Friday Kitcommentary: Signs

by Jon Nadler, Kitco Metals Inc. on April 1, 2011 · 0 comments

Precious metals started the new month and quarter off with muted gains as the focus remained intensely (and apprehensively) on the US Labor Department’s report due just ten minutes after markets’ opening time.

Bullion BarsSpot gold dealings showed a rise of $2.70 per ounce on the bid-side (quoted at $1,434.50), as against a 0.11 rise in the US dollar on the trade-weighted index (to 76.11) and as against a $0.48 gain in crude oil (last quoted at $107.20 per barrel).

Silver opened with a three-penny gain and a quote at $37.70 per ounce. Platinum and palladium also advanced this morning, with the former indicated at $1775.00 per ounce (for a rise of $11.00) and the latter quoted at $768.00 per troy ounce, up $6.00 in early New York trading.

Economists’ anticipation was that the US labor market would add about 185,000 jobs in March while unemployment would show a slight rise, back to the 9% mark following a string of months that have shown notable declines in the number of folks out of work. A parsing of such (positive) data has also been interpreted as the possible catalyst for a shift in Fed monetary policy in the months ahead. The actual numbers the Labor Department offered up for consideration on this first Friday of April were: factory jobs up 17,000 in March, and nonfarm payroll up 216,000 (!) — these were much better-than-anticipated figures. Overall unemployment came in at 8.8% (that is a two-year low, folks) — also a significantly better level than had been the consensus expectation.

As a result of the very good jobs report, gold and silver prices immediately headed somewhat lower (at last check, gold was nearly $13 into negative territory, while silver fell 49 cents), while the greenback showed a modest improvement. NASDAQ, S&P, and Dow futures were all higher as well. The US dollar, in fact, traded at a five-week high against the Japanese yen. Still, eye-popping black gold price levels continued to offer some on-going support to the commodities’ complex, at least in early trading action.

April Fools’ Day had actually already started off with modest declines in precious metals in overseas trading following more hawkish utterances by Fed officials. Minneapolis Fed President Narayana Kocherlakota was not fooling around when he told a Wall Street Journal reporter that it is "certainly possible" that the Fed might raise key interest rates by as much as 75 basis points prior the end of 2011. That type of policy reversal would not be treated as a joke by the throngs of carry-traders who have been inebriated on virtually free US dollars since the somber days of 2007 prompted the Fed to make them available.

The head of the same district Fed office where you can see for yourself what that ounce of gold that was bought by panicked investors in 1980, at $850 per ounce, needs to fetch today in order to be able to declare that gold has, indeed, been able to keep up with the pace of US inflation (not a joke; it is $2277.25) stated that:

"If you consider monetary policy was appropriate at the end of 2010…and then you see core inflation go up by 50 basis points over the course of 2011..the usual response that we know from 20 years of thinking about monetary policy (or even more) is to raise the target rate by even more than that increase in observed inflation."

Mr. Kocherlakota’s verbal signal was the most transparent one yet to emerge from the virtually non-stop string of hawkish Fed posturing on display over the past ten days or so. Even as two of its officials have hedged a bit, practically every district Fed President has now chimed in on the topic higher rates to come, and has done so in relatively perfect "harmony." Unmistakably, the US central bank appears to be "prepping" the markets for that which it now appears it must do following the expiry of the QE2 program at the end of June.

For the time being, any such monetary policy change continues to be held up against the reality on the "ground" — the ground of the housing and labor situations in the US. The latter has been the principal item of concern among economists as well as the Obama administration during the entire rolling financial crisis period. Many analysts see the Fed pulling the interest rate trigger once it is convinced that the labor (and to some extent the housing) market is indeed on a firm footing and improving trend. The Fed may have just received that confirmation in this morning’s Labor Department report card.

However, now, it appears that the agenda has shifted to placing certain other worries at the top of the "to watch" list. Namely, the fact that the "Arab Spring" has sprung crude oil prices to a level which could in and of itself take the nascent economic recovery off-track. Just below that headliner of a line item of worry is the one that is attempting to evaluate the potential impact of the "Great Eastern Japan Earthquake" on factory activity in that country, and elsewhere in the world.

Speaking of manufacturing, we now turn to an area of constant interest to our readers (the platinum-group metals) once again, and we take a look at the latest reports from the auto sector and from our analyst friends at Standard Bank (SA). Japanese auto sales unfortunately (but understandably) fell by the largest percentage (37%) in as many years last month following the natural disaster that took place in that country. Standard Bank’s most recent projection however offers a bullish angle for the noble metals:

"The decline in Japanese vehicle sales was expected, and, we believe, possibly still better than many had expected. We worked on a set of much more bearish assumptions for auto sales for Japan following the quake and we still believe that the platinum market will be in deficit this year despite the fall in demand. While the dent in Japanese manufacturing is bearish for PGMs in the short term (given that Japan accounts for approximately 17% and 20% of global platinum and palladium demand, respectively), we feel that the longer-term impact is perhaps being overestimated."

On a short-term basis, the speculative crowd (oh, those sharky funds) appears to be cooling off on the sector, as corroborated by net outflows from palladium ETFs during the past month. More than 177,000 ounces flowed out of palladium ETFs in March, resulting in a net negative figure of 18,000 ounces for the year-to-date. That, however, was not the case for platinum-based ETFs. They added 29,000 ounces on the month and have brought the Q1 tally up to a positive total figure of net additions totaling 151,000 ounces. Standard Banks also noted that:

"Ultimately, damaged vehicles need to be replaced. While some of the auto catalysts in damaged vehicles will be recycled, recycling is likely to lag demand once it picks up in Japan. Strategically, we still target $1,900 and $950 for platinum and palladium respectively. We expect these levels to be reached towards Q4:11 (refer to Platinum and palladium — we still foresee a deficit in 2011 published on 16 March 2011)."

As well, US auto sales are expected to reveal a sales pace of 1.24 million vehicles in March — a gain of 16.5% from the level seen one year ago, and a 25.1% jump from February’s sales activity. Despite stratospheric crude oil prices, it appears US auto buyers may have rushed to their local dealerships in the quest to secure a vehicle in the wake of uncertainties about auto supplies that arose as a result of the events in Japan.

Have a pleasant weekend, the "snow joke" in the Eastern US notwithstanding.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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