Monday Kitcommentary: Plotting Plosser’s Plan

by Jon Nadler, Kitco Metals Inc. on March 28, 2011 · 0 comments

Bullion BarsFinancial markets suffered a setback in sentiment (and values) across the board as the new and final week of what has been a most dramatic March got off to a start. The inability by Japanese authorities to report good news from the compromised nuclear plant reactor situation and the defeat of the coalition of German Chancellor Angela Merkel following a state election set investors on a souring mood about the global economy.

The euro dipped in the wake of the developing political situation in Germany and also following the suggestion made by ECB governing council member Ewald Nowotny that Portugal should bite the rescue bullet and get on with its economic life. As the euro fell against the US dollar, so did most commodities, including crude oil, despite the still unresolved Libyan politico-military situation. Precious metals were no exception to this morning’s sell-off by global investors.

New York’s Monday morning trading session saw gold prices opening on a defensive footing due to the aforementioned shift in investor sentiment across the globe. Spot trading in the yellow metal started off with a loss of $19.00 per troy ounce. The opening bid-side quote came in at $1,411.20 and traders were on the alert for another potential breach of the round figure beneath current levels.

Just last week, bullion values practically achieved a $1,450.00 per ounce print on the back of MENA regional turmoil and perceptions of inflationary pressures that might in part be brought about by the recent disaster in Japan and the potential for continued easy money policies by that (or several other) country’s central bank.
However, Friday’s release of US GDP data (an upwardly revised set of figures that did not manage to make the impact it might otherwise have, due to the headline-stealing issues coming from Japan and the MENA area) started to impact trading sentiment as well this morning.

Any corroborating evidence that a good trend for the US economic recovery is building steam is seen as lessening the need for the Fed to keep its accommodative policies extended to "infinity and beyond" (as the spec trade has been hoping since about 2007). That, in turn, would also lessen the need for as much protection as was previously seen as optimal in gold and other metals (silver, primarily).

Of course, there is also the possibility (make that a probability) that spec funds decided that skimming profits following last week’s run to a fresh pinnacle was quite the wise thing to do, especially in the absence of additional and/or scarier headlines than those which we’ve already been subjected to this month. Thus, sell they did this morning, and quite heavily at that.

Silver spot prices fell by 80 cents on the open, showing a quote at $36.52 per ounce. The noble metals complex also fell victim to selling and did not appear to be able to benefit from the scheduled reopening of certain Japanese automotive assembly plants. Platinum dropped by $25 per ounce on the open in New York this morning, and it was quoted at $1,723.00 per ounce, while palladium fell $14.00 to ease to the $735.00 per ounce mark. Standard Bank (SA) analysis cautions that albeit open interest in palladium apparently grew in the latest reporting period, net speculative length as well as ETF interest in the noble metal fell.

ETF palladium holdings, in fact, have fallen to their lowest level of the current year. The analytical team at SB opines that albeit this does not make for a definition of a "weak" palladium market, the potential for short-term underperformance vis a vis other precious metals is manifest at this juncture. Palladium significantly outperformed all other precious metals in 2010 (basically, it doubled in value while gold for example rose about 29%).

The trading sentiment was mostly negative this morning, as players focused on the upcoming disruptions in the automobile niche that will be engendered by the virtual disintegration of the automotive supply chains (which are being called as the world’s most complex) in Japan. Everything that goes into making a Japanese car is currently difficult to produce, locate, and/or deliver to assembly lines; and, there are roughly 3,000 such components that make up your average vehicle.

Certain parts manufacturers remain without electrical power, gas, or water. Add all of this up and the world’s second largest source of automobiles is basically out of the equation. Analysts expect April’s situation to only get worse, as the current supply chain difficulties really begin to be felt overseas as well.

In the background, the US dollar gained 0.24 on the trade-weighted index (reaching 76.39) and crude oil dropped $1.09 (to $104.31) as the combination of factors cited in the opening of this morning’s analysis took its toll on market participants and their respective speculative sentiment. The GDP data’s reverberations were cited as an integral catalyst to this morning’s selling action by several traders we polled in New York during the early hours on Monday.

Indeed, the manifestly improving rate at which US economic conditions are proceeding is prompting speculators to reassess the scope and the timing of the Fed’s liquidity withdrawal strategies. Such re-evaluation of the US central bank’s roadmap for 2011 and 2012 was at the forefront of hedge fund behavior during January and it led to sizeable declines in certain safe-haven oriented and/or carry-trade-inflated commodities.

Speculators may also be taking Fed policymakers’ words a tad more seriously, now that such words are being uttered while being backed by concrete evidence that — spotty as it might be in certain regards- the economy (and employment) in the US is on the mend. Just this morning, the Commerce Department built upon that type of ‘evidence’ with the release of fresh data that showed that American consumers spent more than had been forecast for February.

One gauge of such spending, the personal consumption expenditure index, showed its best gain for a given month since the dark days of the summer of 2008. Rising incomes helped the aforementioned spending trend pick up steam, as did the addition of jobs in the US for the sixth consecutive month. Spending rose despite the headline-making gains in energy and food prices (which are still seen as transitory by the Fed).

Philly Fed President Charles Plosser suggested on Friday that the Fed should consider setting a pace and a timeframe for an exit from its hitherto accommodative stance. Mr. Plosser went one step beyond making mere suggestions however; he gave a "blow-by-blow" outline on exactly how (i.e., by selling Fed-owned mortgage and Treasury holdings in conjunction with raising interest rates) all of this should be done. Short of giving specific dates and times, Mr. Plosser’s presentation was, in effect, the indirect (but quite minutely detailed for what it was) "announcement" that the Fed is about to get serious on unwinding its easing programs.

By the way, Mr. Plosser has "company" for letting the word out that the Fed’s generosity is about to expire. Three other Fed Presidents (Kocherlakota, Lockhart, and Evans) have all come forth — and within the past week — to jawbone about similar shifts in the Fed’s policies during various speeches they made around the US, and in conversations with reporters.

Add one, Mr. Bullard, to that growing list of Fed "hawks" as of this morning. The St. Louis Fed President called for the Fed to "consider curtailing" the extant stimulus program. Such "posturing" whether direct, or indirect, was nowhere near in sight or within earshot, late last summer when the US economic data spooked the Fed into devising (and eventually launching) battleship QE2.

Until tomorrow, try to sail smoothly.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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