In The Lead – Let’s Twist Again?

by Jon Nadler, Kitco Metals Inc. on June 20, 2012 · 0 comments

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Precious Metals Commentary"Fedspectations" of "let’s twist again like we did last fall" notwithstanding, gold prices lost more than $30 between Tuesday and Wednesday morning’s early dealings and breached the $1,600 support level once again.

The speculative crowd was said to be "flattening its books" ahead of the Fed announcement, but it at once also appeared to be factoring in an accommodation from the Fed as well as the fact that such accommodation would only be in the form of a mild OT gesture intended to show that the Fed is cognizant of recent US economic metrics and that it wants to look like it is doing something about them.

As regards such Fed-oriented betting, the hedge fund crowd has been quite badly hurt by the commodity markets’ May "performance." The average fund invested in that space lost more than 3% last month on wrong-way bets on "stuff." This was the third year in which the month of May ended up as a disaster for these types of funds. For some, such as Astenbeck Capital management, the losses were as large as 14% in May. Meanwhile, short-commodity players such as Clive Capital gained about 10% on the month as they wagered that energy prices would take a hefty dip — which they certainly did (17% to be exact). Gold prices fell 6.3% last month.

Most of the pre-Fed announcement betting this morning was centering on the possibility of an extension of Operation Twist — call it OT v1.5 if you like — for a few more months. Barclays Capital analysts saw such a development as actually US dollar-positive and not conducive to risk appetite enhancement. The reason why inflation-fearing gold bulls do not view O.T. v1.5 — if it happens — as playing into their hand is the very nature of the program.

Buying longer-dated debt with the proceeds from the sale of short-term Fed holdings does not expand the central bank’s balance sheet, it is not tantamount to "naked money printing" and it tends not to carry the risk of unleashing Zimbabwean-style hyperinflation. Then again, neither did QE1 and QE2 but you would not know it, judging by the heavy bets that were placed on gold anticipating mega-inflation in those programs’ wake.

CitiFX gave the following odds for Fed action this morning: 60% O.T. extension, 20% QE3, and20% stay the course. Mizuho Securities USA believes that the Street will be disappointed by the results of the FOMC meeting. Goldman Sachs on the other hand expected a full-blown QE3 as of last night, to the tune of another $600 billion in Fed balance sheet expansion.

Spot gold was bid at $1593.50 per ounce at this morning’s lows while spot silver fell to 9 pennies beneath the $28 level losing more than 50 cents ahead of the open. Spot platinum traded $21 lower at $1,456 while palladium lost $6 to trade at $619 the ounce. Marginal changes were noted crude oil (down 25 cents to $84.28 per barrel) and the US dollar (down 0.19 to 81.26 on the index).

Copper declined by 0.76% and the euro remained slightly above $1.27 after in reached that level on Tuesday, mainly on account of the dollar selling off a tad ahead of today’s Fed announcement. Some technical analysts have opined that if gold gets a shot of adrenaline from a more meaningful action by the Fed and takes out overhead resistance around $1,640 the momentum plays could extend its rise to as high as near the $1,700 area but that such an event ought not to be construed as the commencement of a "moonshot" phase in the metal towards new records.

Meanwhile, over on the physical side of the gold market, news sources note continuing apathy among Indian would-be buyers and a holding-out for a dip in gold to under the 30,000 rupee level. Premiums on gold bars are ranging from 60 to 80 cents above spot gold prices but there are few takers. A leading bullion trader noted the other day that India sits upon gold reserves estimated to total over 14,000 tonnes but that very little has been or is being spent on R&D in the mining niche. To wit, India — still the world’s leading taker of gold-has only produced 2.5 tonnes of gold as recently as 2008-2009. By comparison, China, which has invested heavily in this space, currently produces 320 tonnes per annum-the most globally.

Scrap sales continue at robust levels in India as well as in Thailand and gold dealers in India report some apprehension among clients about the strength (or lack thereof) of this year’s monsoon. The rainy period fell short of expectations (it was 41% below averages) for the first fortnight of this year’s season and one gold dealer cautioned that if the pattern persists (and leads to poor crops) then rural bullion demand in that country might experience a dip on the order of 60% or more. The country’s gold imports have already seen a 52% drop-off in May/June and thus the focus on the current weather is quite justifiable.

There are indications that if the normal rainfall does not materialize, and gold prices remain at or near where they are now, India might only take in 650 tonnes of the yellow metal this year. India’s gold demand would normally pick up between the months of August and October but the window between June and September is vital for such subsequent gold demand in terms of how much precipitation it produces and what size harvests it leads to. Therefore, prayers that El Nino does not wreak havoc on India’s monsoons are presently as abundant as the amounts of liquid fallout from the sky that are being hoped for this summer.

"Fallout" of another kind — financial and economic — appears to be minimal at this juncture as regards to the effects of the European crisis on the USA. Former Treasury Secretary Paulson has opined that America will emerge relatively unscathed in the wake of the turmoil that has impacted the EU. While the debt debacle certainly presents a drag and is worth keeping an eye on, the likelihood of a catastrophic outcome has diminished in the view of Mr. Paulson.

That said, the gentleman cautioned that the US will continue to "muddle along with growth that really is not enough to make a dent in [un]employment." As we previously noted, there is also a chance that the US may have experienced a "Swedish event" and that from here forward "full" employment might not be anything better than around 7% unemployment, owing to the number of jobs that have permanently been lost amid a structural change in the labor market during and after the crisis of 2008-2009.

Speaking of the same timeframe (2008 forward), while some of the "change" that President Obama promised before getting to occupy the White House has certainly not yet materialized, the results of the most recent surveys of his country’s denizens are… not what’d you would normally hear on your average Fox news program. Go figure.

A Bloomberg National Poll found that 45% of Americans believe that they are better off than they were at the time of Mr. Obama’s inauguration. 36% of US subjects polled stated that they were worse off at this time. One respondent noted that he was "just tired of the doom and gloom" and that people need to "stay positive." The findings appear to be clashing with recent economic statistics and they indicate that — according to the poll director — "gloom at the personal level seems to have bottomed out." 49% of Americans appear to favor Mr. Obama’s recipes for the US economy as opposed to 33% who are leaning towards the economic vision of Presidential candidate Mitt Romney.

Until Friday, we say, let everyone else make a Fed(eral) case out of "it…"

Jon Nadler

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal 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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