In The Lead – It’s Not Rabbit Season! It’s Duck Season!

by Jon Nadler, Kitco Metals Inc. on September 22, 2011 · 0 comments

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Precious Metals CommentaryWell, the Fed left the wet rabbit of liquidity at rest in the top hat yesterday, and, boy, did the markets throw a tantrum about that! Pretty much everyone ducked pretty much anything they had bought before.

In a display of behavior best suited for a two-year old whose candy was just locked up, equity and commodity markets stomped their collective feet… ummm towards the "Exit" doors as they watched the "bad/old/dead dollar" surge and surge some more in the wake of Mr. Bernanke’s magic act. Here is what happened, starring Daffy as the markets and Bugs as Mr. B.

But, wait, come to think of it, these markets are roughly two years old in the sense of having become so addicted to the Fed’s hand-outs of "Good ‘N’ Plenty" QE candy. Now that we might just find ourselves in the middle of the unwinding of the hitherto drunken orgy known as the global carry-trade, well, a reality check was clearly in order. Whether the Fed "caved" to Mr. Boehner’s warnings or not is not as important as the fact that it decided that its balance sheet had reached the upper limits of what it was willing to live with. That departure from the ‘norm’ may well be the game-changer that the now much-delayed interest rate adjustment might have brought about under different circumstances.

Here, in a brief format is what the Fed said on Wednesday, in case anyone missed it:

"To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate."

And that’s what we call "The Twist."

Share markets also did the "twist" (of pain) as investors threw what now appears to be a global-in-scope tantrum and sold everything including babies and bottles of bath water. The Hang Seng Index lost 4.85% while the Shanghai Index fell by more than 2.5% and so did the Nikkei, the Kospi and the Aussie ASX. European stocks fared even worse in the wake of the Fed’s bond-swap dance. The Stoxx Europe 600 fell 3.9% while France’s CAC lost nearly 5% and the Dax in Germany caved by 4%. The FTSE also played footsie with the floor leading to the exit doors and received a 4.5% haircut this morning.

In what had almost become a fall ritual, investors had rolled up their sleeves and licked their greedy little chips anticipating yet another dole-out from Mr. Bernanke & Co. The latter however, at least on the surface of it, appears to have taken the GOP "warning" memo it got recently — telling it not to dare to ease-quite seriously and, it… didn’t. The US central bank’s balance sheet thus remains unaltered, and short-term yields are now likely to trend higher. This is something that the specs (in gold and other commodities and even equities) hate — with a passion.

Spot gold prices lost $35 in overnight dealings after having shed more than $24 on Wednesday after the Fed announcement made it clear that Mr. Bernanke was not going to "go big." December gold fell more than $54 in electronic trading as the aforementioned beneficiary of the FOMC’s new "twist" left traders… twisting in agony about the near-term prospects of everything from gold, to silver, to copper, and to crude oil (now nearing $82).

The deep sell-off in gold has yielded a certain amount of chart damage and the technicals are once again reinforcing the possibility that a double-top has been put into place. In pre-opening dealings this morning silver fell more than $2 and black gold lost nearly $4 while the greenback mounted what appeared to be the beginnings of an assault on the 79 and perhaps 80 mark on the trade-weighted index. The traditional, inverse gold-dollar correlation has (finally) shown that it is still valid, after months of false indications.

Thus, Thursday’s opening bell witnessed a sea of red on the New York commodities’ exchanges floors. Gold dropped $43 to the $1,737.50 spot bid level prompting a re-evaluation (and then some) of its near-term prospects despite the louder-than-loud "back up the truck, honey!" calls coming from the permabull gold bug forums. The yellow metal could now be targeting the $1,700 pivot zone-one that must hold lest we head to $1,660 and then towards the high $1,400s on the charts. Ditto for silver-it must try to remain above $37.80 or the odds of a repeat visit to the low $30s (as an initial target) increase by the day.

Silver shed $2.27 (or 5.73%) to open at $37.35 the ounce. Platinum and palladium also trimmed former safe-haven premia from their value equations and slid $46 and $33 respectively, revealing themselves to be more industrial than insurance metals. The former was quoted at $1,713 and the latter dropped to $660 the ounce, going beyond lows at $695 recorded many months ago. Rhodium remained static with a bid of $1,800.00 per troy ounce. Dow futures augured a possible 250+ point drop in value for the day ahead. US initial jobless claims came in below expectations at 423,000 last week but the four-week average is still running at its highest level in sixty days’ time.

The commodities’ complex has now in fact wiped this year’s profit slate clean as the one-two punch having been dealt by the IMF and the Fed (both quite worried about global growth, to say the least) has prompted laggard longs to throw in the towel and take what they still can off the gambling table. Adding to that selling spree was the news from China that the country is flashing its own growth warning lights as reflected in the current reading of the preliminary Purchasing Managers’ Index (now solidly under the 50 pivot point on the scales). Little wonder then, that copper dropped 7.3% (!) this morning and that it was closely followed by silver which exhibited its own 6.2% decline.

At the end of the day, the Chinese development shows that nothing (and we mean nothing) defies the laws of gravity for very long; ultimately, that mysterious force takes over and some folks get a reality check forced upon them. That goes especially for the "ChIndia" crowd that has consistently been in denial about potential erosion in the so-called "insatiable" demand coming from Asia. Such superlatives no longer apply. Rapidly rising inflation in China (and India too) has undermined the purchasing prowess of the very middle class that was supposed to keep demand at the "insatiable" notch for decades to come. We won’t need to mention why Europeans or Americans are presently not exactly scooping up truckloads of Chinese-made "stuff." Okay, we just did.

Curiously (and this one is a stunner!), just as had been the case with oil’s surge and inflation in Europe and the USA, it was a commodity’s price gains that has fueled these inflation numbers in Asia. That commodity? (Oh, boy, here comes the hate mail) Gold (!). Go figure; the one asset intended to protect against inflation, is now fueling it. To wit, the near one-third jump in the price of gold rings in South Korea has helped push local inflation past the 5% mark.

In Indonesia, the rising cost of gold jewellery has accounted for most of the near-1% bump in consumer prices last month. The cost of gold is included in the inflation basket of several Asian nations. Even in gold-loving India, the escalating price of the yellow metal has made for an inflation level at 9.78% last month — a figure that might have come in at 9.49 percent had it not been for soaring bullion values.

Until tomorrow (at least) the scramble for cash remains the order of the day…

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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