In The Lead – Nothing Newt Under The Sun

by Jon Nadler, Kitco Metals Inc. on January 23, 2012 · 0 comments

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Precious Metals CommentaryThe euro had a hesitant start in the new trading week that opened over in Asia overnight as private creditors had failed to come up with a firm agreement with Greece on a debt swap deal. However, the initial wobbliness in the common currency soon dissipated and made room for optimism and the rekindling of the ‘risk-on’ sentiment that, by this morning, had it trading at a near three-week high at the $1.30 level against the dollar.

Such an elevated mood brought about some gains in the precious and the base metals spaces this morning. Of course, crude oil was also assisted in notching a better than 1% gain by the EU decision to ban Iranian oil imports as of July. The announcement was greeted with more threatening posturing by the recipient of the proposed ban.

Gold prices had traded as high as $1,678 overnight but they opened nearer to the $1,670 level — one above which current resistance barriers are still found. The yellow metal has reaffirmed its recent correlation to the euro once again and it does manifest the potential for an extension of its recent upward correction to the $1,700 and just above area.

Much of the strength and longevity of the push towards those higher figures will therefore depend on the flavor of the news coming out of Europe over then next week or so. Private creditors who are about to take some fresh ‘hairstyling’ sessions in connection with the Greek debt they own, have said that they have reached the end of their road insofar as how much they are willing to have taken ‘off the top’ and have passed the proverbial ball over into the decision courts of the EU and the IMF.

Speaking of the IMF, its head, Ms. Lagarde, speaking just ahead of the Davos meeting of the World Economic Forum this week, noted that the world’s economy could experience what she called a "1930s moment" (some "Kodak moment" that would be at this juncture!) if the European debt crisis is not truly tackled. A major collapse in global demand (and of course huge asset liquidations as well) could ensue if various nations continue to fritter away the opportunity to properly address certain problems. Ms. Lagarde’s institution is set to release its projections for global economic growth tomorrow.

Ms. Lagarde also reaffirmed the need for an expanded lending capacity by the IMF and thus the quest for half a trillion dollars to bolster the fund’s coffers is thus actively on. On the other hand, there might not be too many problems to take note of as regards the US economy when the country’s latest quarterly GDP report comes out this week. Estimates are that America’s economy expanded at an annualized 3% rate in the final trimester of 2011. We shall know specifics this Friday.

Whether or not the Fed will choose to ‘stay the course’ in the wake of the GDP release’s metrics remains to be seen. For the moment, the "Bernanke program" to tackle price stability and employment levels simultaneously (derided by many as "disastrous") has shown that the US central bank has actually been able to circumvent "a catastrophe." As a result, many former critics of Mr. B. have now come around to acknowledge that the "Big Gamble" taken by the man has panned out, and that the only "economists" still laughing at his policies are now (still) found in the hard money newsletter cottage industry.

Speaking of policies of the monetary kind, would-be US President Newt Gingrich has indicated that he would lean towards creating a committee to study the feasibility of a return to the gold standard by the US. Aside from perhaps having been to too many New Orleans-based hard asset investment conferences, and possibly taking monetary policy advice from certain dollar-morticians (who are thought to still be working for Ron Paul’s campaign), Mr. Gingrich’s golden scheme unfortunately does not turn out to be as good…as gold. Nothing new under the sun here; we have often seen and heard politicians promising the moon and the stars to prospective voters, irrespective of the quasi science-fiction flavor that their visions entail.

To wit, Marketwatch political watcher Jeff Bartash remarks that: "Returning to a gold standard now, however, is virtually impossible. Aside from Ron Paul, a gold advocate, few politicians in Washington support the idea. Nor do the vast majority of economists. There’s even less support overseas. Governments don’t want to be limited in the amount of money they print by a source of metal that’s in short supply. If the U.S. went back on a gold standard, the government probably would have to set the exchange rate at an extraordinarily high level, potentially damaging the economy in the short run. Otherwise other nations such as China would quickly exchange their excess dollars for gold and drain the bullion out of Fort Knox, where much of the nation’s yellow metal is stored.

The latest in CFTC reports indicate that the positioning in the gold market’s speculative niche has improved a tad, but that there remain some doubts about the precious metal’s near-term price prospects at this juncture. The reported situation is not quite the same in silver, where the ETFs have made a fresh buying sortie in the latest reporting period and loaded up on over 340 tonnes of the white metal. This, just in case anyone was still left wondering why the white metal managed a $1.5 pop ahead of last weekend, with not fresh news on the industrial demand side, or from China, or the EU.

Silver traded near the $32.50 resistance level early this morning in New York. Standard Bank (SA) analysts opined this morning that despite the sizeable additions by silver-based ETFs (best in 12 months) the general silver market spec positioning is still relatively weak when judged by the net longs as a percentage of open interest. That metric is running at 11.8% currently as against an average of 15.7% seen in 2011.

Thus, the remaining question is at what price target above current levels the silver specs will be mobilizing their computer-driven profit-taking forays. A better price outlook for platinum was also reflected by that metal’s increase in net long positions albeit the size of the total short ones remain considerably high at this point. The noble metal traded near $1,555 this morning (up about $15) and its discount to gold fell to about $120 an ounce.

Palladium advanced $2 to trade at $684 and it has now tallied gains on the order of 11% this month, almost as good as platinum’s 13% advance since recent lows at year-end 2011 were put into place. Rhodium was $75 higher on its bid quote this morning, with indications coming in at the $1,375 mark per ounce. You might wish to read the interesting article on the aging US vehicle fleet and how it relates to the PGM complex, written by Kitco’s Allen Sykora. There are a lot of 10-year old+ automobiles soon to be headed to the scrapyards and their replacements could bring smiles to the automotive industry in the US.

The initial price enthusiasm in the precious metals’ space was dealt a bit of a setback as the trading morning completed the first hour of action. Gold went into negative territory under the $1,667 level while silver fell 25 cents to the $31.96 mark. While platinum was still ahead by $7 an ounce, palladium declined a net $2 from its previous close. Following that short-lived swoon, the metals all regained their composure and posted once again solid gains but the volatility remained quite visible ahead of a slew of news yet to come from the Fed, Davos, and of course, Athens. PGMs continue to still benefit from news related to labor action at Impala Platinum’s South African facilities. The standout stalwart performer remained copper; it maintained a 1.51% advance for the morning.

The above brief retracement in values took place despite a still sizeable decline being manifest in the US dollar on the trade-weighted index (down .075% at 79.76) and was attributed to quick maneuvering by spec funds and the rising perception that perhaps ‘risk-on’ at "full speed" was a bit premature of an attitude to adopt this morning given that nothing concrete has yet come out of Athens in terms of news and that the Bundesbank now sees that country’ economy as moving "sideways" in the near-term. "Sideways" for Germany could equate "skids" for various other EU member nations…

Stay tuned…to any European station you choose.

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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