Raiding The Treasury(s) – Monday Kitcommentary


Bullion Bars

Some price weakness continued to remain manifest in gold, and to a lesser extent in other precious metals, as the second trading week of 2011 got underway overnight. The near 4% loss in gold’s value that took place last week is currently also being tied to the euro’s most recent woes and to its own breakdown to beneath a second support line at $1.29 against the greenback.

Friday’s bearish-tilting weekly low closing does not mean that bounce-backs will not be attempted this week, but it does bring the $1,350.00 and $1,360.00 support levels into possible focus. Furthermore, the European common currency’s troubles do not yet appear to be a thing of the past (as in: the recent Irish ‘issues’) as Portugal seems to have come under pressure to go knocking on the EU’s fiscal ‘door’ in the quest for a life preserver of its own.

Technical charts indicate that the euro may have room to move lower in coming weeks, Portugal, or no Portugal. Much depends on the eagerness of certain Asian central banks to scoop some European debt (or euros) up within the same timeframe. For the moment, the Chinese leadership appears to be set to allow the country’s currency to gain a tad, just ahead of the upcoming visit to Washington by Premier Hu, notwithstanding the most recent spot rate weakness of the currency, on the back of "cooling" trends in the country’s economy.

While some bargain hunting-based buying support has been identified on a sporadic basis in the yellow metal, the perception amid traders is that dollar strength-related and portfolio reallocation-based fund-originating selling may not yet have been exhausted, and that any additional positive US economic data sets to come may once again reignite liquidations in the complex. For the time being, some degree of caution is palpable among participants, corrective rebounds notwithstanding.

Spot gold opened Monday’s session with a modest $2.30 per ounce loss, at the $1,367.50 level. About equal parts of the small decline were due to US dollar strength and some lingering physical selling, according to the Kitco Gold Index. The opening quote showed silver rising by 3 cents to start at $28.72 per ounce, while platinum and palladium were indicated down by just a couple of dollars.

The former opened at $1,728.00 the ounce, while the latter fell to $748.00 at the same time. All of the metals attempted to briefly regain composure following the market’s opening and showed small gains within the first twenty minutes of trading action. In automotive news, once again we have a bit of a mixed bag on offer. China’s car sales growth appears to be set for a ‘cooling off’ period of its own (along with the economy) in 2011, notwithstanding December’s still torrid vehicle delivery pace of more than 1.3 million sedans to car-starved Chinese buyers.

Meanwhile, such slowdowns potentially coming from the Chinese car market will hopefully be offset by improving sales of vehicles in Europe and North America. The Big Three US carmakers appear all set to turn in their best performance in many years, just months after coming back from what was the very brink of a bottomless pit. More than 40 new vehicles will be unwrapped at the Detroit Auto Show over the next several days.

The age of the US auto fleet remains high enough (10.2 years and/or 125-160 thousand miles) to give automotive analysts hope that US car sales will remain above 12 million units this year, and perhaps try to trend back towards the 15 million units level, if still not back to the 17 million cars sold a decade ago per annum. Platinum/palladium/rhodium would all stand to benefit from the improving trend.

Monday’s trading markets also appeared to be paying some attention to the news that Chinese copper imports fell 2% in December and that the market’s import trends showed signs of stabilizing in 2010. Potential further monetary tightening by the Chinese central bank is still preoccupying commodities speculators at this juncture.

China reported a trade surplus some $7 billion lower than had been estimated by economists for the month of December. The surplus figure came in at the $13.1 billion level as exports expanded by 17.9% last month, vis-a-vis the same period of 2009. However, that rate of growth has only half of the levels recorded in November.

Speaking of trade, that of Germany might be fraught with challenges in 2011. The principal one is the hitherto incessant rise in the prices of raw materials. Commodity price inflation might in fact engender a German import growth that surpasses exports by the country.

Something else also evidently on market players’ minds is the rising trend in yields on US Treasuries. Bailing out of such instruments (holdings in Treasuries at various Wall Street banks are being cut at the fastest rate in six year) is generally an indication that holders anticipate a stronger US economy and that they also expect a generally higher interest rate and/or yield environment ahead.

One investment manager noted that "You’re not going to see a repeat of the low yields that we’ve seen in the last six months. The overall tone has shifted. The trend is higher in yield, but it won’t be in a straight line."

Actually, the commodities niche also no longer appears to be headed for a ‘straight-line’ increase after having run the kind of ultra-cheap dollar-induced marathon it recently has.

"Commodity markets are near a top and set to move sideways in 2011 even if the U.S. economy improves, as last year’s best-performing asset class has mostly priced in the recovery."

This, according to a top PIMCO fund manager quoted by Thomson Reuters this in this morning’s Metals Insider briefing by the news organization. Mihir Worah, who manages PIMCO’s $21 billion Commodity Real Return Strategy Fund  — the largest commodity mutual fund in the world — said he is neutral on base metals as China moves to slow growth, sees oil topping $100 a barrel and warned that wheat prices, which have surged to near-record highs, could be set for a hard landing.

UK Financial News’ (Dow Jones) Giles Turner reminds his readers that "The biggest potential trigger for a collapse in gold prices is an increase in interest rates. As gold does not offer any form of dividend, it often loses out to fixed-income investments as interest rates rise. For example, when the US increased federal funds rates in 1980, reaching 20% in 1981, it led to a collapse in gold prices."

Indeed, rising interest rates could be the initial trigger for a different turnout in 2011 for gold and other commodities. Yes, and so could the end of de-hedging by miners, a shift in ETF gold uptake patterns, etc.

However, it is another ‘component’ of market structure that, these days, poses a potentially larger threat to bullion prices. FN points out that:

"When interest rates rise, the widespread use of stop losses may exacerbate a potential fall in gold prices. Andrew Thompson, head of advisory portfolio management at Kleinwort Benson, remains bullish on gold in 2011, but has placed a series of stop losses to protect clients from a fall in gold prices."

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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