The B-Word Is In The Eye Of The Beholder – Tuesday Kitcommentary


Bullion Bars

Precious metals opened Tuesday’s session with some indications that today could possibly turn out to be a day of "repairs" as conditions (a slightly lower dollar and rising European-oriented fears) were somewhat more conducive to the process. This mini buying spree took place despite an across-the-board reduction in long positions and the addition of fresh short positions manifest in the latest CFTC trader commitment reports. Net speculative interest has fallen to a five-month low in gold.

Spot gold started off with a $5.70 per ounce gain this morning, opening at the $1,382.40 bid level as against a US dollar at 80.84 on the index, but assisted by a near 90-cent gain in black gold (last seen at $90.23 per barrel). The rally was rather short-lived, as it turned out, as a subsequent (and more substantial) advance in the dollar truncated the initial buying energy and the precious metals turned negative (revisiting the $1375.00 area once again).

Of course, notwithstanding the intra-day gyrations we all witness, the debates as to whether or not the yellow metal is or is not in a bubble, continue unabated. The more things change…

A lengthy CNNMoney article covering Money Magazine’s Investor’s Guide to 2011 contains an embedded video within which five panelists offer point and counterpoint regarding that very topic.

On the same day, the UK’s Financial Times observes that "If a bubble could be identified by popularity, then gold is in a bubble. Harrods, the Knightsbridge department store, now sells bullion over the counter. There are even gold vending machines. Breaks on Bubblevision, aka CNBC, are filled with ads for gold promoters. Retail investors pile into the exchange traded funds, while some of the most respected institutional investors take delivery of bullion."

Meanwhile, Deutsche Bank opines that bullion may not wear the ‘bubble’ label unless and until it rises to higher than $2K (ignoring for a moment the fact that there is no proper ‘unified field theory’ by which to value gold) per ounce, the Money Magazine piece does point to one important factor that appears to define recent bets being made by gold buyers.

Namely, it identifies the fact that (at least as regards the last two and a half years’ worth of investment patterns):

"…a return to 3% inflation or even something a bit higher isn’t what many gold investors are betting on. Many are concerned about low-probability catastrophes like the collapse of the global money system or a U.S. debt default. It’s not that those things are impossible — it’s that gold owners have to worry about what happens to their investment if those things don’t happen." Therefore, "gold is already fully pricing in some very nasty scenarios, including high inflation," says Jason Hsu, chief investment officer at Research Affiliates. "The price is going to react in a very negative way to any reality that deviates from that expectation."

Silver added 48 cents to open at $29.57 per ounce. The mid $1,300s and the $28 levels remain key supports for the yellow and white metals to maintain, while the current advance must first overcome the $1,390-$1,410 and the $30+ marks in order to attempt moves back towards recent peaks. Platinum and palladium offered fairly substantive gains as the markets opened for action. The former rose $19 to reach $1,758.00 the ounce while the latter climbed $25 and touched the $776.00 figure on the bid side per ounce. Repairs, indeed.

Tomorrow’s Portuguese bond auction was seen as generating early waves of jitters in various markets this morning. While the bond sale is going to be rather small in scale, it could turn out to be an acid test for the country’s ability to continue to borrow in the debt market at a time when the yield on its 10-year instruments are flirting with the 7% level; a level which proved to be the fuse that lit the Greek and Irish ‘events’ of 2010.

Market analysts actually expect the bond auction to be quite successful and do not see such pivotal ‘tests’ of Portugal’s borrowing abilities until sometime in April, when about 5 billion euros’ worth of bond redemption come due. Whether or not history repeats itself and the country soon shows up at the EU’s doorstep — hat in hand — remains to be seen. Thursday’s similar sales of debt by Spain and Italy could shed some more light on the nature of how the region’s credit saga shapes up at this juncture.

Skeptics keep shoveling heaping servings of doom regarding eurozone debt and the fate of the common currency. Others have taken comfort in the words of Angela Merkel (she asserted that there will be no euro collapse if she can do anything about it) and in the actions of China (and now Japan) as regards the continued buying of euro-debt. Japan pledged to be supportive of euro bonds and purchase same going forward. Coming from the world’s second largest holder of foreign exchange reserves, such assuaging rhetoric helped the euro recover some lost ground this morning (along with gold and other commodities).

Speaking or reserves, those of China swelled by a record amount ($199 billion) during the past quarter and have now reached $2.85 trillion. The country has been creating currency at a break-neck speed in order to buy…dollars and euros. The process has likely contributed to the rising inflationary tide in China — a tide that the government is setting its sights on stemming via various tightening methods. Thus far, at least as regards bank lending, the verbal (and recently, actual) efforts to curb inflation via hiking reserve requirements and key interest rates has not been very effective; the pace at which China’s financial institutions have been lending in December…grew once again.

Back to the US, (and the Fed) — where somewhat less contradictory talk seems to be developing among officials. Whereas last fall we had two sharply divided camps (hawks/doves) and a harvest of divergent opinions about the wisdom and eventual effects of the then imminent QE2 program, the tone has appeared to not only moderate lately, but (gasp) actually aim towards some kind of…harmony. To wit, Dallas Fed President Fisher said that the $600 billion program (while still likely to fully run its course) will be "it" and that going beyond it is highly unlikely.

At practically the same time (!) Philly Fed President Plosser, in the first speech of the year for him, toned down the central bank’s rhetoric by stating that the QE2 program could be "adjusted" if the US economic recovery warrants it. Mr. Plosser, as well, tendered that additional easing by the Fed would only come if a serious deflationary threat re-emerged down the road.

As Marketwatch framed it, Mr. Plosser "made no secret [about the fact] that he thinks tighter monetary policy may be needed soon."

The Fed’s Philly Chief also made no secret about the fact that (in his view) the Fed’s policy may soon ‘backfire’ unless ‘gradual reversal begins, that sustained US deflation is highly unlikely, and that QE2 should be reviewed on an on-going basis.

For our part, we will continue to review and bring you (on an on-going basis) the great debates framing the bulk of the year ahead (inflation/deflation, bubbles/non-bubbles, expansion/collapse, easing/tightening, bullish/bearish tilts). There is no alternative, just as there is no substitute for that ten percent gold lining (but not for speculative purposes) in your financial life.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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