Hu’s On First? – Wednesday Kitcommentary


Bullion Bars

Gold prices remained hesitant to stage significant advances this morning, despite a weaker US dollar (down 0.29 to 80.52 on the index) and gains in the other precious metals and crude oil. Were it not for lingering physical selling (see Kitco’s Gold Index) in the market, the yellow metal might have opened some $5 higher than where it did for this, the midweek session.

Spot gold recorded a $0.60 per ounce gain at the start of Wednesday’s trading action and it was quoted at $1,381.90 on the bid side, at that time. The choppiness and subsequent dips (to lows near $1,375.00) in bullion were partially chalked up to the success of the Portuguese auctions. Shop talk highlighted by one industry source alludes to the potential for a gold price dip to under $1,350.00 if, in fact, the high $1,380s are not overcome soon.

Silver managed to show a 12-cent gain on the open, with a bid quote of $29.63 per ounce. The really meaningful gains this morning were reserved for platinum and palladium. Once again, the noble metals showed that strong(er) fundamentals combined with fund (hedge and ETF-flavored) attention beget moves on the order of 1.2 to 2.4 percent with relative ease.

Platinum climbed $24 per ounce, to reach the $1,799.00 mark while palladium recaptured the $800 level (and more) rising to $807 with a $20 pop (the highs came earlier, at $811 the ounce). Rhodium was static at the $2,380.00 per ounce bid level. The complex was lifted by the continuing positive outlook in the automotive sector and by lingering power supply issues in South Africa. Some of the feel-good vibes coming various auto manufacturers’ stands exhibiting at the North American International Auto Show in Detroit also lifted speculative spirits in the noble metals’ niche this morning.

As was anticipated, and despite the fears manifest in Tuesday, Portugal did not run into any trouble with its sale of 1.25 billion euros of government debt this morning. In fact, yields on its ten-year instruments declined to 6.71% (albeit the 2014 issues’ yields did climb to 5.39%), as the country exhibited a continuing ability to tap the financial markets for funding.

On the other side of the European spectrum of conditions, we have Germany. The country just reported its most robust rate of economic growth since reunification. German GDP expanded at a 3.6% pace in 2010, just one year after it experienced a sizeable slump. Exports surged 14.2% and imports rose 13% last year.

Something else, other than Germany’s core EU economic leadership, or the perceived ability of Spain and other, more ‘peripheral’ EU nations to access debt markets is also at work here; it is the fact that there is an obvious recent leaning towards supporting such countries and buying their hitherto ‘loathsome’ (in the eyes of some) debt offerings. China and Japan have, just recently, both announced not only verbal support for EU sovereign paper, but the intent to buy sizeable amounts of same in the future.

Such willingness on the part of Asian nations to soak up certain EU bonds is also being bolstered by the European Commission’s recommendations on additional budget-cutting measures for the region’s governments. Other signs of the ‘right kind’ were also given by Belgium this morning, as it chose not to …waffle any longer and announced that its budget deficits could fall to under 4% of GDP in 2011.

The EU Commission’s fresh guidelines on budgetary fixes came at the start of what is known as the "European Semester" — a phase during which closer coordination on spending and deficits issues is expected to yield some results and — more importantly-avert future Greece and Irish-like ‘incidents.’ Stay in school, at least for the "Semester." Get good grades (from Moody’s?).

Meanwhile, China is, of course, also not exactly "shunning" US debt and the US dollar. However, just ahead of Premier Hu’s upcoming visit to Washington, the country’s Vice Premier — Mr. Cui Tiankai — let it be known that

"If the U.S. makes a positive statement on this issue we surely will welcome that. China follows very closely the economic health of the United States and vice versa."

"This issue" the VP was referring to, is the continued stability of China’s US dollar holdings. Some $907 billion in US Treasury securities are being held by China.

Treasury Secretary Geithner wasted no time in coming up with a response — of sorts — this morning. He said that the American and Chinese economies are "largely complementary" and that they have "a great deal invested in each other’s success." Such reciprocal dependence may be seen as co-dependence by some and as essential collaboration by others.

What ought to be clear is that neither nation is likely to do something silly and undermine the other’s progress or harm its interests. That said, Mr. Geithner also managed to "squeeze in" one more call for China to allow its currency to rise, and for China to distance itself from mostly export-based economic growth, while quickly framing such a plea within the aforementioned warm/fuzzy interdependence statement.

Speaking of currencies, the British pound traded at a four-month high against the euro yesterday, despite recent assurances that it might just go the way of the Zimbabwe dollar and collapse in a hyper-inflated heap. Why did the UK currency gain? Largely because markets perceive the British economy to be in better shape than many of the EU’s members and because the pound offers a "lesser of evils" proposition when compared to the euro at this juncture.

In other news, countries such as China, South Korea, India, and Australia have all shown a tendency towards higher interest rates as current inflation and the threat of more of the same in the future prompts their governments to take action. The latest country to hike interest rates (for the seventh time in seven months) was Thailand, this morning. Albeit core Thai inflation remains well within its central bank’s target (3% at the upper limit), the 1.4% gain it manifested in December did manage to trigger the Bank of Thailand’s rate action today.

Reuters Metals Insider reports that yet "another Chinese interest rate increase in the first quarter is likely." Li Daokui, an academic adviser to the People’s Bank of China, said a rate increase in the first quarter would be "reasonable because inflation tends to be elevated for seasonal reasons during the opening months of the year."

As for the US, its cost of imported goods rose by 1.1% last month, in the wake of higher energy and food items. That said, the 2010 final tally reveals that US import prices gained only 4.8% last year, following a sharp, 8.6% rise seen in 2009. Inflation remains as tame as a house cat, despite continuing drumbeating about the imminent advent of the American version of the Weimar Republic’s rates of inflation.

For a… "lighter" take on matters of inflation (of the hyper and other varieties), gold, and currency issues, look no further than The Colbert Report in this link. Go ahead, it’s time for a midweek pause that refreshes. Got cattle?
Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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