In The Lead – Payrolls Hit Pay Dirt

by Jon Nadler, Kitco Metals Inc. on January 6, 2012 · 0 comments

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Precious Metals CommentaryAlmost all was quiet on the market fronts ahead of the US Labor Department’s pivotal December report this morning. The euro was still struggling near 15-month lows under $1.28 as yield on Italian ten-year bonds climbed to 7.12% and prompted the ECB to undertake a sortie into the market and buy some Italian and Spanish debt. Banks in Europe are continuing to sit on whatever cash they can get a hold of and they continue to keep such funds in the care of the ECB as opposed to lending it out.

Meanwhile, in a continuation of the ratings derby to the downside, Fitch’s Rating took the scissors to the rating of Hungary and trimmed it to the BB level. The fear remains pervasive and the state of suspended animation continues to plague regional investors. The common currency is on course to notch its fifth weekly decline against almost all of its rivals and gold fans must not lose perspective of that stark reality especially given the recent pattern of tandem gold-euro trading we have all witnessed.

There is also another potential threat that at least parts of the EU — if not the whole region- are now facing. The agreement in principle to ban Iranian oil imports is making for a situation whereby crude prices could spike back to record highs not seen since 2008 and whereby Europe’s economic woes could be seriously aggravated. Consider Greece, for example. The country imports 30% of its oil from Iran. Italy would be similarly vulnerable and the current threat of a mild recession could turn into Europe’s nightmare scenario if a quarter million barrels of Iranian black gold do not make it to the region. Saudi Arabia has promised to plug any gaps that the supply of oil might experience in the event the import ban comes into existence.

Well, the US jobs report certainly did not disappoint this morning. America added 200,000 jobs last month and the country’s overall unemployment rate fell to 8.5%. To be sure, the growth in positions was not the result of a quarter million mall Santas walking the halls of US shopping centers. The Labor Department’s numbers actually indicate that as many as 212,000 jobs were added to the private sector if we were to take out a shrinkage in the number of government positions. Last year, 1.64 million jobs were created in the USA. There are schools of economic though however that estimate that "full employment" these days anyway, might be in a broad range of from 4.5 to 7 percent. By that metric, the shaving of another 1.5 percentage points from America’s current joblessness might go a long way towards satisfying a very important target.

This morning’s figures remain some distance from what certain market observers feel is needed for the US economy to be on course to make a serious dent into its unemployment level. If the American job market is to be perceived as growing at a robust enough pace, then it is thought that it must add roughly 350,000 positions on a monthly basis as we go forward. There are some signs that the trend is headed into such a direction, certainly if one looks at the country’s automotive sector as well as its private sector. The recent and decent growth in America’s GDP could be the support factor that the job market really needs at this juncture and the hope is that Europe’s travails do not become the "X" factor that could derail recent US growth patterns.

As mentioned in previous articles, the Fed is embarking on not only new communications policies as we head into 2012 (regular press briefings, the disclosure of Fed officials’ interest rate projections) but perhaps also on something else that matters to the markets and to its growing body of watchers; inflation targeting. It appears now that the Fed is but one step away from stating an explicit numerical target for US inflation levels. While the targeting of a certain inflation threshold is achievable, the Fed’s other mandate (employment levels) might be a ‘taller’ order to fulfill. Anyway, the added transparency that the Fed is signing up for has at least partially and temporarily quieted some of its most vocal critics. It appears they are more preoccupied with winning public support for their campaigns to be elected Chief Executive than with the abolition of the US central bank…

Gold prices opened on the nervous side this morning but eked out an 80-cent gain to start the final session of the week at $1,622.20 per ounce. The dollar’s current strength (it is trading near one year highs) is continuing to hold gold back from convincingly surpassing the $1,633 (200-DMA) resistance area and from trying to aim for at least $1,700 or so given the geopolitical tensions at hand. London-based Sharps Pixley notes that the "firmer dollar (in election year) could provide a drag on runaway gold prices."

The analytical team over at Standard Bank (SA) noted in this morning’s commodities report that "[gold]physical demand remains relatively light, although we have seen a pick-up in Indian buying ahead of the upcoming religious festivities. However, as we’ve highlighted before, the weaker rupee is dampening this demand, and we don’t expect it to provide the same measure of support that it has in previous years. Chinese demand for physical gold has been fairly strong this week ahead of New Year celebrations which begin 23 January."

Silver dropped a penny to open at $29.36 the ounce. The picture was mixed in the noble metals’ space where platinum was unchanged at $1,412.00 but palladium fell $11 to the $628.00 mark per ounce. Subsequent market action had gold slipping by $5 to $1616, silver falling 44 cents to $28.93 and platinum and palladium recording losses of $13 and $15 respectively. Background metrics included a half-dollar gain in crude oil (quoted at $102.29 per barrel basis WTI) and a small climb in the dollar index (to 80.91). US equity futures greeted the Labor Department’s good news with additional gains. However, those gains did not translate into a good initial half-hour for the Dow; it lost 67 point to fall to 12.348.30 at last check.

Speaking of market metrics, the most recent CME statistics show some heavy-duty increases in the volume of precious metals contracts that were traded last year. While gold contract volume surged 9.9% to more than 49 million, silver contract volumes spiked 52.9% higher and tallied over 19.5 million. NYMEX platinum and palladium contract volumes experienced a 34 and 26 percent expansion respectively. The real doozy however took place in the COMEX E-Micro gold contract niche where volume went from 23.5K contracts traded in 2010 to nearly 475K in 2011 (a 1,916% jump). With gold prices having been where they have over the past three years, the addition of a ten-ounce contract by the CME could not have been timelier. Small investors have obviously rejoiced.

Meanwhile, the continuing discount in platinum versus gold price is prompting spread-trading aficionados to alert unaware investors to an opportunity that basically has not been on the scene in nearly three decades. The larger than $200 inversion in platinum’s value (as against a historical premium of from $200 to $400) vis a vis gold is still manifest despite the ten-fold higher gold production figures and the 35-fold more rare total available supply that platinum enjoys. Given the intensity of platinum-group metals usage in the automotive niche, it is worth mentioning once again that — for example-US car sales, which had fallen from an annualized level of 16 million in 2005 to 9 million during the financial crisis, have returned to the 13 million mark last year and are still aiming for higher ground in 2012.

Recent Barclays Capital projections have platinum potentially reaching a $1900 pinnacle during the course of this year. On the other hand, Deutsche Bank opines that the discount to gold might stay with us for another year and a half. Platinum is believed to have closed out 2011 with a small, 195,000 ounce surplus condition. As well, Deutsche Bank believes that palladium might be the "better pick" in the noble metals’ space as far as investment opportunity in 2012 is concerned. For our money, a bit of both (plus some rhodium) might not hurt in rounding out an already existing core gold allocation.

We close this week with a fascinating Bloomberg piece on the aging of China. It has often been said that China might grow old before it grows wealthy. Reading this captivating yet also devastating article should be worth your while sometime this coming weekend. Not everyone is facing a Happy Year of the Dragon.

Until Monday,

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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