In The Lead – Eskom, I Need More Power!

by Jon Nadler, Kitco Metals Inc. on January 11, 2012 · 0 comments

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Precious Metals CommentaryTuesday’s rallies in commodities and equities did not appear to be following through very convincingly judging by the early patterns manifest this morning. Much of yesterday’s surge was due to perceptions that it was okay to take some investing risk based on the reading of Chinese economic fortune cookies.

The country’s import/export data showed a marked slowdown in December on the import side of the equation (which fell to a two-year low).

The contraction gave rise to speculation that the government will address the situation by easing monetary and fiscal policy in coming months. Thus, once again, we were treated to speculation-based rallies rather than a buying spree induced by hard (and current) data. If there was a bright spot in the figures from Beijing, it was the 13.4% growth in exports — something that many had feared would also slow given Europe’s debt trials and currency tribulations.

Fitch’s Ratings suggested that the ECB should ramp up its assistance to indebted governments by buying more of their bonds. Especially troubling to the ratings agencies (and to markets) is the condition of Italy. France, for the moment, is still expected to retain its AAA rating. Whether or not the ECB cuts rates on Thursday remains to be seen (most economists do not think so), but some see no harm and only good if the central bank were to ease a bit.

The midweek sessions in overseas markets showed that much of Tuesday’s optimism had dissipated on the back of resurfacing anxiety about Europe’s prospects. German economic data indicates that the European powerhouse is possibly on the brink of recession with a fourth quarter 2011 contraction to the tune of 0.25%. The annual growth rate of Germany also shrank in 2011, slipping from 3.7% in 2010 to 3% last year.

The Bundesbank projects German economic expansion to come in at only 0.6% this year, before rebounding to near 2% next year. The dip is giving rise to doubts about the EU economic situation once again. We already have seen data from Spain that has revealed the largest decline in two years in its industrial output. Spain is Europe’s fourth largest economy. Spanish PM Montoro has warned that his country is skirting recessionary conditions.

The US dollar picked up some steam this morning and repaired some of yesterday’s "risk-on" flavored damage. The trade-weighted index reading for the greenback was up 0.51% early today at 81.265 after having slipped to 80.864 on Tuesday. EW analysis envisions the US currency targeting the 82.60 area on the index but also offers the take that a deeper and perhaps more protracted mini-correction might be in the cards for it provided in closes under the 79.52 mark (last week’s low). The trend remains higher for the moment. The euro once again fell to under the $1.26 level on account of the worries surrounding the Old World and the dollar’s recovery.

Gold prices traded with muted gains ranging from almost unchanged to roughly seven dollars and with bids coming in mainly around $1,635 to $1,645 in early action. Yesterday’s rally was in part helped by robust Chinese gold import data ahead of the Lunar New Year festivities. The yellow metal’s recent climb also might have more energy left in it. EW analysis allows for a potential $1,642 up to $1,700 range on the upside before the next down wave gets underway.

On the other hand, Thomson Reuters technical analyst Wang Tao opines that gold medium-term downtrend is likely to continue during this first quarter of 2012 and that it could bring prices to lows near $1,400 per ounce, and that such a level is not necessarily the lowest possible one. A price target of $1,269 has been allowed for in the report. Any dip beneath the recent $1,530 low might be the one to usher in the trek towards $1,417, initially. The T-R analysis also allows for a first foray in gold prices towards $1,700 before the downtrend resumes.

The T-R technical analysis also envisions crude oil dropping to lows near $79 per barrel as that commodity too, is riding a downward "c" wave. As for silver, the projections made by Wang Tao include a price target of $20.40 to $22 on the downside over the next three-month period. Such a bearish outlook has apparently been confirmed by the previous head-and-shoulders formation that was put into place between October 5 and December 8 last year in silver. Only a rise above $33.79 per ounce would negate the bearish trend in the white metal at this juncture.

Similarly, silver has the potential to touch prices ranging from $30.26 up to $32 before resuming its downtrend- a process that would be validated by a fresh breach of the recent low near $26 per ounce. The white metal traded about a dime lower this morning with a bid near $29.90 the ounce. Platinumadvanced more than 1.44% this morning, touching $1,483 per ounce while palladium did not join the rally and fell $2 to the $633 level. Analysts at Standard Bank (SA) have labeled this surge in platinum as the "Eskom Rally." Read on.

Here is their in-depth analysis of the power supply situation in South Africa and the effects they expect it to have on platinum and the PGM niche overall. First, the news:

"South Africa’s power utility, Eskom, has issued an alert that the country’s electricity network is under severe pressure. These warnings come on the back of seasonal power station maintenance that has reduced generating capacity. At the same time there are indications that some mines in South Africa have received request from Eskom to have a look at their electricity consumption for possible savings." 

And now, the SB analysis — which believes the current rally may not have very strong legs:

"Arguably the strong rally platinum received over the past few days was on the back of the above news. It has been our view that Eskom might cut electricity to major mines, but we have believed, at least since 2009, that this is only a small chance. We continue to hold this view despite the latest warnings. Eskom’s reserve margins have improved relative to 2008 and coal stockpiles are higher. Also, the mining sector had had to reduce electricity usage by 5% in 2008 and has kept it at these lower levels, which might imply that it won‘t be first in line to have to reduce consumption this time around. As a result, although we believe that platinum at $1,400 is $100 to low from a cost-of-production perspective, we believe the risk of Eskom cutting electricity supply to mines should fade and so should any rally that found support in that risk."

No change was noted in rhodium; it was quoted at $1,250 per ounce following yesterday’s small decline. Crude oil declined to $101.34 mainly on account of the dollar’s gains and despite continuing Iranian tensions and stocks fell in New York with the Dow showing a 50-point drop in the first hour of trading action. Wall Street was anticipating the release of the Fed’s Beige Book and the parsing of its contents after the 2 p.m. hour in New York.

While investors are trying to divine what the future holds for the US economy, based on the facts they will ascertain in the Beige Book, there is at least one international body that believes that the future may not look very rosy when it comes to the global one. The World Economic Forum warned today that the pattern of rising nationalism, protectionism, and social upheaval that it is witnessing around the globe could lead to a "dystopian future" and erase the progress that has been achieved by globalization.

The WEF points to the rising number of employment-prospects-bereft youths and to a similarly rising number of state dole-out-dependent retirees (in already debt-ridden nations) as a volatile combination of negative trends to be cautious about. As well, the WEF is very concerned about the widening chasm between the poor and the wealthy denizens of the world. The Forum’s report comes ahead of the annual meeting it will hold in Davos, Switzerland starting on the 25th. Echoes of 2011’s "Arab Spring" and images of numerous, worldwide "Occupy X" movements are still fresh in its’ members’ minds. No "Mayan calendar visions" there, but still enough to nervously fret about in coming years…

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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