In The Lead – Fed Tweets: Weak! Specs Tweet: Eek!

by Jon Nadler, Kitco Metals Inc. on June 23, 2011 · 0 comments

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Bullion BarsBen Bernanke’s press conference and the preceding FOMC announcement hardly contained any comforting words for those who have made it a habit to make money on the Fed’s largesse up to this point.

The fact that US growth and employment forecasts were scaled back, and, that despite such projections, the Fed gave only the slightest of hints that it might be willing to offer further "accommodation" of one type or another clearly disappointed commodity speculators and their subsequent selling off of various sector assets was, indeed, plainly visible this morning.

Well, every good thing must eventually come to an end. And, a "good" thing this was, indeed; commodities had gained 80% through the end of last year precisely on account of the truckloads of "easy money" that drove away from the Fed’s doors over two years’ time. Nonetheless, PIMCO’s Bill Gross Tweeted to the world yesterday his prediction that the Fed will unveil QE3 at its Jackson Hole WY retreat coming up in August.

Of course, Mr. Gross had also said in early June that QE3 was unlikely, even with poor jobs growth in the US economy. There is, of course, another explanation for the apparent about-face by PIMCO’s fund manager. CNBC believes it has the answer. It has to do with the predicted massive sell-off in Treasurys at the end of QE2 (now) not having materialized.

Crude oil led the declining commodities’ pack this morning, losing more than 4% (!) amid of heavy selling by speculators and sinking to the $91.55 mark per barrel. Inventories of black gold rose for the first time on a month and once the Fed indicated that growth maybe subpar for some time to come, the realization that fundamentals may matter after all yielded the aggressive selling we saw this morning.

Precious metals prices were not spared the damage seen in other areas in the commodities’ space this morning either. Spot gold traded in the first half-hour of the Thursday session in New York with a sizeable, $30.00+ (1.85%) per ounce loss in value. The bid-side in gold was indicated at $1,517.70 per ounce shortly after the market’s opening, when, just one day ago, the fact that bullion had managed to once again touch the $1,557 mark (a seven-week high) had actually increased the odds of it reaching for not only its previous highs near $1,577 but possibly as high as the $1,600- $1,630 area.

As of today, the support-line for gold crosses the $1,528 level on an Elliott Wave basis. A solid close beneath the $1,528- $1,530 zone — according to EW analysis — would mean that a "major phase down for gold prices" has possibly commenced. Had gold pushed to fresh highs, it would have done so without the collaboration of silver. In fact, there was — as of last night — a "massive non-confirmation" in gold relative to silver; as large as any seen over the past ten years. Such a divergence suggested (to the EW team) that gold was possibly near the end of its rise, and not some other phase in the cycle.

Silver lost 34 cents on this morning’s open and then dipped to well under the $35.50 mark per ounce shortly after that time. The $37.90 high of June 10 still looms as solid overhead resistance for the white metal and if it does indeed break the $34.40 level on the downside (its low on June 14) its declines could pick up speed and drag the white metal down to under the $30 level initially.

One of the areas that held a lot of promise for silver demand — that of photovoltaic applications — is now being seen as a bit…"murkier" in the wake of the speculation-driven near 75% gain in the average price of the white metal. Solar panel fabrication accounts for some 11% of the global supply of silver as each panel normally uses about 20 grams (0.64 of an ounce) of the stuff.

The meteoric rise in the price of silver (hardly based on its fundamentals) is squeezing margins to the breaking point for the photovoltaics industry and will accelerate the research into how to use less of it in such applications. Call it "demand destruction" of another type. It also makes — at these prices — for a potential "competition" with the good old source of energy production that fossil fuels have historically represented.

Noble metals also fell victim to the selling manifest in the commodities’ space this morning. Platinum dropped $42 to reach the $1699.00 mark on the bid-side, while palladium declined $20 (almost matching the percentage loss in crude oil) to start the session off at the $741.00 per ounce quote on the bid-side. Rhodium indications from New York remained level at the $1.950.00 per ounce mark.

Our analyst friends at Standard Bank (SA) covered the situation in the platinum import-export market and came away with the following conclusions this morning: "Exports from Switzerland continue to be dominated by seemingly resilient Chinese demand. Net exports from Switzerland to China were 62,860 oz during May, comparing favorably with the 56,795 oz in exports seen moving to China in April. The numbers for the last three months have all been well above the 2010 average of 49,755 oz net exports to China, and the most consistently strong figures seen since mid-2009."

The Standard Bank report also noted that "Chinese customs data however paints a different picture, showing a definite slowing down in platinum demand over the past three months. [The month of] May saw 156,388 oz in total imports to China, compared to 255,627 oz and 330,677 oz for April and March, respectively. For the first time this year, the monthly figure is lower than last year’s average imports of 196,731 oz, and the worst figure since October 2010.

"The discrepancy between the Swiss and Chinese data remains, and is widening. The Chinese data indicates that imports from Switzerland were only 19,880 oz, compared to the 62 k oz the Swiss reported. As highlighted previously, this indicates that perhaps Chinese platinum demand is not weakening as much as suggested by the official figures."

There was, of course, something that did rise in value this morning. The "loathsome" US dollar gained quite a bit of traction in the wake of "Fedsday" and it was seen this morning just above the 75.52 level on the trade-weighted index (a gain of 0.74%). Some of the greenback’s gains came from additional losses in the euro however. This, after ECB President Jean-Claude Trichet said that the regional debt crisis is threatening to infect banks. Mr. Trichet minced few words when he warned that the risk signals of stability on the financial sector in Europe are flashing "red."

As for now, keep watching the "red" flashings of the price tickers in the commodities’ space. They could be indicating a possible sea-change underway. Since that is not a prediction, it will not be Tweeted to anyone, anywhere.

Until Friday,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler

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