Thursday Kitcommentary – Take My Hike, Please!

by Jon Nadler, Kitco Metals Inc. on April 7, 2011 · 0 comments

Precious metals trading opened on a mixed note this morning as the trade parsed the various statements coming out of the Brussels, Lisbon, London, and Tokyo for clues as to what tenor today’s market betting might take on.

Bullion BarsNo surprises were detected in such announcements, and thus a bit of stability is what defined the first hour of trading action. Spot gold traded from up 80 cents on the open to down $2.10 cents shortly thereafter, but remained largely in orbit around the $1,460.00 level.

Silver oscillated between an opening gain of two pennies and a subsequent flat-to-slightly-down (12 cents) quote but it also remained very close to the vicinity of the $39.50 pivot point. The upside potential remains in place for both the yellow and the white precious metals. Gold might be aiming towards a possible peak between $1,480 and $1,530 while silver is already more or less but $10 beneath its 1980 record. A break beneath $36.50 would be needed to shake the confidence levels (make that uber-confidence, at nearly 95% bullishness this week) among the specs and the retail public.

Even as Elliott Wave patterns point towards potentially higher price ground in gold, Hulbert contrarian analysis concludes that the metal’s rally is built on "shaky ground" and that "you should be able to buy gold in the next couple of weeks at lower prices that today’s lofty levels." One cannot recall Mr. Hulbert frequently (okay, ever) using the word "lofty" to describe gold prices. Market timers obviously do not see it his way. Therein lies the bugaboo, says Mr. H. in his Thursday take on the market (at

The two more clear losers at this morning’s New York opening were platinum and palladium. The former lost $5 to ease to the $1,786 mark while the latter fell $2 to start the session at $782 per ounce. The duo lost more ground as the morning’s action among players appeared to be driven by "selling the fact" (of the ECB rate action).

In the background, crude oil continued its gravity-defying high-wire act and rose another 36 cents to touch the $109.19 per barrel price level, while the US dollar actually gained 0.16 on the trade-weighted index, going against expectations that the news from Mr. Trichet and the ECB he leads would sink it further. The greenback was last quoted at 75.74 on the aforementioned index. US Labor Department data showing a larger-than-anticipated drop of 10,000 in weekly initial jobless claims filings helped pressure the metals a bit lower while March sales by US retailers came in below forecast and helped underpin the same.

The European Central Bank moved to combat regional inflation via its first interest rate hike since 2008. Albeit the quarter-point lift was largely anticipated and baked into many a market price equation, the significance of the fact that the institution moved ahead of the US Fed (a lead it has not taken in some eight years) was not lost on the investing crowd this morning. Moreover, the ECB took this important step at a time when conditions in Europe are not exactly confidence inspiring. Portugal became the third domino to wear the "bailed out" label as it finally began seeking aid from the EU yesterday.

Market analysts see no similar threat from Spain, but there is plenty of fretting about peripheral debt issues to keep things muddled. Yet, Mr. Trichet’s institution obviously did not subscribe to the idea that the commodity price-driven rise in price tags is — as Mr. Bernanke puts it- "transitory" and pushed the interest rate button while cognizant of the various risks of doing so. ECB watchers are now focusing on ascertaining whether this morning’s rate adjustment is but the first salvo in a to-be-continued series or whether the move will turn out to be a mistake and convince the Fed to remain "loose" for a while longer than currently expected.

Michael Darda of MKM Partners has quickly accused the ECB of making a "serious policy error " and saw nothing but pain and a hard landing for Europe as a consequence of such a "mistake." Others see the ECB move as now forcing the Fed’s hand as it would loathe to be perceived as being "behind the curve."

Central bankers are not however sitting around and taking their cues from critics or from fans, and believe they have mandates to honor. One of them — in fact the only one that the ECB really has — is the obligation to keep inflation at bay and at or below targeted levels. In that sense, at least as measured by consumer prices, the ECB acted from the angle that regional CPI is running between 2.4 and perhaps 2.6 percent and that the time had come to do that which it did today.

US CPI is currently just one tenth above Fed targets, giving the Fed a little more time to do a similar thing. For now, the US central bank is taking a bit of a ‘wait and see’ attitude as in expects commodities to have some of the ultra-hot air leak out of them and do some of the job on its behalf. To be continued.

Also to be continued, the situation in the EU’s debt-ridden satellites. While declaring that the country faces absolutely no prospects of going the way of Portugal, Spain’s Economic Minister, Elena Salgado, probably convinced only a handful of skeptics that her country will be able to handily overcome difficulties such as 20% (!) unemployment while also putting into motion austerity measures designed to avert the fate of neighboring Portugal at the same time. Mr. Socrates’ country is set to receive a 75 billion euro-sized life preserver in the near future.

Analysts and economists concur that so long as oil continues to trade at stratospheric levels, we will likely continue to see more of the same as we have seen in Portugal, or worse. There is now a growing concern among them that the speculative-driven spike in energy might just take the global economy off the recovery track and send it off into an undesirable direction as soon as this year. GDP statistics (and not just those of the US) will thus be under heavy scrutiny all summer long, to be sure.

There is a school of thought that opines that the massive "buy everything" campaign unfolding out there in speculation land is merely a reflection of the fact that the bloodletting days of 2008 have placed hedge funds and similar profit-seeking enterprises wearing different name tags into a position where they must pedal in hyper-drive to try to get back even a modicum of the sums they lost back then. Many financial firms have yet to come back into the ‘black’ despite double-digit gains they boasted about in 2009 and 2010.

More than35 percent of hedge funds find themselves in that predicament and the industry is bracing for a possible shaking-out this year. No surprise then, that we have seen all sorts of strange investment ‘bedfellows’ popping up on the balance sheet of various hedge funds since the dark days of 2008. Stocks now live alongside commodities in investment baskets that would normally not tolerate such ‘contamination.’ However, when collecting the customary 20 percent after profits "management fee" is not an option so long as a fund’s assets stay below their peak, we have such a paradigm on hand.

The other part of the explanation for such tandem tango trades is of course the generosity of the Fed (up to this point, anyway) and the virtually free bucks it has placed on the platter since that very time. The withdrawal of the "party tray" by the Fed may thus have more repercussions than the mere bolstering of the US dollar or the perception that it is keeping up with the ECB. It may finally bring some semblance of order to various asset classes and reestablish some of their historical inverse correlations.

Such "normalization" may present additional danger to certain funds that may have placed the highly explosive mixture of commodities into their basket of goodies in a desperate quest to re-make a buck or five. All of this bears watching, even if it will turn out to be less than…pretty. Why, it could even be blood-curling, at times.

Until tomorrow, oil remains in the driver’s seat. Everyone and everything else, remain in tow.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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