonic even that occurred last Friday. Media Matters observed that conservative and reactionary media figures in the US have cited Japanese fiscal policy during the so-called "lost decade" of the 1990s in order to criticize President Barack Obama‘s own stimulus programs.

"These media figures ignore evidence that, according to prominent economists, economic conditions were improving in Japan before the Japanese government temporarily abandoned stimulus spending in an attempt to reduce the deficit,’ notes the organization. Further, it cites Nobel laureate and New York Times columnist Paul Krugman, who assessed Japan’s fiscal stimulus packages as "probably [having] prevented a weak economy from plunging into an actual depression."

In a similar fashion, Fed Chairman Bernanke can demonstrate to his very vocal critics such as Sara Palin and Ron Paul that his QE1 and QE2 programs did yield the intended results, despite the plethora of all-too-eager naysayers who see nothing but the Treasury’s printing presses allegedly running at 100% on a 24/7 basis, and continue to warn the public about the US turning into a Zimbabwe-like inflation mess imminently.

Bloomberg News relays that, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, "quantitative easing was a key factor in taking deflation risk off the table. It certainly helped bolster longer-term inflation expectations, and it was a factor that contributed to the rally in the stock market."

Avoiding deleterious outcomes, whether they involve deflation (Japan) or inflation (China), depression (Japan) or runaway growth (China) appears to have also been on the minds of India‘s central bankers overnight. The RBI‘s policy makers hiked interest rates for the eighth (!) time in one year this morning after they raised their inflation forecasts for the second time in a trimester. Bringing inflation under control is now Job #1 for India as well. Last week, Chinese Premier Wen declared that Public Enemy No.1 in China is the inflation spiral.

While the US Fed has not yet signed on to any specific methods that it might use in order to undertake its exit from accommodative policies, it has already been (albeit slowly) leaking certain key aspects about its ability to drain the previously expanded reserves. Such implements include the increase in the number of counter parties to be used for drainage. Fed President Dudley reinforced assertions that the US central bank has the necessary "tools" (i.e. hiking interest rates, tightening credit, etc.) when they become needed, and he also underscored the fact that QE2 has helped the US economy.

Finally this morning, a quick roundup of pertinent US economic statistics (and there were plenty on offer): US jobless claims filing fell to 385,000 last week (the four-week average is still at its lowest level since 2008). US consumer prices rose 0.5% in February (gasoline prices were blamed, mainly) while core inflation was still subdued, showing a 0.2% gain on the month. Both of those figures were largely in line with economists’ expectations.

However, US industrial production unexpectedly fell by 0.1% last month, even as the index of leading economic indicators (LEI) recorded its eighth consecutive gain, of 0.8% in February (slightly under consensus forecasts but still indicating a stronger recovery in progress). In fact, the Philly area manufacturing activity rose by the most since 1984 according to this morning’s slew of data. The Dow Jones average picked up 152 points’ worth of steam and appeared to have a better day on tap, for a change.

Until Friday,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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