Thursday Kitcommentary – A Low(er) Budget Production

by Jon Nadler, Kitco Metals Inc. on April 14, 2011 · 0 comments

Precious metals trading opened on a slightly weaker note this morning as minor gains in the US dollar and a small decline in crude oil and copper dampened buying enthusiasm somewhat more.

Bullion BarsThe spot gold price fell to near the $1,455.00 level but did not yet appear to threaten a breach of the $1,450 support that it had held during overnight trading. Expected ranges for the yellow metal remain between $1,445 and $1,475 through tomorrow, barring fresh, surprise developments.

Midweek Elliott Wave analysis opined that unless a sharp decline follows the backing down from the $1,477 to the $1,444 area we have seen in the yellow metal over recent days, the path is still open for a possible attempt to lift values towards a potential $1,525 target — at which a number of pivotal lines are said to converge.

For the moment, the jobless claims figures will have the most likely to be significant impact on market tenor this morning and any spike in same could bring the bulls back to the casino tables. Yesterday’s finding that US foreclosure claims fell to their lowest level in 36 months did not appear to have much of an impact on traders.

Curiously — for the same firm whose own leader opined just last fall that the long-term bulls case for gold is "fatally flawed" — London-based GFMS yesterday offered a projection of $1,600 per ounce gold as attainable, sometime this year. Of course, the $64,000 question, at current prices, turns to assessing whether chasing a further 5 to 10 percent potential gain in the face of extant downside risk roughly twice (or more) as large, is still worth it for latecomers to the speculative party. Long-term insurance gold buyers are exempt from the conundrum as their objectives do not entail the profit motive.

Silver traded in relatively nervous fashion, opening with a small, four penny gain, and then easing by about the same amount immediately after the start of trading, but basically the white metal orbited in the $40.50 to $40.75 space and it is thought to have support that needs to hold at the $39.75 mark. Platinum and palladium offered a parallel picture at the start of this morning’s action; they each lost $1 and dipped to $1,772 and to $762 respectively. No change was reported in rhodium with the current bid at $2,300 per ounce.

In the markets’ background, other countries continued to tackle various first-order issues as the week unfolds. Japan lowered its economic outlook as the toll from its recent catastrophe was being factored in. The Japanese government did however state that it expects the country’s economy to begin to recover in the latter part of 2011. China reported consumer prices as having risen by more than 5.3% last month while also noting a 16.6% y-o-y gain in its M2 money supply. All the more reason for the PBOC to continue with its tightening policy, evidently. Finally, the ECB, in its latest monthly bulletin, reiterated its tough-talk on inflation this very morning, saying that it is monitoring that bogey "very closely." Can you spell: "hike" again come July?

Substantive rhetoric on the matter of US deficits by President Obama prompted Moody’s rating agency to note that yesterday may have marked the advent of an inflection point beyond which hitherto gloomy notions related to America’s credit quality will need to be revised. The US President detailed a long-term plan via which a mix of lower spending and higher taxes would result in the reduction of the US deficit to only 2.5% of its GDP by 2015. That ratio currently stands at 10.9 percent.

Here, in extremely condensed fashion, are the very specific items that Mr. Obama called for in his speech at George Washington University on Wednesday:

"The first step in our approach is to keep annual domestic spending low by building on the savings that both parties agreed to last week — a step that will save us about $750 billion over twelve years. The second step in our approach is to find additional savings in our defense budget. The third step in our approach is to further reduce health care spending in our budget.

The fourth step in our approach [and we have been warning about this for some time now] is to reduce spending in the tax code. That’s why I’m calling on Congress to reform our individual tax code so that it is fair and simple — so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford."

Simple, to the point, and concrete. Yes, America, you will have to pay more in taxes. Cost-free lunches are so…last decade.

The US deficit "hawks" appeared to have had their wings clipped a bit by such specificity in terms and by the deadline that came attached to the plan: June of this year. In fact, the angry birds in that camp actually used words such as "serious" and "balanced" to describe Mr. Obama’s proposals. Budget experts have hailed the presentation as the point at which the national conversation in the US has just changed from "if" -laden speculation to "what" and "how" blueprints for addressing that which ails the country and doing so with the level of prioritization that such action currently merits.

The enactment of the US debt reduction plan, along with the imminent expiration of QE2 as well as the rising potential for a first-in-a-series-to-come Fed rate hike in the second half of the year are all converging upon the dollar bears with increasing speed. In fact, the players who have most benefited from the absence of the aforementioned threats will now have to root for the total derailment of the US economic recovery, or some "black swan" event to come to their assistance-and fast. As mentioned in yesterday’s post, commodities (benefiting from the hitherto feeble greenback) are at their most overvalued in two centuries, based on certain metrics.

In fact, such uber-rich valuations have engendered calls by the leaders of the BRIC block to warn that "excessively volatile" (read: ultra-high) commodity prices pose a threat to the global economy. In making such assertions said leaders echoed the red flag warning that the IMF has posted in recent days on the same subject matter. Perhaps the best admission of the current status quo came from Russia’s PM Sergei Ivanov, who said that $100+ black gold is preventing his country from diversifying its economy.

He was heard to say: "When the gold rain is pouring on your head, you are not motivated to diversify."

That remark could apply not only to oil, mind you …Mr. Ivanov also said that such values are unsustainable and that Russia will fall back into a deficit paradigm when the crude party comes to an abrupt end.

Questions continue to be posed as to why the US central bank might raise key rates later in the year.

Answers to the same are not in short supply, to be sure. First, the current rate environment is no longer there based on an imminent systemic failure threat. Economic growth appears to have become self-sustaining as well as stable. Core inflation is well-contained but transitory price pressures originating from the energy sector have manifested on the scene and have brought the inflation combat theme back to the forefront.

Finally, Fed hawks have been seen and heard on numerous "preparatory" sorties in recent weeks, trying to gauge market sentiment to what is coming down the pipeline. To top it all off, the ECB has made the first chess move and will probably be matched by a Fed that cannot afford to be perceived as playing a "second-fiddle" role for much longer.

The focus now shifts to the upcoming G-7 meeting and the possibility that the current trend to hike currency reserves manifest among members of the group could be presaging more currency market interventions to come, down the road. Monsieur Sarkozy, speaking at the end of March, gently "suggested" that "concerted interventions are an indispensable means of safeguarding our international monetary system." Even whilst conceding that such measures are "instruments of last resort" the remark should be taken seriously by currency (and, by extension, commodity) speculators. Look no further than the most recent such "manipulation" in the wake of the Japanese yen’s post-quake surge.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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