In The Lead – “Yes, We Cain? Ummm…No”

by Jon Nadler, Kitco Metals Inc. on October 14, 2011 · 0 comments

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Precious Metals Commentary Once again, optimism and risk taking returned to the scene as dollar sellers pushed the US currency 0.40 lower on the trade-weighted index and the euro along with European equities gained value ground. Euro-centric speculators lifted the common currency above the $1.388 level this morning, emboldened by hopes that the G-20 meeting in Paris will bear some resolution fruit to the now way-too-extended crisis that has gripped the continent for most of this year. The euro was setting the trading stage for the best week it has enjoyed since January. In trader terms, that’s like… 10,000 BC.

The top agenda items to be tackled in Paris by the G-20 include enhancement of the IMF’s "firepower" (read: lending abilities). The word "special" has been used in connection with the issuance of certain potential IMF bonds. It is unknown at this juncture if the word "special" refers to gold or to something else. As well, the size and scope of the EFSF- the European version of TARP- will come to be discussed during the next couple of days. However, some market observers do not place as much importance on the eventual G-20 communiqué as they do on the one to come out of the meeting of European finance ministers, which commences next weekend.

The G-20 tete-a-tete comes amid a fresh batch of downgrades of various types, from various rating agencies. First, Spain’s sovereign debt rating was trimmed by S&P. Then, markets witnessed a jump in Italian debt premia over that of Spain. Later, Fitch’s Ratings placed negative reviews on several European banks and actually downgraded four of them-UBS and RBS among them.

Such creditworthiness views did serve to temper some of the optimism about the outcome of the Paris meeting and also capped the advances in precious metals to some degree. This was somewhat apparent by the 10:30 hour in New York, when gold’s opening gains were trimmed to about only $3 per ounce (and silver’s to a dime), despite a further dip in the greenback on the index. Anyway, let’s continue.

Buoyed by the aforementioned better outlook among currency and equity specs, the commodities’ complex also received a lift and exhibited a spring in its volatility-sprained step. We thus had copper advancing 2.6% and crude oil rising 3.2% as Friday morning’s trading action got underway. Spot gold rose eight-tenths of a percent and touched the $1,685 pivot level once again as buyers made a return almost on "cue" (one day up, one day down, one day… you get the picture).

It has not taken too long for uber-optimism to also make a comeback among traders and media-quoted… bullion vendors. They are currently showing the highest level of optimism about the yellow metal since gold underwent its largest price decline in three years. The resurgence in positive expectations comes despite notable losses that have been sustained last month by some of the most prominent bettors in the space. Their shareholders continue to pose a potential selling threat to bullion if their mood sours further after last month’s dismal performance by a certain fund.

Other market observers opine that the whole complex in commodities is bottoming out that that better days lie ahead. Still, there is a school of thought that sees a multi-month correction in gold lasting… many months. That would be about seven or eight more, to be precise; complete with potential dips down to the $1,400-ish price level. Today, as if on cue after the devastating environmental disaster story about gold mining in Peru that we covered two days ago, damage control-flavored statistical data was released highlighting… gold mining in Peru.

In particular, the World Gold Council (sponsored by global miners) finds that gold mining plays "an important role in [Peru’s] government revenues, with the government collecting around $800 from [the] four mines in 2009." The four largest mines operating in the country account for ten percent of Peru’s foreign direct investment. However, the impact that is being highlighted in the report addresses only the positives of employment and local procurement.

Silver traded 60 to 70 cents higher and was quoted at near the $32.50 level for most of the morning hours ahead of Friday’s ritualistic book-squaring. Platinum and palladium both advanced by double-digits; the former gained $23 to trade at $1,559 on the offered side of spot and the latter climbed $21 to the $618 level per ounce. Standard Bank (SA) market analysts opine that based on " a cost of production basis [view] both metals are too low and they are expected to move towards $1,600 and $700 respectively, towards the end of the year."

A portion of Friday morning’s speculative-flavored optimism was attributed to news from China that inflation slowed somewhat during September. Chinese CPI figures came in at the 6.1% year-on-year level, slowing from their recently alarming peak of 6.5%. PPI also showed some signs of slowing and was reported at 6.5%, down from its own unwelcome pinnacle of 7.5% in July. Specs feel that the numbers might result in a "pause" phase as regards further tightening by the PBOC.

Slowdown in inflation figures aside, there remains a stubborn level of food price pressures in the system and the country’s central bank will need to keep a firm grip on the policy handle in coming months. One month may not a trend make, and inflationary expectations — frequently the bigger fly in the economic ointment- continue to show a lack of easing.

Policies and guidance coming from the PBOC are expected to undergo a fine-tuning in December; that’s when the Communist Party holds its agenda-defining conference. While rate hikes may undergo a temporary phase of "hold" there are hardly any expectations of rate cuts present among analysts at this time. Thus, the Chinese business community is also ‘pausing’ for the moment and will try to ascertain what size and scope lending activity might take in coming weeks.

The US business community, on the other hand, appears less than pleased with candidate Herman Cain’s "9-9-9" tax plan. Some (including a growing number of GOP opponents to it) have called the triple-niner a "job killer" and "empty sloganeering." Entities such as the National Retail Federation, the National Association of Homebuilders have come out and warned that Mr. Cain plans would aggravate retail sales (this comes on a day when US retail sales gave a shot in the arm to the Dow and many other assets) and that it would deepen the already more-fragile-than-porcelain US housing market (ironically most of all, Florida’s — Mr. Cain’s own).

As for Mr. Cain’s last "nine" — the national GST — it is thought to result not only in screaming retailers, but it might also yield transference of the tax burden onto the middle and lower class in America. That is something that-at this particular point in time, and given the country’s mood- could have some… interesting outcomes. Think "Occupy America." At the forefront of such "occupation" might be America’s truckers who are probably shuddering at the idea of a further surcharge on fuel and on heavy-duty vehicles.

One USC-based economist has projected that the tax burden on an American family of four that earns $50K per annum would balloon from $5,100 to $13,500. While most everyone is in favor of solving deficits and of simplifying the labyrinthine and/or Byzantine US tax system, this kind of ‘overhaul’ is not what they apparently have in mind.

Until Monday, do have a splendid weekend, please; even if you choose to spend it camping out all night in front of your nearest Apple store waiting for the iPhone you can talk to.

It is rumored that you can ask Siri the question: "What will gold do next week?" Your likeliest reply will be: "More data needed."

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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