Deficits. Of Truth – Tuesday Kitcommentary


Bullion Bars

January concluded with the tallying of gold’s poorest "start" to a trading year, since…1997. Amid slumping prices (bullion fell by over 8% during the month) and a rising appetite for other, perhaps higher-yielding assets, gold balances in the largest gold-backed ETF decline by over 53 tonnes last month, making for the second-largest such loss in bar holdings since the investment vehicle was launched in late 2004.

On Monday, the trend towards lightening up on hitherto substantial gold positions continued, with global ETP products shedding a further 2.61 tonnes of the yellow metal, bringing the aggregate holdings down to the 2,031 tonne mark — some 83 tonnes fewer than had been tallied at the pinnacle reached in such balances in December.

Hedge funds as well as money managers continued to reduce their bets on higher bullion price in January, to the extent that by the 25th, the cumulative net-long market position fell to 129,664 contracts on Comex. That would be the lowest such net-long commitment level since May of 2009, according to the CFTC’s most recently available contract data.

As of the first trading day of February, gold continued to exhibit some of the same nervousness that has characterized the sessions of the past week. Bullion is hardly responding to the on-going instability in Egypt, and — despite further slippage in the US dollar — is tilting towards lower levels as further US economic data releases remain less than conducive to piling on bullish bets for bullion at this juncture.

Do note that the Dow had — in precise contrast to gold- its best showing for a January since…1997 last month. More than a 2.7% gain in the leading equity market index was tallied in January. "Effect" or not "effect" the early pop in stock values may be a harbinger of trends to come. The principal catalyst for such gains was the detail available for parsing in the month’s economic data releases. Meanwhile, copper prices, apparently taking a cue from the same factors the Dow was paying attention to, rose to a new all-time high of $9,878 and showed no signs of the hesitation manifest in gold.

Spot gold dealings on Tuesday had to contend with prices meandering within the $1,324- $1,342 channel and participants were perhaps more mindful of the decline in open interest (some 103,000 contracts lost since the 3rd of January) than on the fluid and still-developing Egyptian situation. Potential corrective upward bounces notwithstanding, the school of thought that subscribes to the view that the overall correction in gold is not yet over (targets of $1,280.00 keep popping up with regularity) is still attracting pupils sporting technical charts that feature circled tops in gold that bear various exotic names.

Following Monday’s good news relating to US consumer spending statistics, the Institute for Supply Management this morning released its data about America’s manufacturing activity levels. The ISM’s gauge rose for the 18th consecutive month, reaching the 60.8% mark last month (up from 58.5% in December) — a seven-year high. The gain exceeded economists’ expectations (they, in fact, anticipated a slump back to the 58 level) and bolstered the signals that point to a sustainable US economic recovery. Readings above the 50% pivot point are considered to underscore expansion trends in the economy. They did.

Silver prices continued their upward bounce within the larger downside correction pattern, showing relative strength vis a vis gold this morning, but still confined to a rather narrow (based on recent wider intra-day swings) price band (of from $27.75 to $28.50 per ounce). Platinum and palladium de-coupled once again, showing robust gains. The former climbed $21 to reach $1,814.00 the ounce, while the latter added $7 to touch the $820.00 mark.

Rhodium was unchanged at $2,450.00 per troy ounce. General Motors reported a 21.8% rise in US vehicle sales for the month that just concluded. Sales of its high-end nameplate, Cadillac, rose by 49% in January. FoMoCo’s sales gained 13.3 on the month. Meanwhile, a quick slice/dice of current fundamentals in the PGM niche indicates that despite production increases being planned by the industry’s largest supplier of palladium —Norilsk– the market remains fairly tight and has a reasonably strong footing to rely upon, especially if global auto sales trends hold up.

Once again, we have seen "news" that is but at the embryonic and certainly not fact-supported stage at this point, but which has already been adopted and published as a fait-accompli. On offer: bullish statements such as: "China may increase its gold reserves." Or, "China should add to its gold reserves." (the former, a reporter’s conjecture, and the latter, a by-now-familiar recommendation by an academic type). Lacking altogether from such "coverage" is any formal announcement by the PBOC that it intends to raise its gold reserves (how much, by when, and why), and/or that it needs Chinese gold reserves to exceed the oft-cited ‘optimal’ 2% allocation level it targets as a matter of policy.

Then again, we have also run across many a declaration that hyperinflation is/has been already knocking at the US’ door. Not so fast, writes AVAResearch’s Mike Stathis in a detailed dissection of the "state of affairs" visible at this moment. Mr. Stathis searched (in vain) for the hyperinflation that was supposed to have taken the USA by storm…last year, already. He also fails to come up with substantive proof that US deficits are sizeable enough to be "fatal" — at least prior to 2035, and only IF the Fed would intentionally ignore reality.

Well, proof, of sorts, as relates to the topic of the "fatal" and/or "unsustainable" US deficit, may be on offer over at Daily Finance. No ghost-statistics there, only some hard numbers. No conjecture, either. Note that no one is stating that deficits do not matter, or that deficits are "good" in any way. However, and just for starters, DF columnist Joe Lazzaro reminds us that:

"One way economists measure the seriousness of a country’s debt problems is as a percentage of GDP. Based on the Central Intelligence Agency estimate of 2010 U.S. GDP — $14.7 trillion — the national debt in March will be about 97% of GDP.

In comparison, the CIA’s 2010 GDP estimates for other nations indicate that Japan’s debt is about 196% of GDP, France’s 83.5%, Germany’s 74.8%, Brazil’s 60.8% and India’s 55.9%. But again, the high debt levels of those developed and emerging-market giants doesn’t mean their economies are on the road to ruin. Large national debts haven’t prevented Japan, France or Germany from maintaining their status as economic powerhouses. The U.S. debt won’t stop this nation either."

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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