Wednesday Kitcommentary: Gold Offer. Below Market Price. Not Spam.

by Jon Nadler, Kitco Metals Inc. on March 23, 2011 · 0 comments

Mild gains were noted in precious metals for a fourth session this morning and they were primarily driven by currency market gyrations and the uncertainties engendered by the on-going Japanese post-quake woes and by the allied campaign taking place in Libya.

Bullion BarsSpot gold prices opened the New York midweek session with a gain of $3.80 per ounce and were quoted at $1,432.60 as of 8:20 local time. The advance in the yellow metal appeared to have run out of speculative steam during the early morning hours at near the $1,435 resistance zone and players were searching for fresh impactful news based upon which they might make a case for further gains.

Gold market talk offered some conflicting opinion on the topic of Japanese gold market activity, with some traders citing possible bargain-hunting purchases by local investors in the wake of recent, extraordinary yen strength, while others offered the prospect that the Japanese central bank might have to come to market with some gold in order to fund reconstruction efforts in the near future. The Japanese government was considering the setting up of a reconstruction office that harks back to the days following World War II. More on the staggering costs of the quake will follow below.

Meanwhile, stay on alert for those ubiquitous Internet offers of "gold for sale" coming from various African spam "boiler rooms." They might just be substantive offers, this time around. The BBC reports that Libya possesses gold reserves that might be worth more than $6 billion. These are not insubstantial gold reserves, as they rank the country in the global "Top 25" of holders, according IMF data.

The gold stash could potentially be used to finance Col. Gaddafi’s fast-fading government at a time when it has become subjected to international financial sanctions. The BBC speculates that it might be possible to transport the gold to other African countries and sell it. Our bet: not at current market prices, or anywhere near them. Thus, when your e-mail inbox swells with "gold below spot" messages, you might have just landed on Gaddafi-sourced bullion.

Silver started the Wednesday session off with a 12-cent gain and a bid-side quote at $36.50, but it too, was seen as bumping up against near-term resistance points on the charts. Modest price advances were noted in platinum and in palladium, with the former adding $8 to climb to the $1,741.00 per ounce mark and the latter rising $6 to reach $740.00 per troy ounce. A number of Japanese electronics and automobile plants remain idle as supply chain issues related to the quake have yet to be resolved. Toyota is delaying the introduction of new models of its highly successful Prius as a result of the logistical problems.

In the market’s background, the US dollar appeared to hold on to small gains on the trade-weighted index (up by 0.27 to 75.71) and it advanced to 1.4144 against the euro. The common currency dipped on concern that Portugal’s minority government will not see its calls for more austerity measures become a reality, and that in that case the country may have to knock on the EU and the IMF’s respective doors, hat-in-hand, and ask for more money.

The Bank of England opted to hold the interest rate status quo at 0.5% despite mounting internal dissent on what course of action to follow amid manifest gains in UK inflation. A majority of policy makers voted for no changes in rate strategy, however three members called for rate hikes and one leaned towards pumping another 50 billion pounds into the British economy.

For the time being, the BofE (as the Fed) sees the spike in inflation as transitory and as mainly oil price-related. The trick will be to avert inflation from taking root at or above the "target" 2% level. Central banks in China and India are currently battling price spirals that are unfolding at certainly higher than that benign level. The ECB also appears on course to launch its first anti-inflation interest rate missile, possibly as early as next month.

At any rate, the efficacy of additional stimuli – barring some really, really black swan landing on the global scene – is already in question. Billionaire global investor Warren Buffett has tendered his opinion on the matter during a meeting in Bangalore. Mr. Buffett declared that the world’s central banks have already used "most of their ammunition" on stimulating the various economies in their countries. Mr. Buffett offered no suggestions as to what else he thinks might be left in the official sector’s arsenal in order to deal with potential future systemic shocks.

The greenback did not manage the same winning feat against the yen however. Earlier in the overnight session, the Japanese currency advanced to higher levels after more apprehensions surfaced about the after-effects of the devastating quake that shook that country on the 11th. Estimates have put the damage to the country in a league of its own; namely, near $309 billion or so. That would be an event that might equate some four Katrina disasters in terms of costs.

The mounting fears related to further restrictions on the sale of likely radiation-contaminated foods and officials’ advice to avoid giving Tokyo tap water to babies sent the Nikkei average reeling overnight resulting in a sizeable unwind (158 points) of the previous day’s optimism-based gains. The nuclear radiation and all related issues remain unresolved nearly two weeks after the disaster and there are confirmations that the cores of reactors Nos.1, 2, and 3 have all been at least partially exposed and have leaked unknown amounts of radioactivity. The spent fuel rod pool at reactor No. 3 is also posing a significant potential radiation risk and efforts to keep that material cool continue at a feverish pace.

Meanwhile, the pace of Libyan military actions against Col. Gaddafi appears to be shifting away from airstrikes against key installations and more towards attacks against the defiant leader’s ground forces. However, certain command-and-control issues have surfaced among the coalition forces as the US appeared to have taken a few steps back from being "in charge" or appearing to be in the leading role of said operations. The still fluid situation in Libya and in the MENA region is keeping crude oil rather well-bid and traders have pushed the commodity back into the $105 per barrel value zone on the back of such geopolitical storminess.

As we go to print, reports of a bus having exploded in Jerusalem are just surfacing and could add to regional apprehensions and uncertainties. Regional tensions should lend further support to the bulls, now that the aforementioned impactful news items have just materialized in the media. Unfortunately, the market-lifting news is yet another story of human suffering. Of that, there has been an overabundance of supply of late. Walk up to your nearest newsstand and behold a major weekly magazine’s cover asking the alarming question: "What the #@&* is NEXT?"

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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