In The Lead – My Computer Did It

by Jon Nadler, Kitco Metals Inc. on September 12, 2011 · 0 comments

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Precious Metals CommentaryThe new trading week got off to a fairly rocky start in the precious metals’ complex this morning as slumping equity markets and a stronger US dollar sapped more value and bullish enthusiasm from the sector.

Spot gold was down about $40 near the $1,820.00 per ounce level ($1,800 appears to have come into play once again) while spot silver lost about 75 cents to trade near $40.60 the ounce.

Platinum and palladium were not spared in the sell-off, as the former fell $23 to ease to the $1,807.00 level and the latter declined $21 to reach $715.00 on the bid-side. Platinum-gold parity has once again shown up on the investment radar and some investors appear ready to take advantage of the (rare) occurrence. Do note that on Wednesday at 2:00PM New York time, Kitco News will be webcasting the CPM Group Platinum-Group Metals Seminar; an event at which yours truly will address the investment demand and patterns in that niche in recent years. You may sign up to attend the event right here: http://cpmevents.kitco.com/

Gold has tested the sub-$1,820 area this morning and some technicians have opined that it may well fall beneath the $1,700 mark (near $1,680) prior to attempting an assault on the $2K mark, later in October. On the other hand, a more sizeable correction of from 28 to 35 percent (something that the yellow metal has not experienced since 2008) could bring values down to anywhere from $1,250 to $1,380 the ounce, were it to occur once again.

Either scenario would continue to yield very choppy and unsettling patterns in the so-called "ultimate safe-haven" as the presence of hedge funds makes for a potent and flammable brew in this market. Computer-driven programs have already manifested their influence over bullion’s value in both directions during most of last month as the aforementioned speculative entities dove in and out of the market amid the worsening European situation and following the S&P downgrade of US debt. Many a fund came through the market storms of August thanks to their nimble moves in and out of the gold market at a time when equities offered little more than loss propositions almost on a daily basis.

However, most everything has a flip-side to it. Validating our concerns that the influence of hedge funds is stripping away at least one of gold’s long-standing attributes (stability in the face of fluctuations in other asset classes), one Singapore-based wealth manager said that:

"Gold has become a very volatile asset class so if you’re good at trading through the volatility you can profit from it."

That’s a fairly big "if" for most small, retail-sized investors, to be sure.

A Japanese hedge fund manager cautions that "Continuing to be overweight gold, or holding more bullion relative to benchmarks, to boost performance might not be prudent. Betting on gold only just because the mandate allows you to do so may be too risky. If you are looking for a mid-to-long-term gain, you should be diversifying your assets; after all, gold is just one of many asset classes."

As of late last week anyway, many of the aforementioned players appeared to be increasing their speculative long positions in gold and silver. CFTC data released last Friday shows that net spec longs in gold experienced a gain in numbers after their ranks fell for four straight weeks previously.

In the background, more contradictory positioning was also taking place in other commodities. Crude oil prices fell initially, reflecting concerns that the protracted European debt situation will put an unwelcome damper on regional growth. Check. However, spec funds, at the same time, increased their bullish bets on raw materials largely based on the bet that the Obama jobs stimulus plan would boost demand for assorted "stuff" when and if it goes into effect. Check, too. It is true that most analysts estimate that as much as 2 points might be added to US GDP levels if the $447 billion jobs package manages to see the light of day as opposed to getting gutted (or worse) by the GOP/Tea Party warriors in the US legislature.

Something else was bothering certain commodity specs this morning as well however. The euro, and the European debt problem. Just when the Obama plan appears to have arrived in the nick of time to avert a double-dip in the US, the Old World appears to be skirting a deep chasm into which it could well fall if things continue on their current trajectory. Thus, base metals players were quite the nervous gang this morning.

Reuters Metals Insider reports that "London copper declined 1 percent, extending a fall of 3.2 percent in the previous session, as mounting worries about stalled economic growth in the West out-weighed robust growth in China’s copper imports. “The euro cracked and risk has cracked,” said a Singapore-based trader. “The foreign exchange market has taken a turn to the worse and base metals are going to be shattered today.”

Except, thus far, they weren’t.

With the exception of copper, most other industrial metals managed to remain in the green for the morning, even as the euro hit a decade-low mark against the yen amid headlines that (in somewhat poor taste) declared that "Germany Readies Surrender Over Greece."

Over the weekend, according to Bloomberg News, "G-7 officials vowed to "take all necessary actions to ensure the resilience of banking systems and financial markets," and to make a "concerted effort" to support a flagging world economy. They detailed no new policies."

Said spec funds might as well try their hand at making a buck (or five) in commodities once again, since similar anti-greenback-oriented bets did not quite "pan out" in Aussie and Brazilian assets of late. The so-called "carry trade" crowd is licking its wounds following its bets having gone sour on the heels of the "Nosferatu Dollar" that once again resurrected and contradicted them recently.

Those who borrowed bucks and yen heavily in anticipation of either one’s coma or demise are now hurting, and then some. Similarly to what took place in 2008, when push has come to major shove, the worlds’ most frightened investors have sought refuge in the good ol’ greenback once again. As for the yen, well, Japan’s current-account surplus implies that the nation does not need to borrow from foreign lenders to finance its sizeable budget deficits.

Meanwhile, for the nth time in several weeks, China’s leadership has reasserted that it is still heavily preoccupied with its anti-inflation campaign. Cooling price spirals and containing runaway growth and bubbles from doing further damage to the country’s economy is still the "top priority" for Chinese officials. Thus far, the anti-inflationary war being waged by the PBOC and other Chinese governmental entities has managed to shave three-tenth of a percent off of the 6.5% inflation level that was recorded in the country in July of this year — a 37 –month pinnacle of the most unwelcome kind.

Still, that kind of inflation does not hold a candle to what happened in Austria after World War I. For a fascinating summary on Austria’s descent into economic chaos and on the revival plan for the country that its then finance minister Joseph Schumpeter had proposed, do yourselves a favor and read the article currently running on Bloomberg News. Hint: the story also involves one, John Maynard Keynes.

Until tomorrow,

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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