Wednesday Kitcommentary – Game of Commodity Thrones

by Jon Nadler, Kitco Metals Inc. on April 20, 2011 · 0 comments

Bullion BarsThe midweek session in the markets was off to anything but a quiet start this morning as a massive display of risk appetite took center stage and pushed the US dollar back to under the 75.00 mark on the trade-weighted index overnight.

That drop set the stage for the remainder of the events that followed in other assets and their related markets. More detail on all of that, follows below.

Ironically, the greenback took a speculative-driven beating even as bi-partisan US lawmakers are thought to be entertaining the idea of an "automatic" trigger mechanism that would kick in at some point and force the GOP to agree to tax hikes while forcing the Democrats to live with entitlement program cuts. The dollar’s drubbing also cast aside the remarks by Treasury Secretary Geithner that "the US will never lose its AAA rating" made on the heels of the S&P outlook shift the other day. President Obama has basically embarked on a ‘whistle-stop’ type of tour to sell his deficit reduction proposals to the nation. Dollar sellers appeared to care less about all that and they acted as if quite the opposite had taken place.

Additional catalysts for this morning’s betting were seen in a string of hefty earnings reports by IMB and Intel and they helped bolster such risk-taking while adding more fuel to the "buy everything!" syndrome that has been lifting normally inversely correlated assets in concert of late. Speculators were seen not only willing to take huge risks but also as still taking advantage of on-going yen (and dollar)-based carry trade conditions. Spiking precious metals values helped the Aussie dollar reach the $1.06 level — one not seen since the currency was first floated nearly three decades ago.

Wednesday’s action in precious metals was off to a robust start across the price boards. Platinum and palladium shone brightest this morning, offering starting gains of 1.5 and 3.2 percent respectively. The former opened up at the $1,793.00 level per ounce with a $26 gain, while the latter rose $23 to start the day off at $754.00 the ounce. Certain year-to-date statistics in the noble metals group show that additions of nearly 127,000 ounces in platinum and 24,000 ounces in palladium gave taken place in the ETF space. Those additions do not compare favorably, for example, to the 334,000+ ounces of palladium that were piled into ETF holding during the latter half of last year (figures courtesy of Standard Bank SA).

Strong optimism was on display among global car makers as they flocked to the spectacular Shanghai Auto Show (at the detriment of the New York one). VW said that it may leap ahead of its competitors in Chinese sales by as much as 12 percent this year. GM said that it expects to overtake Toyota’s sales in China and to be able to shrug off the recent government-imposed curbs on car sales in that country. On the other hand, Japan’s exports did fall by 2.2% in March due to the huge quake event and auto production and export was indeed part of that unwelcome statistic.

More gains were in store for silver on the back of intense speculative attention and the white metal broke through yet another price barrier with relative ease: the one at the $45.50 level. There is, at this point, not much that potentially stands between that level and the round figure overhead in terms of resistance. Of course, corrections (if that is what one might end up calling the pullbacks that will eventually occur, given their potential magnitude) were not in the market players’ vocabulary this morning as it typical of 97%-plus levels of bullish consensus, and the 14-day Relative Strength Indicators flashing 85 (!).

As regards silver, the analytical team at Standard Bank (SA) notes that the patterns of accumulation in the ETFs that deal with the white metal warrant some caution. The team notes that:

"there has been a significant slowing down in ETF buying, as during the second half of 2010; we calculate that 3,105 tonnes were added to holdings. This raises a caution that, despite strong rallies this year, investor interest in silver is no longer as supportive as it was in 2010.

The SB team further observed that "this corroborates recent CFTC data which appears to indicate, through a dramatic increase in short silver positions over the past two weeks and last week’s fall in speculative longs, that there is a growing expectation amongst markets participants of a correction in silver prices. However, with reduced interest from ETFs, resistance to such a correction could be less than it was in 2010." Also of note is the fact that — according to Abraham Bailin, ETF Analyst at Morningstar — "silver has only been this expensive relative to gold twice in the last 25 years. Both of those instances lasted for only a few weeks before the ratio normalized. You would have to venture back to the 1970s to find any length of time when silver remained more fashionable than it is today."

In the background, crude oil nearly recaptured the $110 per barrel price tag and while some analysts attributed the spike to post-election violence in Nigeria, the bulk of the gains in black gold were largely a result of dollar weakness and the pre-opening rally in US stock index futures. Crude has been the subject of mammoth speculative activity ever since Col. Gaddafi first showed signs of not having both oars in the water in February. The conflict in Libya now appears to be dragging on beyond the expectations of the UN-sanctioned intervening forces.

Spot gold dealings opened with a gain of $8 per ounce and were quoted at the $1,502.70 per ounce mark in New York. The confluence of higher moving averages, higher daily closings, higher trading volumes and higher open interest levels all led to the momentum-based buying on display this morning. The achievement of the psychological threshold prompted Clive Lambert, the Director of Technical Analysis at FuturesTech to warn that:

"usually we get a bit of volatility on [gold] at a key psychological mark, so take care today. We might see a shakeout trade lower as people pile in at $1,500/oz and then get hosed."

Once again, the metals-backed ETFs marched to a slightly different tune as they showed a drop of 0.07% in the GLD vehicle from Monday to Tuesday. The GLD has basically lost balances in five out of the past six months. Meanwhile, the 14-day Relative Strength Indicator in gold stood at 72.9 as of last night.

According to the Wall Street Journal "traders also warned that clusters of options — which give a seller the right to buy or sell at a certain price — around $1,500 an ounce could keep a lid on prices if investors decide to take the opportunity to cash in on gold’s rally. While put options — the right to sell — could be followed through, call options — the right to buy — could be sold in an attempt to avoid paying out for gold at such a high price."

Meanwhile, scouts from CNBC were on the hunt for a gold bar — any gold bar — to borrow from any dealer willing to lend it to them to be put on display for this morning’s early show. The picture is complete. A simple line item from Barclays Capital explains the fever succinctly: "Commodity assets under management rose to a record $412 billion in March." Not a bubble. Just an all-time record in another niche where the money has piled up sky-high.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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