In The Lead – How Sweet Is IT?

by Jon Nadler, Kitco Metals Inc. on September 17, 2012 · 0 comments

Precious Metals CommentaryPrecious metals prices headed a bit lower at the opening this morning, mainly on the back of light profit-taking that ensued after the euro retreated and the US dollar rose owing to apprehensions about Europe and Asia.

Some Japanese firms stopped their production activity in China after violent anti-Japan protests took place during the weekend. The protests came in the wake of Japan’s nationalizing of a group of disputed islets in the East China Sea.

Spain and its possible bailout continue to weigh on investors’ minds despite denials by th IMF that no rescue-oriented discussions are taking place at the IMF or the ECB. Deposits are fleeing from Spain’s banks at a hefty clip ($34 billion were drained in July) and are throwing the loan-to-deposit ratios in certain banks into a situation where lending will become questionable, at best.

Meanwhile, two-thirds of polled Germans are convinced that they would be better off if the euro was not the currency of the realm and if they had stuck with the mark. Nearly half of Germany’s polled denizens also believe they would be better off wihtout the EU itself. By contrast, only one-third of polled Frech folks still miss the franc at this point in time and less than a third of Polish folks believe they would have fared better without the advent of the EU.

Over in Asia, Chinese stock markets tooka tumble in the wake of growing Sino-Japanese tensions over certain disputed islands and following rising perceptions that, unlike the Fed, and the ECB, the PBOC might not only not follow suit and stimulate the country’s decelerating economy, but might actually be forced to… tighten if the present pattern of capital flight and currency strength continues. Contrary to conventional "wisdom" the principal creator of fresh global money supplies since 2007 has been China and not the Fed.

Now that the Fed news has been "baked" into the market equation and the "sugar rush" appears to be wearing off just a bit, participants are once again focusing on the slowdown in China and the structural issues plaguing the financial side of the EU. Spot gold traded near $1,770 and silver near $34.50 per ounce respectively as the  greenback retook the 79.00 level on the trade-weighted index and as crude oil and copper prices declined 0.30 and 0.90% respectively.

Conflicting news regarding physical gold demand was once again on tap overnight. One source (Barclays) reported an increase in Indian gold demand ahead of festival season and based on the fear that if purchases are not made now, the price tags will only be higher in the months ahead. Another source (India’s Business Line) reported that with gold at 32.000 rupees per ten grams, "people who bought gold coins or small pieces of jewellery a few months ago are now selling them for cash." One World Gold Council report notes that Indian consumers are "disenchanted" with the current gold price while local gold retailers report a 20-30 percent decline in foot traffic.

The latest CFTC market positioning reports show that net spec length in gold gained for a fourth week last week, while in silver the net spec length as a percentage of open interest is indicating a market that is — in the words of Standard Bank analysts- "becoming overstretched." The specs do not appear to be particularly bullish on platinum, despite the developments you can read about below, and the specs in palladium decreased positions by almost 16,000 ounces.

Platinum fell $9 to $1,696 while palladium dropped by the same amount to the $686.00 per ounce leve. Rhodium was ahead another $25 to reach $1,325 per ounce on the bid-side. Mining group Lonmin revised its forward-looking platinum sales forecasts owing to the on-going labor strife at its Marikana mine in South Africa. Workers at that mine rejected a wage offer on Friday and remained above ground. On Saturday, local police used stun grenades and rubber bullets to disperse a crowd of about 1,000 protesters gathered near that facility.

Albeit the sales projection cuts made by Lonmin amount to between 50 and 65 thousand ounces for the year that ends this month, the PGM market is still very concerned about output for the noble metal and are quite aware of forecasts for significantly higher prices in months to come, should the troubles down in South Africa persist. That country sill mines 80% of global platinum supplies.

The South African government has vowed to halt all illegal protests and to disarm strikers who have halted production at one gold and six platinum mines across the country recently. CPM Group analysts fear that the political and labor issues have no quick solution at hand and that the platinum market is not only no longer oversupplied but is in a tighter balance than commonly estimated.

Well, it did not take long for the QE3 post-mortems to make their way into the mainstream media. The downgrade of US government debt from AA to AA- by rating agency Egan-Jones (made in the wake of the QE3 news) prompted a plethora of politically-tinged chatter from both sides of the proverbial isle. Senate candidate Heather Wilson (R- NM) issued a schating attack on "Helicopter Ben" and accused the Fed Chairman of doing nothing more than rescuing Mr. Obama and not the US economy or workers.

Ms. Wilson notes that QEs I and II do not appear to have done the job that they were intended to (putting money into the hands of lenders who would in turn help grow the US economy) and she concludes that

"The truth is that both Obama and Bernanke are running out of options. A $16 trillion debt has left the federal government with no fiscal flexibility at all, and the Fed’s usual tools to manipulate money through interest rates are useless with those rates close to zero. QE3 isn’t a new hope for the economy; it’s a clear sign of desperation."

Ms. Wilson sees Mr. Bernanke as being left with "nothing" after the "sugar rush wears off."

Richmond Fed President Jeffrey Lacker (the sole dissenter from last week’s monetary "sweetener package") said he believes that the allocation of credit (putting money into the hands of the lenders, etc.) is in the domain of Congress, the Treasury, but not the Fed. He noted that he "strongly opposed" the new bond-buying program as "channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve."

According to Bloomberg News,

"The Richmond Fed chief said he also opposed this language and that "an implied commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates."

Last week’s "sugar rush rally" — okay, we’ve beaten that term to death now- came on the fourth anniversary of the Lehman Bros. collapse that almost "broke the buck." Markewatch’s Mark Hulbert found some irony in the development, noting that

"In essence, we’re told, the market rallied because the Federal Reserve concluded that the economy is in such horrible shape that it must be put on even more remedial life support. Got that?"

Mr. Hulbert also reminds us that when thing appear to be most bullish, that’s precisely the time to put up the "radar" and turn cautious. He cites, for example, among others, a statement that reads something like this:

"I am ready to be a bull again! Not now of course, the exact time is still difficult to tell, and we will in all likelihood be early to the game, but three crucial elements necessary for a new bull market are getting our attention. The housing market is beginning to show serious signs of a bottom. … Quietly, the financial sector has been slowly healing."

The observation was made just a few weeks prior to the Lehman collapse by one noted market advisor. Now you may freely substitute stocks with commodities and the housing market with the dollar and cut to today’s blue-skies/ green-light gushers of bullishness that are being made in the wake of QE2. Is your radar on?

Beep….beep….beep…beep….

Jon Nadler
Senior Metals 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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