In The Lead – The Moody’s Blues: Tuesday Afternoon

by Jon Nadler, Kitco Metals Inc. on July 13, 2011 · 0 comments

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Bullion BarsMetals markets opened firm and continued firmer on Wednesday as reverberations of the European crisis coupled with the parsing of the Fed’s meeting minutes released yesterday prompted additional buying by momentum players as well as the retail investor segment.

Spot gold dealings opened their midweek session only some $3 beneath their previously set record and were showing a gain of $7.30 per ounce in New York. The tilt in the market appeared set to yield a challenge of that previous high and also appeared leave open the potential for a vault to the $1,580 – $1,630 price band.

Silver commenced trading this morning with a 69-cent gain and an opening quote of $36.84 per ounce. As with gold, the breach of the $36.80 resistance point might now allow for a fairly quick rise towards the high $39s with a possible overshoot into the $41-43 area if conditions collaborate. Platinum and palladium were also higher — much higher — on the day as they opened for trading in New York. The former registered a $22 rise out of the starting gate; it was quoted at $1,751.00 per ounce. Palladium climbed $9 to the $774.00 bid level while no changes were noted in rhodium’s bid at $1,975.00 the ounce.

This was, once again, a case of "another day, another downgrade, another set of worries" for investors to contend with. The summer that is proving to be anything but full of lazy days continues to offer virtually daily doses of anxiety and uncertainty; not only about the present but also as regards the upcoming months and years. We start today’s roundup in — where else — Europe once again. Moody’s (becoming quite the household name in this summer of turmoil) downgraded Ireland’s credit rating to "junk" status yesterday afternoon.

The move may have been the "prudent" thing to do as regards the mission of a ratings agency, but it was met with far less than a sense of crying the blues by Ireland’s leadership in Dublin. The country’s Minister for Jobs, Enterprise, and Innovation flat-out accused Moody’s of holding back Ireland’s economic recovery with its assignment of the "junk" status. Expressing similar, deep frustration, Prime Minister Enda Kenny said this morning that the EU needs to get its act together and offer a comprehensive solution to the regional debt issue. "Moody’s problem is not with Ireland, Ireland’s problem is with Europe," said Mr. Kenny.

Incoming ECB President Mario Draghi basically concurred with Mr. Kenny and noted that the European debt crisis has entered a "new phase" and that the EU’s leadership must come up with a "clear" plan to halt the spreading debt-implosion virus before it eats the flesh and bones of the common currency. Ironically, Mr. Draghi also still heads up…the Bank of Italy. That country’s bonds (and stock markets) took a drubbing in recent days as concerns have been mounting about its debt-reduction efforts. Many have come to see Italy as the next domino to teeter in the EU’s so-called "peripherals."

Much of the above did not appear to undermine the euro however this morning. The common currency gained some ground after the sell-off that impacted it earlier in the week. Thank you, Beijing. Speculators exhibited a rise in their appetite for risk following data that revealed stronger-than-expected growth in the Chinese economy. The gains noted in various commodity currencies this morning spilled over to the euro as well and there was a sense that investors were less worried about the potential for a global slowdown that might be sparked by the possibility of a deeper crisis in the eurozone.

The US dollar on the other hand gave back some of Tuesday’s gains and slipped to 75.71 on the trade-weighted index this morning as the euro touched $1.41 in early dealings. The on-going flow of debt-related news kept the gains in the euro (as well as the losses in the dollar) fairly limited as the feeling that fresh news could reignite selling remained very much on the front and center of the trading scene in various currency dealing rooms. For the moment, US dollar bulls have been dealt a bit of a setback in the wake of the release of the Fed’s meeting minutes yesterday. The Fed’s membership remained divided on whether or not to add additional stimulus when they last met in June.

The one thing they all agreed upon however, was the fact that if the debt ceiling issue is not tackled before the August 2nd deadline, then "even a short delay in the payment of principal or interest on the Treasury Department’s obligations would likely cause severe market disruptions and have a lasting effect on US borrowing costs."

