In The Lead – How To Train Your (Inflation) Dragon

by Jon Nadler, Kitco Metals Inc. on January 12, 2012 · 0 comments

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Precious Metals CommentaryRisk appetite was still manifest in the commodities and equity markets this morning on the heels of better-than-anticipated Spanish bond sales and a decent reception for Italian bond offerings.

This is not to say that the euro had a markedly better morning; it was still trading at $1.273 against the US dollar and the latter managed to turn positive on the index after the release of US economic data (more on that topic, later).

On the other hand, as far as the euro is concerned, the assurance that France will retain its triple-A rating by Fitch Ratings (who at the same time warned about Italy’s status) was probably a wash. Some say that France had resigned to the idea of a downgrade so the mood was more upbeat in certain markets after yesterday’s soothing words from Fitch.

The euro was neither helped nor hurt by the ECB’s decision to stand pat on interest rates and to take a wait-and-see attitude during what appears to be an intermission in the European debt crisis. Albeit parts of the EU are teetering on the edge of recession (whilst others are already in one) the ECB appeared comfortable in holding off on easing following its previous two rate cuts. The central bank did make it clear however that "there remains a substantial downside to the region’s economic outlook" and that therefore, if conditions warrant, the rate scalpel might be activated down the road.

Gold prices opened with a gain of $11 at $1,654 the ounce in New York while silver advanced about 40 cents to the $30.35 level. Both metals are in the midst of an upward push which might carry them to the $1,700 and $32 areas respectively, before their downtrends resume. Much speculative chatter has been on display in the past few days on the topic of rising Chinese gold imports. That is, if one considers 3.2 tonnes of bullion as being a "whole lotta gold" (it was the level of October imports).

Some see signs that the PBOC is covertly (?) buying bullion (we do not sign on to that idea) while others point to the calendar and remind us that ’tis the season to go bling (Year of the Dragon). There is nothing covert about buying bullion for reserve purposes from official imports and the PBOC has shown a pattern of buying its gold (if any) from domestic production (clearly at much lower that global gold market prices).

You might also ask yourself how much of October’s 3.2 tonnes might have been taken by the PBOC after the bulk went into jewellery shops. Even if the speculation were to have validity, buying a tonne or two (literally) is not very… central bank-like. The latter scenario (New Year) is the more likely explanation, as first-quarter gold buying patterns have been with us for quite some time as regards China. The Lunar New Year is a traditional time to give gifts of gold to family and friends. That is not the same as making an investment into the asset class.

In fact, the analytical team over at Standard Bank (SA) noted overnight that "Precious metals were unable to sustain their upward momentum into the overnight session in Asia, trading mostly sideways. Poor demand out of China, both in terms of futures and physical buyers, contributed to the lacklustre performance. This is surprising, given that we usually see a seasonal pick-up in physical gold demand from China ahead of the New Year celebrations."

Something to bear in mind before buying all the Chinese-flavored bullish gold chatter out there in abundant supply.

China’s inflation rate fell for a fifth month in December and it reached a 15-month nadir with the tallying of a gain of 4.1% in consumer prices. China watchers feel that with such a reading of the country’s inflation thermometer, the government may feel more comfortable with a shift towards stimulating growth. This is far from a full-stop and go-into-reverse paradigm, however. The PBOC is nowhere near abandoning its vigilance on inflation and on waning growth. And, yes, there are still real estate-flavored woes to deal with.

At any rate, it is becoming apparent that the monetary maneuvering that Beijing conducted last year has yielded some fruit. Has this succeeded in slaying the inflation dragon, or has it merely managed to grab it by the tail and the fight goes on? Stay tuned. Inflation marched upwards at the rate of 5.4% in 2011 and that was 1.4% more than the government officially desires. To be fair, the reported decline in December’s inflation level was only one-tenth of a percent and local stock markets continued their sell-off as they were apparently more preoccupied with corporate profits rather than falling inflation.

On the other hand, the same declining inflation pattern could arguably also lead to less of a compelling need for China’s denizens to continue to load up on a lot of gold bullion. As well, the country’s recently rising gold imports could add a sufficient amount of funds to a trade deficit to convince the government to curtail gold imports to a notably lower level. And then, of course, the question; "Then what?" comes to mind. If India appears not so keen on importing as much as it did in previous years, (and it is not, if you look at recent Bombay Bullion Association figures) then who will pick up the slack?

The action in platinum and in palladium moderated somewhat this morning following a flurry of speculative action seen earlier in the week. While electricity supply problems continue to plague South Africa’s mines, the countervailing news that China’s auto sales have slowed in 2011 and are now trailing those of the US for the first time in 14 years put a damper on further robust gains in the complex this morning. Platinum advanced $1 to $1,493 while palladium fell $2 to $640 per ounce.

And now, we go over to the USA for a roundup of pertinent economic metrics. The US Commerce Department reported that the country’s retail sales grew by 0.1% in December (to about $400 billion). Santa did not appear to be as kind to shopkeepers as economists had anticipated (when they estimated a sales growth of 0.3%). In fact, if we take out a 1.2% rise in car sales, America’s retail sales actually fell by 0.2% in December, and core sales did decline 0.2% for the first time in twelve months.

Another, not-so-hot statistic was released in the form of a rise in jobless claims filings in the latest week of reporting. It could be that the 24,000 claims are the result of many mall Santas being let go, but the computation actually makes sense in a seasonal kind of way. Jobless claims normally rise in the first couple of weeks of January as firms cut back on temporary help and as mail and delivery firms also go on hiatus during the in-between Christmas and New Year week. What should be kept in mind here is that, overall, jobless claims have recently fallen to their lowest level in three years and that the US economy did add 200,000 jobs in December, continuing to show improvement in the country’s economy.

The Fed’s Beige Book noted as much, when it was released on Wednesday. The US central bank stated that the American economy expanded at a "modest to moderate" rate in December but that housing remained "stagnant-to-sluggish" (despite the fact that foreclosures at least, reached their lowest level since 2007). The upcoming FOMC meeting on the 24th of the month will thus, once again, be defined by very likely continuing divergent views on easing (versus not) among its members. The Fed’s Mr. Evans said that the central bank should consider further easing, while Mr. Bullard recently said that he sees no need for same given recent economic metrics. Another Fed official, Mr. Plosser, said that improving US economic conditions may warrant a Fed rate hike before the mid-2013 "commitment" timeframe. All of this leaves us with a fair amount of speculative-flavored commentary on the Fed yet to come. There is no alternative.

Speaking of speculation, prediction, commentaries, and such, consider Marketwatch’s recent list of what noises to consider tuning out in 2012 when making your investment decisions. Still expecting a muni-bond collapse? Still anticipating a dead US dollar? Still waiting for hyper-inflation or a Dow Jones = 1 oz. of Au? Go ahead, read and ponder. The only unsure thing thus far remains the validity of the Mayan calendar and the late December debacle it portends. We will tune in for that one.

Until tomorrow… stay tuned.

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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