Expect the Unexpected – Friday Kitcommentary


Bullion Bars

The forecasted modest growth in US payrolls turned out to be quite modest indeed; only 36,000 positions were created in January, as against the anticipated headline number of 140,000 offered by economists during the earlier part of the week. The better news, embedded within the US Labor Department’s statistical release, was the fact the US unemployment declined by 0.4% since December, to reach 9% — the lowest since April of 2009.

For comparison purposes, Canada‘s job market swelled by 69,000 positions in January, but its unemployment rate climbed to 7.8% (a gain of 0.2%). The Canadian job creation news boosted the loonie, but, -surprise, the US release helped the US dollar punch out its own (thus far) modest gain and sapped the strength with which gold rebounded on Thursday, for reasons as yet not quite clear.

The yellow metal briefly retreated to under $1,350 an ounce following the Labor Department announcement, after first spiking higher on the news. Following that dip, it bounced back towards $1,355, once again. Then, after that, it was back down to $1,350, once more. And, following that set of gyrations, it was…back up again, nearing the $1,360 area. Do the (chart) wave, shall we?

While some (okay, most) of the above sounds counterintuitive, the oscillations in various markets that were noted in the wake of the jobs data are no less perplexing than the ones one witnesses yesterday. Following a series or mostly encouraging words on the economy uttered by Mr. Bernanke and following the announcement by Mr. Mubarak that he will not seek re-election, gold spiked to above the $1,350.00 level while the US dollar gained significant ground. Chalk it up to (hedge) fund play or try to fit explanations later, while parsing headlines. Way to go.

More than likely, what we have here is a classic case of the specs reading that which they think they’d like to see in the news. For instance, while Mr. Mubarak did offer to go "bye-bye," he also — suddenly — came down with a case of the "waffles" and noted that leaving "now" (as in: the "NOW" that demonstrators are demanding) would be "premature" and that it would throw Egypt into "chaos" (something it is not in, right now, according to the man’s line of flawed thinking).

Which part did the markets focus upon? Depends who is being asked, and at what time of the day. As of this morning, the US is said to be "helping" Mr. M make up his mind as to just when to "exit, stage left" — as in: the sooner, the better.

The same can be said about the US jobs/jobless figures. Some wanted to run away with the 36,000 figure and declare that we are back to that proverbial square bearing the digit 1. Others, seeing that overall unemployment headed in the opposite direction of what had been factored into the equation, (70 economists offered a median estimate for 9.5% US unemployment to be the reality in today’s numbers) chose to run with that number, instead.

Some offered the horrible weather as the possible explanation of why January did not result in the creation of six-digit-large jobs numbers. Others, pointed out that, awful winter conditions notwithstanding, Americans found the time to go shopping and help major retail chain stores post a hefty gain of 4.2% in sales last month. Take your pick, as they say.

All in all, we can only count the makings of a nice, volatile, unpredictable day in the markets. How about a $33 range in gold, a $1.04 range in silver, a $36 swing in platinum, and a $24 dance in palladium? They were on display since last night. Enjoy the ride. If you have the money, that is.

Someone who obviously did not enjoy January’s "ride" in gold (and lost SOME money in the process) was the Ruffer Investment Company (RIC); it took a bit of a ‘haircut’ and saw its NAV to fall 1.6%. Its principals will maintain a gold position in the fund; however they now see the metal as providing less than shiny future performance and feel that inflation-linked bonds might do the (inflation-fighting) trick better. Memo to shareholders:

‘In the late 1970s, when gold was a terrific investment, government issues of inflation-linked bonds did not exist, and these are a more effective way of playing high inflation than gold. The second best way to play a phenomenon rarely goes to the moon.’

