Hold Me Tight(er) – Wednesday Kitcommentary


Bullion Bars

More price weakness was manifest in spot gold trading as the midweek session’s participants were confronted with a stronger US dollar, the apparent end of the 30-year+ Mubarak era in Egypt (amid other signs that the man is losing his grip on power: the Internet made a return to Egyptian computers following a five-day black-out), and the continuing string of quite decent news from the US economic front.

Following good consumer retail and strengthening manufacturing activity number, the ADP private employment report issued this morning revealed the addition of 187,000 jobs to US payrolls in January. Perhaps more importantly, the Chicago-based firm of Challenger, Gray & Christmas Inc., reported that announced planned job cutsamong US firms fell by 46% in January. No pink slips in the pipeline have some economic observers…seeing pink. Now, if the other side of the jobs equation (planned hirings) could also point towards a monthly 200,000 creation rate…

The ADP figure was better than had been forecast by polled economists. Meanwhile, US manufacturing recorded its fastest pace of gains in more than six years last month, and the news contributed to the loss of some portion of gold’s recent safe-haven bids, which were somewhat apparent amid social unrest in the Middle East. The recent gains in the Dow (still refusing to "collapse" and go "to parity" with gold at any level, as has been prophesized) also diverted some funds away from the precious metals.

The Dow equity index closed above the 12,000 mark on Tuesday, for the first time since June of 2008 (a month and a year that everyone recalls without any particular nostalgia). The S&P 500 settled above the 1,300 level for the first time since August of 2008. Stocks have gained about 80% since that eventful summer and fall.

While the gain in jobs is smaller than that which was reported in December (final tally was 247,000), it still point to the fact that the data collected by the US Commerce and Labor Departments over recent months is undeniably positive. Friday’s nonfarm payrolls and overall unemployment level tallies could shed some more light on that niche, albeit expectations are not all that rosy for them at this moment. One set of economists anticipates a gain in overall US unemployment to 9.5% to be contained in Friday’s data.

Spot gold prices traded in a roughly $10 band (from $1,332 to $1,342) as the midweek session rounded its first trading hour this morning. Subsequently, gold cracked to under the $1,330 level and recorded lows near $1,327.50 per ounce (a 1% loss).

"For now, the easing of concerns over Egypt and a series of strong macro data around the world suggest that gold might find it hard to break significantly on the upside in the short term," said analysts at Barclays Capital, according to Marketwatch.com

In related dealings, silver spot prices lost 25-cents and traded near $28.30 per ounce after also meandering within a relatively quite narrow channel ranging from $28.20 to $28.60 per ounce. The dollar traded at 77.12 on the trade-weighted index (near three-month lows, and near critical support) earlier, while crude oil reached $91.14 per barrel just ahead of the release of US supply data.

Platinum showed a $20 range this morning, and was still up $3 at last check, quoted at $1,830.00 per ounce, but palladium fell $6 to ease to the $816.00 mark per troy ounce. No change was reported in rhodium this morning, still bid at $2,450.00 the ounce. Still reverberating in the noble metals’ niche is the news that GM exceeded sales forecasts in January (up 22%) while Toyota posted an also-better-than-anticipated sales gain (up 17%) for the month.

The tilt in the yellow metal still appears to point to possible lower values ahead as gold bullion has not benefited from recent lack of strength in the greenback, and has not responded vigorously to the momentous events in Egypt. Physical demand in China will be on hiatus (as local markets commence observing the Year of the Rabbit celebration today) for the next week.

Said "Rabbit" may ‘hop’ sooner than expected, if the PBOC has its way in February. Unidentified sources in Hong Kong have informed Reuters that China will quite likely raise interest rates again within the next few weeks, and Reuters-polled analysts envisage two more such rate hiked prior to the middle of 2011 as still in the pipeline.

"We believe Beijing must act more decisively on credit tightening to stop inflation from rising too fast," said Qu Hongbin, the chief China economist at HSBC, in a research note on Monday.

The specter of rising rates and a slowing Chinese economy have spooked some commodities (but not copper, for the time being). There are five descriptors currently in use regarding Chinese monetary policy: easy, suitably easy, stable, suitably tight, and tight. Such policy has moved from "suitably easy" to "stable" recently.

Yesterday, we brought you analysis that debunked the idea that hyperinflation is imminent, or, even plausible in the US, for that matter. The author had correctly predicted the crisis that commenced in 2006 and had also correctly called for gold to eventually reach $1,400 an ounce, while not being a deflationist or other species of crisis-monger. Among other things that the expose focused upon, was the myth that US deficits are (or will prove to be) somehow "fatal" and "unsustainable" and that they will invariably lead to the hyper-variety of inflation.

The author observes that "The principal force making hyperinflation a virtual impossibility in the U.S. is the dollar-oil link. As a consequence of this link, it could be argued that the dollar is not exactly a true fiat currency. At the same time, the dollar is not backed by a finite asset directly under its possession, although the Saudis realize that any threat to decouple the dollar from oil sales would be met with very severe and immediate consequences. Therefore, the U.S. has a good deal of influence in maintaining this vital economic link.

Regardless whether or not you consider the dollar a true or partial fiat currency, the end result remains the same. The dollar-oil link enables the U.S. to print an excessive amount of currency without a proportionate increase in inflation. Since the dollar is used to buy oil throughout the world, the U.S. actually exports a good deal of the inflation created by the Federal Reserve. Similar to others who fail to understand the importance of the dollar-oil link, [John] Williams concludes that the fiat currency in the U.S. combined with the reckless actions of the Federal Reserve will lead to hyperinflation. "

Today, from the pages of The Economist, we bring you the highlights of the "Deficit hawker as farce" article published just yesterday. Apparently, the GOP believes that the on-going difficulties in the US employment scene and the thus far sub-par growth in the American economy are due to…the federal budget deficit.

This, while "there is no plausible argument that current unemployment or slow growth stem from the federal budget deficit. The [sole] mechanism through which budget deficits can lead to unemployment and slow growth is the bond market: government borrowing raises interest rates, which makes credit more expensive for businesses."

With the 5-year T-bond trading at under 2%, the "cost" of such credit is clearly not "affecting" US businesses and their capacity to grow. Such a reality has not stopped the deficit-hawkers from totally ignoring the fact that it is not the cost of money that is preventing US business from expanding; it is the (still) slack consumer demand. The argument that government budget deficits are "healthy" in terms of the fact that they show a willingness on the part of the government to take on private debt and help the process of de-leveraging. At the moment, there is no evidence that the bond markets are in any way fearful about the creditworthiness of Uncle Sam.

Until tomorrow, have full…faith (and credit).

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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