The (Changing) Rules Of The Game – Thursday Kitcommentary


Bullion Bars

An easing of the apprehension levels surrounding Portuguese in particular and European debt in general, prompted a reversal of yesterday’s gains in gold (and to a lesser extent the other precious metals) overnight and early this morning. Spain, too, just this morning, (as projected) did better with its bond auctions than had been feared by some.

Spot bullion prices drifted lower ahead of the New York opening on Thursday, touching lows near $1,376.00 per ounce, despite a slippage in the US dollar (down 0.28 on the trade-weighted index, at 79.80) and stagnating (but still quite high) crude oil prices at near $92 per barrel.

As of market opening time, the metals’ trade was focusing on the imminent release of the US November trade data and the weekly report on unemployment claims filings courtesy of the Labor Department. Gold spot dealings opened with a relatively minor, $3.80 per ounce loss as the "risk-on" trade siphoned some money out of the market despite the aforementioned weaker greenback. Spot bullion was indicated at $1,384.20 the ounce.

Within the first hour of trading, gold gyrated quite a bit (rising to a high of $1,394, then falling back to the $1,380 area) as the initial effect of higher than expected unemployment claims filings dented the US dollar. Gold did not however follow the inverse path against the US currency, showing that perhaps book-squaring and not-s-hot technicals were still taking precedence among specs. The upcoming long weekend also may be playing a part in the unwillingness of speculators to pile on fresh positions.

London-based metals consultants GFMS today opined that the yellow metal has the potential to achieve the $1,500 -1,600 level in 2011 (given the possible alignment, continuation, and augmentation of certain dire conditions) but not before noting that the market is still almost entirely being defined by investment offtake.

Meanwhile GFMS also noted that background fundamentals-related conditions (chiefly rising mine supply, a further expected decline in jewellery demand, and the end of the era of mine de-hedging) are still deteriorating. More details on all of the above, coming soon. Suffice it to say, mine production (once again) shows zero signs of ‘peak gold’ — as we have been prepped for, over and over again.

Silver slipped 27 cents to start Thursday’s session off at $29.38 per ounce. That of which silver is largely a by-product of — copper, may have some difficulties ahead. Reuters Metals Insider reports that

"After a stellar 2010, LME copper looks set to tumble to a technical target of as low as $8,850, as it looks well overbought, says Reuters North Asia editor Phil Smith."

Copper fell in London (and also in NY later on), following two days’ worth of gains as investors worried about demand waning from China as the top metals consumer approaches its New Year holiday and on concerns it may further tighten monetary policy –said Reuters in its morning report. Meanwhile, platinum continued to exhibit outstanding strength, climbing $17 more, to reach the $1,819.00 per ounce level. Palladium was not showing signs of lagging itself; it rose $6 to the $815 mark per ounce.

Continuing intense ‘attention’ by ETFs and the optimism surrounding the rebound in the auto sector have engendered forecasts for $2K platinum and $1K palladium. At this juncture, the latter is already trading at a one-decade high. Last year, the noble metal was the single best performer in the metals’ complex (it doubled in price). The Prime Minister of Portugal affirmed that his country does not require outside "intervention" following the successful auction of its bond offerings on Wednesday. Meanwhile, German PM Angela Merkel also chimed in on the issues once again, reassuring markets that she would be prepared to take any measures intended to tackle the rolling crisis.

Someone Ms. Merkel is most likely in frequent touch with, these days, Jean-Claude Trichet, is wrapping up his leadership of the ECB this year — a year that could prove to be as much of a handful as the last one was. Mr. Trichet’s plans to enact exit strategies were placed on the back burner last year, as he dealt his the kitchen fire of peripheral debt. At this point, the strategy his institution is operating under calls for the extension of extraordinary liquidity measures through the end of March.

The ECB held interest rates steady at one percent this morning, and Mr. Trichet was slated to be heard from at a news conference. Whether or not Mr. Trichet will eventually be credited with co-rescuing (along with Ms. Merkel) the euro in particular and the EU in general, will be for the economic history books to decide.

What is more certain, is that his successor — be it Bundesbank President Weber, or Italian central bank Governor Draghi, will face some hefty challenges when/if he is nominated for the post in October. For the moment, Mr. Trichet remains quite aware of inflationary threats resulting from the ECB’s current accommodative stance — he underscored (this morning) that the central bank is prepared to raise interest rates in order to ensure that prices remain stable.

Price stability was not on Jim Rogers’ mind when he opined that rising commodity values may spark social unrest in the not too distant future. Mr. Rogers’ neighborhood (Singapore) may escape such violence, but other places may well not. "Governments may topple as they are forced to close exchanges in an attempt to cool prices" is his opinion. Ironically, Mr. Rogers places (and wants you to do the same) his money into…commodities. Is this, then, a case of becoming an accessory to rioting? Will hedge funds be placed on international terrorist lists?

It is but a short leap from the above to the next news item — quoted in its entirety as it just appeared on Marketwatch. US regulators and DC lawmakers are attempting to rein in commodity speculation amid concern that "investors" [you know who] contributed to oil reaching the record high of $147.27 a barrel in 2008. We have warned some two years ago about the eventual advent of such restrictions in the wake of the virtual "free-for-all" that was (and still is) emerging in the commodities’ niche. Now, comes Chapter Two:

"Seeking to combat manipulation and speculation, the Commodity Futures Trading Commission on Thursday voted to propose a rule that would restrict the number of commodity futures and option contracts that any investor can hold in energy, agriculture or metals derivatives. "Position limits help to protect the markets both in times of clear skies and when there is a storm on the horizon," said CFTC Chairman Gary Gensler. The proposal was introduced by a vote of 4-to-1."

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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