Dollar bulls also remain wary ahead of Fed Chairman Ben Bernanke’s semi-annual testimony on the economy and monetary policy before the House Financial Services Committee, which was set to start at 1400 GMT today.

Albeit yesterday’s "take-away" from the Fed minutes was the fact that the US central bank in principle decides how, but not when to take away the accommodation punchbowl from speculators, today’s speech by Mr. Bernanke reignited the hope the said punchbowl — in one form or another — will remain on the scene. The Fed Chairman suggested that if US economic conditions erode to some unacceptable point, then the Fed will need to consider certain novel measures (such as for example extending the maturity of its holdings) with which to try to rev up the US’ economic engine.

Although they really should not have done so, Mr. Bernanke’s remarks shocked the currency markets in a flash; the US dollar fell 0.70 on the index to suddenly trade at 75.25 while the slippage also quickly made for a new record in gold at a level some $10 above the previous $1,577.85 mark. Silver followed suit (and then some) gaining 5.5% and reaching a high of $38.36 on the day.

Gains on the order or 2 and 2.6% were noted in the platinum/palladium duo. This time, the gains in the industrials’ niche were clearly not driven by optimism surrounding demand from a growing economy but were dollar-selling driven and harked back to the commodity frenzies that everyone has grown accustomed to in the wake of relentless Fed easy money policies.

In the interim, the war of words on Capitol Hill continued without pause. GOP Senate leaders attacked President Obama’s credibility and belittled his efforts to cobble together a "grand bargain" plan that contains a mix of tax hikes and spending cuts. Words such as "smoke and mirrors" and "unfortunate" were being liberally sprinkled about in the skirmish.

The whopper however — and one that shows exactly where some folks are really coming from — was uttered by Sen. McConnel of Kentucky, who declared that "as long as this president is in the Oval Office, a real solution is unattainable."  Evidently, Sen. McConnell has lost track of the fact that the calendar still shows "2011" and that the August 2nd deadline will not wait for the US elections to take place and perhaps realize his "dream" (born out of bigotry) of an "Obama-less" White House…

The sparring in DC appears to be overshadowing one little fact; the one that virtually guarantees that there will be no such thing as a default on August 2nd. This, even if the debt ceiling is NOT raised. Marketwatch’s Fundmastery Blog written by Kurt Brouwer also addresses other vital questions surrounding the issue of the dreaded "D" and here are just some that are seriously worth pondering as they are effective myth-busters:

Q: What is a default?
A: In this case, a default would be the failure by the U.S. Treasury to make payments of principal or interest on its debt in a timely manner.
Q: In a given month how much does the Treasury owe as interest on its debt?
A: Roughly about $15–20 billion (more on this in a moment).
Q: How much revenue does the Treasury take in on average in a month?
A: Roughly about $200 billion.
Q: Are you saying the Treasury could pay interest on its debt 10 times over (or more) from monthly income?
A: Yes. Therefore the likelihood of not paying interest on its debt is zero.
Q: But, what about redeeming bonds that come due?
A: As bonds come due, the Treasury would again use monthly income to pay them off. This would lower the debt owed beneath the so-called debt ceiling. Then, the Treasury could turn around and issue debt in that amount up to the debt ceiling.
Q: Why then do Treasury Secretary Geithner and others in government make such apocalyptic statement about the horrors of default.
A: I’m afraid Secretary Geithner and others in government are doing the moral equivalent of yelling "Fire!" in a crowded theater and they are doing so for political reasons rather than financial reasons. They simply do not want any interruptions in the bloated spending underway in Washington and they want to scare Americans into thinking the end of the world is nigh unless the gravy train keeps chugging along.

Yes, math appears to be hugely difficult subject for politicians to master, as we can see these days. However, here is one little math formula, as offered by good old Warren Buffet on CNBC last week that is easy to grasp and would also work miracles if applied. Remarked Mr. Buffett:

"I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection."

We might add the Senate to that, as well. Just for ‘good measure.’

Until tomorrow, there is another figure to calculate; the one that prints as $1,600.00.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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