In The Lead – You Go Your Way, I’ll Go Mine…

by Jon Nadler, Kitco Metals Inc. on July 25, 2011 · 0 comments

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Bullion BarsWith but hours (168 and counting down) to go before August 2nd rolls around, the political arm-wrestling matches continued without respite in Washington after having come to an American version of a Mexican standoff on Friday afternoon.

Albeit President Obama has already assured the markets that the US will not default on its obligations under any circumstances that he might be able to do something about, the markets exhibited no modicum of a trend towards calming down as yet. Separately, former President Clinton’s spouse, now Secretary of State, reassured China that the US will not go down the path of a default despite the overt fireworks taking place in his nations’ capital around the clock.

The Democratic and the Republican lawmakers in the States have now begun to forge their own separate and competing plans to cut the nation’s deficits and to raise its debt ceiling. However, as of this writing, and with just minutes to go prior to the opening of the markets on Monday morning, the only thing that investors and the public at large could bank on was the likelihood that a deal might only be announced very late in the game of "blinksmanship" and that the House and the Senate would have to work 24/7 in coming days to get the deed done and ready for launch.

Spot gold prices hit a fresh overnight all-time high above $1,622 the ounce as the overseas trading action reflected the continuing nervousness surrounding the US debt limit impasse. If there is one thing that markets want, it is clarity; this was made fairly clear ahead of last week’s EU summit on the issue of Greek debt. If there is one thing that markets abhor, it is uncertainty; that is being made amply clear right about now.

Conflicting talk, half-baked plans of short-term debt limit extensions, continuing warnings from ratings agencies, none of these sit well with those who normally make a buck on betting on a defined trend. Thus, the one beneficiary that thrives on ambiguity — gold — was the one in prominence among players over the past several days and hours. The only other thing in heavy ‘rotation’ was the number of talking heads (most of them official heads) on display on the Sunday talk show circuit in the media. Warning, speculations, assurances, warnings, bold predictions, warnings; it sounded like a normal Sunday, of late.

New York metals trading opened with gains of $15 in gold and 73 cents in silver this morning. The former was quoted at $1616 and the latter at $40.80 per ounce against only a slightly weaker US dollar and against a decline in crude oil. Potential targets for gold — should the debt mess continue to swamp DC-include the value zone of from $1,630 to $1,645 but the market also presents some real dangers given the large crowd that has piled in very recently, the options expiration timetable (tomorrow) and the chance that President Obama might go in front of microphones literally at any moment between now and a week from now to announce certain tangible results to this artificial crisis that has been brought on by penis-fencing lawmakers.

While gold continued firm after the opening bell, retaining the uncertainty premium, silver narrowed its opening gains to only about 25 cents as oil sold off some more and as the platinum-group metals also gave up their initial gains. Standard Bank (SA) noted in its weekly review of the gold market’s speculative positioning that the fall-off last week in speculative short positions was "encouraging" but since it is still more than 30% higher than last year’s average, the gold price remains ‘vulnerable to shifts in investor sentiment."

The Standard Bank team has now taken a ‘neutral’ tactical view on the yellow metal, based at least in part on the "weakening physical demand at current prices." As for silver, its short positioning — at 924+ tonnes — is closer to last year’s running averages, but the "abrupt increase in short positions" in the latest reporting period "raises a warning flag over silver" and it still highlights the risk of prematurely calling that metal’s bearish tilt as being over, according to the Standard Bank analytical team.

Meanwhile, last week’s Kitco market survey had a majority of those polled tilting towards a lower gold price; probably on account of perceptions that, by now, some kind of deal would have been made in Washington. What happened on the day when a deal is actually made remains an open question, though it is not one that many want to entertain just yet.

Finally, at last check, the platinum spot bid was unchanged at $1,791.00 while palladium’s bid was also unchanged at $803.00 per ounce. Rhodium lost $50 to fall to the round, $1900.00 mark per ounce. US equity futures fell ahead of the markets’ opening on account of the same Washington impasse that is keeping other markets virtually hostage at the moment. Meanwhile, the financial newsletter scaremongering also continues unchecked.

A plethora of direr-than-dire scenarios are on offer practically every evening, if you just care to look at your e-mail inbox. Gory titles such as "America on the Brink!" and "The Dollar’s Days are Numbered" compete for your gut reaction incessantly. "The debt is an immediate threat to our prosperity!" Oh, wait, that one is a no-go. Or, so says Marketwatch’s Rex Nutting, who would like to call your attention to the basic fact that the American government can "currently borrow at very low rates" and that "if government borrowing were crowding out private investment, you’d see it in the bond yields.

Thus, Mr. Nutting concludes, "we [America] can afford to repay our debts, easily. We have time to fix this." Aside from that, the other little presently ignored factoid is that a mere 1% (!) growth in the US economy would totally fix the ‘issue.’ But, hey, who wants to listen to Arianna Huffington’s solutions when their attention is being diverted to the ‘heroic’ efforts of the Tea Party "freshmen" in Congress by none other than George F. Will? As noted before, a Sunday talk show bonanza, indeed.

Well, Mr. Nutting might also receive some "incoming" following his Marketwatch piece on the ten crazy things about the debt-ceiling "crisis" as he takes on another recently anointed sacred "cow" (or cows, as the case may be). We are all told –says Mr. Nutting- that "we should listen to Standard & Poor’s and Moody’s when they tell us to reduce the deficit." Sounds fair, right?

Only one little problem with who is doing that type of talking, writes Mr. Nutting:

"These are the folks who missed the greatest bubble in history and are now trying to make up for it by causing another recession. Even if the debt-ceiling crisis passes, they’ve threatened to lower our credit rating, even though we can easily afford to pay back our debts for the foreseeable future. Who elected S&P and Moody’s to decide how we’ll run our affairs?"

We close today with the take on the market by Mark Hulbert; his regular pulse-checks on the contrarian sentiment indicators have been enjoying a strong following over at Marketwatch for quite some time now. Mr. Hulbert sums up this morning’s gold market paradigm as follows:

"Gold bugs have every reason to feel smug this morning, with bullion rising to a new all-time high in the wake of the failure to reach agreement on raising the debt ceiling and averting default. That smugness is a worry to contrarians, however, who argue that the rallies with the greatest short-term upside potential are those accompanied by the greatest amount of skepticism.

Mr. Hulbert notes that:

"there is not a lot of skepticism right now. Consider the average recommended gold market exposure among the short-term gold timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). It currently stands at 67%, which is nearly as high as the 73.7% level to which this average rose in late April. Within days of gold’s late-April high, you may recall, bullion hit an air pocket that took $100 off of gold’s price."

All eyes, ears, pocketbook grips, buy/sell orders, etc. — on Washington. Artificial or not, the crisis will make for some genuine gains or losses in hours to come — just depends which track one stands on. One is safe to stand on; the other has a bullet train heading towards the unprepared.

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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