QE’s Quick Effect Quite Ephemeral – Thursday Kitcommentary


Bullion Bars

Wednesday’s FOMC announcement-induced price gains in gold evaporated overnight as the yellow metal not only did not manage to overcome overhead resistance levels but fell victim to selling once again in the wake of rising risk appetite…for other assets (mostly equities). Thus, the 1% jump that took place right after the Fed surprised no one by keeping interest rates steady (for the time being) turned into a 1% loss as of the time the market opened for trading this morning in New York.

Spot gold was off by $16.50 per ounce at $1,332.10 on the bid-side, at last check. Nearly one million ounces of gold were lost by the largest of gold ETFs on Tuesday, making for the worst-ever one-day outflow from the vehicle. At any rate, so much for the Thursday sharp spike that was predicted to materialize, (given the post-Fed bounce in gold) by those who continue to see "evildoers" where there are none in the gold market. Suggestion: try a new ‘theory’ – one that tallies more sellers than buyers at this juncture, and for all the reasons listed in the paragraphs that follow, below.

Notwithstanding the FOMC’s apparent resolve to let QE2 run its intended ($600 billion through mid-year) course, the markets are evidently factoring in higher interest rates down the road. Hawkish smoke signals from various central banks (the latest one being sent skyward by the ECB, this very morning – see below) have introduced a healthy dose of fear and level-headedness into hitherto complacent spec funds, everywhere.

The possible (and actual, in the case of India and perhaps China soon as well) change in the global interest rate environment was the second factor on our watch list for 2011, and it was mentioned in the two-part looking-forward interview with Kitco News, recorded late last year. Reuters reports that:

"Berenberg Bank said a sharp rise in euro zone consumer price trend expectations would prompt the ECB to raise its prime lending rate by 50 basis points later this year. "The relentless rise over the last 15 months (…) will probably catch the attention of the hawks on the ECB council," Chief Economist Holger Schmieding said."

Meanwhile, Forexyard.com (via Reuters) informs that:

"The European Central Bank’s Lorenzo Bini Smaghi said sharper rises in imported goods’ prices carry an inflationary threat that could no longer be ignored, reinforcing the view that the ECB could raise rates sooner than expected. Gold tends to underperform when rates are rising as the opportunity cost — the premium investors forfeit by not buying a yield-bearing product — increases."

A marginally weaker US dollar (down very slightly, at the 77.70 mark on the index), a 2.5% decline in US durable goods orders, and relative steadiness in crude oil prices did manage not help bullion either. Thursday’s jobless claims filings in the US (up by 51,000 to 454,000) also did not turn out to assist gold in this case, albeit they did dent the greenback just a tad. Part of the surge in filings was explained by the advent of a bad weather-induced backlog of such claims, said the US Labor Department.

However, the fact that gold did not at all respond to three developments which might normally make it quite easy for the metal to advance higher, could portend further internal market weakness at this juncture. There was a small explosion reported at a Davos hotel being used by the guests at the World Economic Forum, Japan‘s credit rating suffered the addition of a "minus" sign by S&P, and the unrest in Tunisia spilled over into Egypt in a big way, whist Yemen now appears to be the next domino in the turmoil spreading in the "Arab Street."

Silver lost some of the value that it too, added yesterday in the late afternoon, with a 14-cent decline at today’s market opening time. Spot prices were quoted at the $27.47 level after having touched overnight lows near the $27.25 mark. Elliott Wave midweek updates continue to offer the prospect of $25 silver as the first target of the decline which began when the white metal turned away from its (fairly recent) price peaks.

A similarly-sized (near-one million ounces, as in gold, above) outflow of metal was recorded in the iShares Silver Trust on Wednesday.January’s silver ETP flows (as in: outflows) are set to record their weakest month on record. Once again, that kind of trend remains at odds with the apparent surge in physical demand for high-premium, small retail products, unless it is seen as underscoring the veracity of the fact that the small retail investor is typically the last one to hop on the proverbial bandwagon.

However, as was reported by the Gold and Silver Blog, "After generating some mainstream media attention for the record pace of sales, United States Mint bullion coins had a quiet week. According to figures provided by the Mint, only 136,000 ounces of American Silver Eagles and 7,500 ounces of American Gold Eagles were sold in the past week."

Platinum and palladium also fell this morning; the former more so than the latter, but nonetheless, they were down with the rest of the complex as rollovers, options expirations and the generalized malaise in the metals niche took its toll. Automaker Ford might report its most profitable year in over a decade, tomorrow. That said, FoMoCo still has nearly $21 billion in liabilities on the balance sheet, even after it paid down almost $13 billion in debt in 2009. Gaining market share and improving the books will be "Job #1" for Ford in the current year, evidently.

Yesterday, we offered you one picture (literally) that may speak volumes about global gold production. It is rising, folks. Today, reinforcing the argument that the advent and rise of gold ETPs has had "something" to do with what gold price charts ended up looking like since…oh, say, 2005, we present this little "mountain" of graphical…evidence:

Gold ETF Holdings in Tonnes and Gold Price
Gold ETF Holdings in Tonnes and Gold Price

Chicken-egg theorists need not apply. The egg rules.

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

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