In The Lead – Who Needs Crab-Fishing When You Can Drive A Lambo?

by Jon Nadler, Kitco Metals Inc. on October 6, 2011 · 0 comments

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Precious Metals CommentaryThursday was official sector news day as policy decisions from the ECB and the BoE hit the wires early in the trading day in North America. Coming in with less of a surprise than Sarah Palin’s not running for the US Presidency, the ECB left rates unchanged at 1.5% citing conditions in the eurozone.

The reins at Europe’s central bank will be handed over by Mr. Trichet next month to the current head of Italy’s central bank, Mario Draghi. That gentleman has his job cut out for him as he steps into the office being vacated by Mr. Trichet after eight years.

Pundits expect a cut in the ECB’s key lending rate sometime between December and March. Mr. Trichet urged European banks to reinforce their balance sheets during the press conference he held after the rate decision announcement. He was echoing the sentiment of Juan Manuel Barroso (President of the European Commission) who said that his agency is attempting to get its member states to recapitalize the banks in the region. Presumably, a fresh round of "stress tests" is in the offing for the banking sector in Europe. This, in order to avert bigger "stress" already quite manifest in the markets and among investors.

Meanwhile, Bloomberg Business Week reports that "In a dramatic turnaround, a senior official for the International Monetary Fund is retracting an earlier statement that the IMF could intervene in bond markets to support struggling Italy and Spain. Antonio Borges says that "The fund can only lend its resources to countries, and cannot use these resources to intervene in bond markets directly."

The latest twist comes at a time when anxiety levels are on the rise about the state of the European financial system. France and Belgium are seen as trying their best to keep Dexia Bank from being the first major European lender to roll over and expire since the end of the 2008 credit crunch. The waiting game is on.

No waiting over in London; the Bank of England announced that it will buy 75 billion pounds in government bonds in an attempt not to let inflation fall under the critical, targeted rate of 2 percent. The BoE noted that global expansion has "slackened" sufficiently for it to have made its latest easing maneuver. The pound took a swift pounding in the wake of the bond purchase news and it promptly fell to a 15-month low against the US currency. The latter kept the recent spring in its step intact and advanced about 0.45 on the trade-weighted index to touch 79.41 this morning.

Against this background, the precious metals markets opened ‘in the green’ but gold parted company with the rest of the complex and headed a tad lower. Spot New York dealings opened with a loss of $4.6 for the yellow metal; its bid-side quote was indicated at $1,638.00 the ounce. Bounce-backs to perhaps as high a level as $1,700 are feasible as the metal consolidates from its recent $1,532 low but the next target (as opined by EW analysis) appears to be $1,300.00 per ounce. For the moment, bullion appears confined to the $1,575-$1,675 channel but we all know that out-sized, intraday moves can easily push that envelope and test its limits (see Monday’s $80+ swing for reference).

Silver started off with a gain of one quarter dollar at the $30.76 level this morning. Whether or not a sprint towards the recent $33.60 high is in the cards remains unclear, however a breach of the spike low that was recently touched at the $26 mark could likely usher in a dip to the $22-$25 value zone. Platinum and palladium staged double-digit recoveries this morning, with the former rising $12 to $1,499.00 per ounce and the latter gaining $19 to touch the $595.00 mark.

Standard Bank (SA) analysts project that palladium’s supply will fall well short of demand and result in an "ever growing deficit" over the coming half-decade. They also feel that platinum will eventually fall into a deficit paradigm as well, but not likely prior to 2014. The team sees price progress to the upside in the two noble metals as a function not as much of demand-pull but of cost-push. Recent declines have brought platinum and palladium much closer to production costs. From a strict investment perspective, and not factoring in the requirement for a core gold insurance position, it is still most likely that the next batch of returns will come from the noble niche as opposed to gold and/or silver.

In the background, the dollar remained steady and crude oil advanced fifty cents to the $80.16 per barrel level as equity traders prepared for today’s opening. The Dow’s focus might center on the untimely passing of Apple CEO Steve Jobs and on how the firm’s sharers react to it. We tip our hat and then remove it altogether for the innovator that Mr. Jobs was. It is quite safe to say that he has changed the daily life of many of us in one way or another. Initial jobless claims did not pick up on the positive theme that the ADP report offered the other day; the report noted a bump of 6,000 claims for benefits, to the 401,000 mark. Economists had expected a rise in filings of 19,000 on the reporting period, and thus the news was received as largely positive.

President Obama is expected to make a fresh plea (make that: a push) to US lawmakers today to pass his jobs plan. US economic growth at better-than-anemic levels is possibly hinging on the passage of the plan, according to economists. The US President is also likely to endorse a "millionaire’s surtax" — a rate increase on those earning $1 million or more. Mr. Obama will speak at 11 a.m. ET.

The jobs-and-tax two-pronged approach recently outlined by Mr. Obama would add to US GDP. The question is: just how much? One economist estimates that the full plan — if enacted — would yield a US GDP growth rate at 3% in lieu of the projected 2% level of expansion in 2012. If only the tax portion of the plan becomes reality, then that would add only about 0.50% to America’s GDP.

Meanwhile, as we noted early this week, the one economy that shows signs about which many should worry a whole lot more, is that of China. Writing for Roubini Global Economics’ EconoMonitor, associate Professor (Tsinghua University School of Economics in Beijing) Patrick Chovanec lays bare the economic landscape in China and has some quite alarming findings to relay. This is a piece well-worth your reading time. It throws a potential cold and very wet blanket on all those "insatiable Chinese commodity demand mantras" you have been force-fed incessantly over the past five years in various newsletters and by various commodity celebrities (Rogers, Faber, etc.).

For starters, Prof. Chovanec focuses on — what else?– China’s real estate problem. Of late, a gap is developing between primary and secondary housing values in many a first-tier metropolitan area in China.

"In several cities across China, prices in primary housing markets (developers selling to homeowners) have begun falling away from those in secondary markets (homeowners selling to other homeowners)" notes the Professor.

Ever heard the story of the crab-fishing village in China which suddenly turned into a boom– town replete with 800 BMWs, 600 Mercedes, 500 Audis, 50 Porsches, and one each Lamborghini, Ferrari, and Maserati? It’s real. Then, there is the possibly even wilder story of a "Hong Kong -listed baby formula producer that was loading up on loans and relending the money to non-ferrous metals, tungsten, and highway companies."

Professor Chovanec observes that "When companies neglect their core business and start speculating in "hot" sectors they know nothing about, especially with borrowed money, it’s a sure sign the market is out of whack. Sometimes it’s because companies themselves are caught up in the "irrational exuberance" of a speculative bubble. Other times, it’s because inflation, price controls, credit controls, or other factors are distorting normal incentives. In any case, it’s a big red flag that something is seriously wrong."

Until tomorrow,

Jon Nadler
Senior Metals Analyst — Kitco Metals

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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