As for the need to buy sizeable loads of either inflation fire-extinguisher device, well, at least Mr. Bernanke appears far from being convinced that there is a need to do so at this time. A surge in global food and energy prices has prompted calls for sharply rising inflation rates from certain quarters. We’d have to disagree with two nuances contained in this theme; a), that potentially high future food prices will be at all supportive for gold (quite the opposite: one might have to sell a bit of bullion to keep eating) and, b), that The Fed’s easy money policy has not contributed to speculators inflating food and energy (and metals) prices, even if Mr. Bernanke opines that:

"some of the emerging markets are facing inflationary pressures because their own economies are growing perhaps even faster than their capacity."

Mr. Bernanke, while sounding considerably more upbeat about the US economy than he did, say, in August of last year, still did not give any clues as to what he might be inclined to do (or not to do) after the Fed’s bond purchase program expires in June. Although the evidence is mounting that the US recovery has ‘legs’ and is no longer crawling like a toddler, the Fed Chief does tend to hold his card(s) very close to his vest.

However, the same cannot be said about his body language (make that: verbal…language) when it comes to the next step in the monetary policy process: the drainage and sterilization part. Quote:

"It bears emphasizing that we have the necessary tools to smoothly and effectively exit from the asset purchase program at the appropriate time."

The ‘smoothly’ and ‘effectively’ part of that short sentence is what the universe of current commodity investment bets is orbiting around, and is the subject of all but fist-fights (and maybe even some of those) among opposing factions in certain markets.

While on the subject of Fed-talk, here is a strongly (for these times) ‘hawkish’ string of words from its Dallas President, Mr. Fisher. The man is unlikely to support more QE and has been on record as a critic of QE2 when that money ship took to the US economic waters, back in November. For now, Mr. Fisher told Bloomberg Radio that:

"[While] you can never say never, but I cannot imagine a convincing argument for further quantitative easing after this round, given what is developing now in the economy."

Developments on another front- that of the precious metals’ ETF world– have market observers express some degree of caution. While gold ETF outflows drained more than 53 tonnes from the largest such vehicle in January (the second-largest such loss in balances since 2004’s launch), the outflow of metal from silver ETFs presents a potentially bigger issue for that small market. The potential impact of the ebb and flow of ETF metal is a topic we have repeatedly attempted to bring to you and to highlight it as critical to keep a sharp eye upon.

It is an open secret that silver’s hyper-performance in the latter part of 2010 was due to hardly anything more than the 1,135 tonnes of the white metal that had been taken off the market and warehoused (in what amounts to off-exchange hoarding) by the largest silver ETF; the iShares Silver Trust. Do the math: a 42% gain in silver prices in QIV — taking place at the same time as the huge tonnage offtake. Last month, that same fund lost nearly half (495 tonnes) of the silver bars that had been stashed away in the final quarter of 2010. Silver prices fell by 9%. A coincidence you say? Use a different math book, we say.

Today’s report would not be complete without at least one mention of China. There are reports that the country has offered $3 billion to Zimbabwe for its extensive platinum reserves. Zimbabwe’s President Mugabe is ranked as the 7th worst dictator in the world (how do they come up with such lists?) and oversees a $6 billion economy, so you can see what an offer of that size might signify.

It is no secret that China has connections to Mr. Mugabe’s ZANU-PF party, or that China remains commodity-hungry. Some have called Africa "China’s open pit mine." On the other hand (there is always that) announcements such as this one, or the one made on Monday regarding another $10 billion in Chinese money being offered to boost the country’s mining and agriculture , are being viewed with some reservations elsewhere. The UK’s Guardian newspaper hints that they:

"could be aimed at trying to prod Western investors to sink more money into Zimbabwe out of fear they will lose ground to China."

Fear, greed, perception, obfuscation, power, selective interpretation. Welcome to the global markets, as brought to you by…human nature. Lost in this week’s news flows, was the fact that a solar system quite similar to ours was discovered only 2K light-years away (complete with six planets in orbit). "We" are but run-of-the-mill when it comes to the Universe, apparently. The good news is that our radio and/or TV transmissions won’t reach that quadrant of space, anytime soon. Why, those folks might just ask to be ‘relocated’ somewhat further from us, if they get wind of what we’re up to.

Enjoy your weekend.

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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