In The Lead – This Time is Different. Yeah, Right.

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

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Precious Metals CommentaryNew Gold prices once again broke below moving averages as sellers emerged in the wake of a fresh party spoiler by rating agency S&P. With just hours to go prior to the pivotal EU meeting the by now (in the minds of some) notorious firm issued a blanket warning on any and all eurozone debt. Critics have labeled S&P’s "well-timed" warning issuance as a deliberate attempt to meddle in the region’s politics and they see it as aggravating an already quite bad situation.

In fact, one member of the ECB’s Governing Council, Ewald Nowotny (Austria) flat-out declared that "rating agencies are assuming a political role" with these kinds of steps. The S&P alarm bell managed to pull the rug out from underneath the euro overnight and it gave rise to a fresh set of gains in the US dollar while sinking commodities pretty much across the board. The euro broke to under the $1.34 mark, French and even German bonds took one on the chin, and bellwether copper sank 1.74% this morning. Merci, S&P.

Gold spot fell to just under $1,705 per ounce in early dealings while silver lost about half a dollar and slipped to just above the $31.50 per ounce bid level. Gold continues to be impacted by the funding squeeze in Europe and thus finds itself $100 away from a level it must break above ($1,803) in order to have a chance at revisiting previous highs or trying to set new ones.

As for today, traders are now digesting the news that not only is S&P considering slashing into the ratings alphabet soup of 15 eurozone nations, but that it is also contemplating lowering the AAA rating previously assigned to the European bailout fund (!). The confrontations with S&P are possibly about to turn ugly as some have suggested that the agency’s warning issued on Monday was in retaliation to the European Commission having announced plans to turn the regulatory screws up a notch on rating agencies last month.

Team "Merkozy" has basically agreed upon the need for a new eurozone treaty. However, this new version is thought to be a tough one; complete with automatic sanctions for member nations that spend more than they can afford to, and with no more ‘haircuts’ for bondholders. Ms. Merkel’s two ‘sacred cows’ also be featured in the to-be-yet-adopted treaty: i.e., the ECB will not become a lender of last resort and eurobonds will not see the light of day. At any rate, this week’s summit might indeed be an apex of sorts for the crisis that has completely dominated the year’s markets and headlines. You can hear the fiat currency/ hyperinflation doomsday writers scrambling for new scary material right about now…

The time has once again come for another bit of myth-busting. Surely, you have by now read a plethora of articles by such newsletters as the aforementioned ones as to the likelihood of China gobbling up massive gold tonnage, demanding US gold, and/or turning sour on the US dollar and unceremoniously dumping it from its huge reserves. Well, not so fast, says erudite research house CPM Group New York. In the firm’s latest market commentary the following debunking of such wacky ideas is presented as follows:

"Some gold market commentators, in China as well as in the United States and Europe, have suggested that the Chinese government might someday demand the gold in exchange for some of its holdings of U.S. debt, but this runs into two problems: First, again, the small size of the value of U.S. gold holdings compared to the volumes of its debt held by the Chinese government. More importantly, however: There is no clause, agreement, or legal statute that says the U.S. government is or could be compelled to hand over its gold in exchange for Treasury bonds. That link was severed in August 1971. Interestingly, the Chinese government is fully aware of both the folly and futility of such thinking. The head of the Chinese Investment Corporation, the Chinese sovereign wealth fund created in late 2007, in December 2011 stated the official wisdom, which is that the Chinese government would be interested in finding a way to use some of its U.S. dollar holdings to invest in infrastructure projects within the United States, to help rebuild the U.S. economic capacity and provide jobs in the United States."

Ironic? Not when you consider the vested interest at stake. Keep those large grains of pink Himalayan salt handy for when you run across the next "China to Dump US dollars/debt/etc" newsletter…

On the ‘good news’ front, a surge in German factory orders resulted in at least one commodity trading near three-week highs; crude oil bounced around the $101 per barrel level as speculators digested that bit of news while also keeping an eye on developments on the Iranian situation. There are reports that the country’s Revolutionary Guards have been placed on a war footing while President Ahmadinejad repeated that his country will not budge from its nuke programmes. US equity markets made an early attempt at gains but slipped into the red as regional bank issues presented a drag on the Dow.

Meanwhile, there is a notable absence of physical gold demand on display, especially in India where the yellow metal is trading within striking distance of all-time highs owing to the rupee having fallen hard and where price-conscious shoppers are once again crossing their collective arms. Funny, certain newsletters would have you believe the complete opposite scenario is taking place…

The downside ‘must-hold’ level in gold is also about $100 away at this point, but, if broken, it could open a path towards the $1,300 value zone in quite a hurry. The first line of defense at this point is the $1680-$1700 zone and technicians will be eager to see if that holds up. A decline of $13 per ounce was noted in platinum to $1,503 while palladium managed to still rise $4 to $636 the ounce. We covered palladium in-depth in yesterday’s report so let’s take a quick glance at the latest news of importance to platinum fans.

According to estimates by Morgan Stanley global automakers will likely use some $7 billion worth (4.5 million ounces or so) of the noble metal; about 17% more than they are thought to have demanded in the current year. Such expansion in the demand for platinum could narrow this year’s supply surplus of 295.000 ounces to only 81.000 ounces. On the back of such an improvement in fundamentals analysts polled by Bloomberg news expect that the metal’s average price in 2012 might rise to $1,845 per ounce; some 22% higher than that of 2011.

As we turn into the home stretch of this turbulent year, it might be worth taking some timeout to ponder the fact that perhaps the uncertainty and the crises we have been witnessing are anything but surprise event that should have us rush to declare that the ‘unthinkable’ is taking place. Mind you, it turns out that the Mayans never predicted an apocalypse in 2012. Really. However, one, Benoit Mandelbrot, a mathematician, and many physicists after him, have been able to ascertain that such large and violent events are in fact the most reliable constant when it comes to economics. Shocked? Perhaps a thorough reading of this article by theoretical physicist Mark Buchanan will help.

Words of infinite wisdom from Mr. Buchanan: "It seems that we’re complete suckers for the illusion of certainty and the seeming unlikelihood of the unthinkable, even though financial and economic history is one long string of crises. This time always seems different, until it turns out not to be."

You may safely add that last sentence to your personal reading radar the next time someone tries really hard to tell you that not all bubbles are created equal, that 2011 is not 1980, that this is the "mother of all crises’ and so on…

This concludes today’s public service announcement…

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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