Tuesday Kitcommentary From Kitco Metals Inc. – When The Going Gets Tough…


Bullion Bars

An overnight foray to resistance levels near $1,410.00 was noted in gold prices as the US dollar slipped closer to the 79 mark on the trade-weighted index and commodity speculators continued to enjoy an early Christmas courtesy of Chinese inaction on interest rates.

Copper, for example, made headlines yet again with a fresh price record achievement. However, with the Fed meeting due later on today, the early advances weakened somewhat and the yellow metal drew closer to what appears to be a ‘comfort’ zone for the moment; the tight orbit around the $1,400 level.

Spot bullion trading opened with an $11 gain in gold which was quoted at $1,405.50 on the bid-side as against a 79.25 print on the dollar index. Silver advanced 22 cents to the $29.75 resistance area and platinum and palladium continued to shine brightly on the commodities’ holiday tree. The former gained $11 to touch the $1,706.00 bid level while the latter rose $5 to reach $761.00 the ounce.

Invariably, the shop talk turns to precious metals ETFs and their recent, present and potential future impact on markets (read: prices). Our long-time friend Rhona O’Connell writes (in a detailed Mineweb piece) that certain metals (as we pointed out last week) might be facing swings that would leave Elvis Presley green with envy, were he around to witness them.

Rhona notes current conditions in the gold and silver ETF domain and relays that:

"The major [silver] ETFs have taken up 2,473 tonnes so far, with a net dollar inflow of just less than $1.5 billion and the total tonnage in the funds is almost 14,800 tonnes, with a value of $14 billion. The increase in [gold] tonnage so far this year has amounted to just under 300 tonnes, for a net investment of $12 billion. At gold prices of more than $1,300, there have been ETF purchases of 62 tonnes, but also sales of 58 tonnes, which could suggest that investor appetite is becoming sated.

At this [price] level [$1,300+ and $25+], momentum has also slowed in both metals, but the slowdown has been more marked in the gold market than in silver.  In terms of the value of the gold in the coins bought in the first days of December, investment is running at approximately 45% of the average daily level in November.  The silver coin investment has slowed to 75% of the November rates.

So at the moment, while silver is continuing to command attention, the market is, as always, keeping a close eye on gold, where momentum has slowed.  The levels of investment in silver only have to be considerably lower than in gold in order to maintain upward price momentum.  Weight of money arguments only apply up to a point, however and if and when gold momentum investment stops or reverses then silver could be in for a rocky ride."

As the action intensified in the first half-hour on Tuesday, so did the fluctuations in at least gold and silver, both of which gave back portions of their gains (gold touched levels under $1,400 and silver reversed to near $29.50). After the first hour of trading activity the entire metals’ complex turned lower as risk appetite dissipated a tad and profit-taking ahead of year-end returned to the scene. The gains in the US dollar (back up to 79.40 on the index) following the PPI and retail sales data sets were still the key driver behind the slippage in metals. But, is this a flash-in-the-pan for the US currency? Let’s ask Tokyo:

Bank of Tokyo-Mitsubishi UJJ Ltd. opines that the recent dollar sell-off (following the Obama tax break extension agreement) is strictly temporary, and that the greenback will likely rise to as high a level as $1.27 against the euro, possibly in the coming quarter.

The BTM team remains "unconvinced" (and in the minority, we might add; but, then again, we like maverick-ism) that "US fiscal concerns will remain the key driver of currency trends through the first half of 2011."

What, then, could represent those ‘key’ drivers? Well, (wrote he, glancing over at a map of Europe on the wall), look at the alternatives. BTM did, and found that

"The relative safe-haven appeal of U.S. government debt has been reinforced by the ongoing euro-zone sovereign debt crisis given that the dollar is the only viable liquid reserve-currency alternative to the euro," wrote Hardman. "We expect that both the recent dollar and U.S. government debt sell-off will prove temporary although moves could overshoot before reversing in illiquid year-end markets."

In other news, two noteworthy reduction stories. In commodities. By hitherto quite welcome participants. As reported by Reuters Metals Insider. First, the news from Sacramento is that CALPERS (the top U.S. pension fund), has trimmed its target allocation for commodities to 1.0 percent from a previous 1.5 percent, saying the change was effected in order "to better manage risk and would be more technical than material." Maybe a half a percent reduction is not a sizeable move; however it is not an addition to the hitherto white-hot sector that commodities have been. This is supposed to be a time when everyone and their cousin is piling headlong into ‘stuff.’ Food for thought.

The other shrinkage-related story is that JPMorgan Chase & Co. has reduced a large position in silver futures, the FT reported on Tuesday, "citing a source familiar with the matter." The company’s silver futures positions would be "materially smaller" in the future, the FT reported the source as saying. More bits of food for thought.

The two bits of important economic data that had been awaited this morning did not in fact ‘disappoint.’ Unless you happened to be a commodities’ trader, that is. First, the release of the US retail sales figures indicated that forecasters got it wrong (duh) again. US retailers recorded a robust November during which purchases rose by 0.8% and appeared to be paving the way towards a fairly healthy holiday shopping season tally this year.

Stores such as Target, Costco, and Macy’s (but not Best Buy apparently) evidently hosted more than just ‘lookie-loos’ during the spending period right after Thanksgiving. American shoppers did in fact open wallets and did their "part" in the economic recovery process, albeit still being mindful of uncomfortably high unemployment levels. Now, if they can just keep this pattern going for the current month…

The second item of market "interest" was the gain in US producer prices. The PPI numbers (also up by 0.8% in November) were showing their largest gain since March while core producer prices also revealed a fairly large increase (the largest, in fact, since July) climbing by 0.3%. The implication is that the Fed might get those ‘desirable’ levels in inflation sooner rather than later and thereby be motivated to steer a different course come the latter part of 2011.

For today’s US central bank meeting, that "course" likely entails the reiteration of the ‘inflation is running below target’ mantra and also of the ‘unemployment remains too high’ one. A bit of head-scratching might also be on the menu among Fed team members as (curiously) borrowing rates and the US dollar have risen of late (not quite the intended result of the November QE ‘package’). A recent article at Daily Markets by Michael Lombardi alluded to the fact that rising utility stocks might indeed be pointing to a higher interest rate environment in the coming year.

That emergent phenomenon places the housing recovery in jeopardy. On the other hand, the ‘easy money’ jamboree on display since late August has helped the S&P rise by 19% and has added about $1.2 trillion to US household net worth in Q3 (households whose ‘balance sheets’ need all the help they can get due to the massive erosion in home values over the past three years).

In all, the meeting in Washington today is largely anticipated to be lacking much vigor or to result in new/significant wording following its conclusion. After all, some of the ‘heat’ is off the Bernanke team following the Obama tax deal compromise. There may be no further need to book air time for Mr. Bernanke on "60 Minutes" in order to defend policy, at least for a quarter or two…(if only folks like Ms. Palin decide to remain silent on matters evidently beyond their grasp).

Back to Fed-watch. There is no substitute.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler
Article: When The Going Gets Tough…

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