In The Lead – Circus Maximus

by Jon Nadler, Kitco Metals Inc. on July 28, 2011 · 0 comments

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Bullion BarsThe internecine political warfare that threatens to rip apart America’s two-party system, bring about threatened downgrades from various ratings quarters, and wipe billions off of all kinds of market valuations continued to drag on yesterday and into today.

Tea Party figureheads ripped the House Speaker, Mr. Boehner for coming up with a plan that their membership does not find adequate by even the longest of shots. Former Republican presidential nominee John McCain ripped the Tea Party ‘hobbits’ for demanding ‘bizarro’ alternative plans with which to balance the US budget.

Mr. Boehner had little more to say to the rank-and-file participating in this internal revolt than to rip them in turn, and bluntly tell them to "get their [insert synonym for the word donkey here] in line."

The President, albeit having been all but marginalized as a result of the brawl and the developing ‘Civil War’ among Republicans, remains opposed to any production coming from Boehner-land and Congress will vote on the bill today but Democratic lawmakers (all of them) have already signaled that they will pound their shoes on the podium and say "Nyet!" to it. Welcome to Ringling Bros. America; a place where the tent might collapse at any given moment and send the menagerie flying in a cloud of sawdust. If this is brinksmanship, then Clint Eastwood needs to reshoot certain cigar-chomping / eyebrow-furrowing scenes from many a spaghetti western he made eons ago.

Albeit having run out of vigor to a certain extent, Wall Street gold specs did not loosen their bullish grip on the yellow metal too much; not when the consensus perception (and this applies to Mr. Smith on Main Street as well) is fast turning into conviction; the conviction that Rome is flaming out while several dozen Neros are still fiddling, instead of carrying water buckets. Spot bullion dealings opened with a gain of $4.10 per ounce, quotes came in on the bid-side at $1,618.20, and the market remained as nervous as Don Knotts ever was in certain situations. Unsurprisingly, major gold producers Barrick and Goldcorp reported swimming in the warm waters of huge profits; the former’s increased by 35% while the latter’s adjusted earnings more than doubled. Ride’em (margins), cowboy.

Last night’s short-term update from the analytical team over at Elliott Wave opines that gold appears to have completed a wave v of 5 at yesterday’s intra-day high of $1,629 and that a decline under the $1,580 might offer initial indications that the gold rally has turned into reverse (with a large downside potential baked into the equation). As for silver, the breach of $42.13 on the upside could usher in higher values, whilst a successful penetration of the $39.46 level could offer significant downside price potential.

Standard Bank (SA) analysts note support in gold at $1,608 and at $1,599 while first-line resistance is seen very near the aforementioned $1,629 area. Increasing price volatility is a given at this juncture, and it could spark serious consequences for those on the wrong side of the betting tracks as we get closer to next Tuesday. Silver’s support is estimated to reside around $39.75 as a first step, while resistance might emerge at or above the $41.09 level.

Said nervousness also applied to the other metals; silver in particular. The white metal has been riding along on the wavelengths of the interminable DC standoff and managed contact with the $41 level but then opened at $40.35 (with an 11 cent gain) and subsequently slipped into the red by about an equal amount of pennies, while the bulls and the bears played their own version of the Mexican standoff playing out in Washington. Platinum dropped $1 to $1,791.00 and palladium advanced $4 to $828.00 the ounce. Sizeable profit-taking liquidations buffeted the PGMs yesterday and overnight and the focus remains on the resumption of wage talks between mineworkers and management over at Anglo Platinum.

Rhodium retained the $25 gain it has made and remained quoted at $1,925.00 per ounce. Carmaker Saab is thought to be heading towards defunct status in as little as two weeks, while the VW group’s profits tripled in Q2 and the firm envisions record 2011 car sales. In the background, the US dollar advanced 0.20 on the trade-weighted index and was trading at 74.26 at last check. Crude oil fell about 14 cents to trade at $97.26 per barrel. Also falling a tad was the euro; it changed hands on currency markets at $1.426 earlier this morning. Dow futures traded higher however, bolstered by hopes that jobless claim might show progress on the US labor front and that something — anything- concrete might be on tap from Washington today.

Jobless claims filings did indeed show amelioration in the labor picture in the US this morning. The most recent level of applications for unemployment benefits fell by 24,000 and eased to under the 400,000 mark as against market expectations that had pegged the tally to roughly 413,000 claims. The four-week average of new claims also fell; the reading was 413,750 — the lowest since April. Economists continue to pine for a string of monthly jobless claims that would consistently remain at under the 400,000 mark. The current political impasse in DC is not very conducive to employers confidently posting "wanted" signs for workers, to say the least. Equally skittish, US consumers are still wondering what exactly to do given the prospects being implied by the boxing matches in Washington.

More and more noises are being made about the inevitability of an eventual US ‘credit event’ of some kind, even if that which President Obama has asserted will not happen on August 2nd does indeed not happen. About $5 billion have been earmarked by investors thus far to be parked in various instruments that could offer protection in the event of ‘the big problem’ materializing. These vehicles are also known as credit default swaps. For the moment, however, the ‘biggest’ credit event that is being factored in is the likelihood of a mild downgrade coming the US’ way — even if the debt limit is expanded on August 2nd.

The current spread on CDS stands at 63 basis points; that’s the highest level since February of last year. Of course, compared to Greece’s level at 2.5 points, the price of US swaps is cheaper than almost all of 58 other countries. One has to wonder what happens to investors who are snapping up these insurance devices if there is no credit ‘event’ large or small coming down the pipeline.

In fact, there is a real possibility that US bonds could get a serious lift if in fact the debt ceiling is not raised next week. With a dearth of safe havens available to scared investors, US Treasuries might just be (correctly) seen as the lesser of all evils and be in huge demand if America’s debt limit is not expanded. Consider that ultimate irony. Consider the ultimate contrarian trade. The Wall Street Journal in fact fast-forwards to next month and offers a scene where the debt ceiling will have been lifted, the deficit reduction plan will have been signed by Mr. Obama, and, yes the AAA rating of the USA will have been rearranged into a different sequence of the alphabet soup. And, the WSJ proposes, it will make no difference in certain terms.

It might well turn out to be the case that a US debt downgrade could have more effects on the political front than the financial one. For one, the US Congress would be compelled to actually try to address the deficit problem. The other outcome (and we alluded to this recently) is that all of the noise being made by the rating agencies will have the effect of making them also-rans in the big scheme of things and lessen their influence on governments in Europe and the USA.

They S&Ps and the Moodys and the Fitches might become ignored in the process and their ratings trumpets might just come to be regarded as mere "suggestions" or opinion (which is what they were to begin with). In the interim, if anyone can find at safer alternative to (even a AA-rated) US Treasurys market- the largest, most liquid, and deepest such market currently manifest on the global scene- well, they are welcome to try. Good luck. Bet they won’t come up with one.

Until after-voting day on you-know-what, keep spectating. Circus Maximus does not come to town too often…

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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