Manning The Inflation Battle Stations? – Thursday Kitcommentary


Bullion Bars

A relatively "new" but really unsurprising (for the times) buzzword combination made the rounds in overnight markets; "inflation curbs." Apparently some have become totally fed up with commodity price inflation as brought to them courtesy of the Fed’s "easy money" policies and the resultant addiction of speculative funds to gambling with the basic lifeblood of modern agricultural and industrial life. Thus various governments around the world (mainly the BRICS thus far) are now pulling out a combat arsenal designed to stop that burlesque show before the "second act" gets underway.

To wit: "Rises in oil and raw materials prices cannot be allowed to stoke inflationary pressures, ECB Executive Board Member Gertrude Tumpel-Gugerell told Austrian magazine News.

"What is important now is that higher commodity prices do not feed through to the services sector, for instance, and other price and wage increases," she was quoted as saying in an interview published on Thursday"

One should not even remotely consider ignoring the effects of such countermeasures on the markets related to "stuff" despite the (still) incessant (and very high-decibel) intonations coming from the agenda-driven propaganda camps that see nothing but ‘insatiable" demand for commodities into, well, the next lifetime, at least. Copper- that bellwether which has had "commo-bulls" all frothing at the mouth for many a month now –complete with gold-like stratospheric price forecasts- could be set to take a hit that might make Tony Soprano’s boys’ midnight "settlement" sorties look like the work of rank amateurs.

Reuters reports that:

"the record-breaking rally in copper futures may stall in coming weeks as physical consumers, reluctant to chase prices higher, work through surplus Chinese inventory before returning to the spot market. Record high futures prices do not reflect the physical market [where else have we heard that on before?] and will fizzle as Chinese consumers returning from Lunar New Year holidays this week are likely to buy hand to mouth, according to traders."

Of course, this is not just about copper, as we might soon learn. But, that said, fat copper prices meant FAT profits — at least for Rio Tinto. The mining colossus’ profits nearly tripled (!) to $14.3 billion in 2010. Billions from bullion, but for how long? Attendees at a major Cape Town mining conference were told yesterday that the windfall from the continent’s commodities’ bonanza – ‘ shared with the masses — risks fanning the winds of…political change (or worse). Look no further than the smoke rising from Cairo or other places on this map, for clues as to what "worse" implies.

"Blame" your Blackberry, some say. Reuters reports that:

"with more than 500 million mobile phones in Africa, compared with around 50 million a decade ago at the start of the last commodities boom, governments and companies no longer have a monopoly on information. For instance, union officials in northern Zambia’s Copper Belt pride themselves on checking up-to-the-minute world prices on their phones during wage talks with company bosses."

Clearly, more than just hedge fund-based speculators and the throngs in the streets of Africa and such are watching this drama unfolding. The New York Times sums up the longer-term developments in this niche as follows:

"Last year, commodities prices gained about 17 percent over all, according to the Dow JonesUBS Commodity Index. Until three years ago, commodities were on an uninterrupted bull run that began in 2001. The index peaked in 2008, having risen to a post-World War II record, posting a gain of 236 percent over the seven years. One surprise in the 2009 commodities rebound was the sectors that led the rally — not gold, silver or platinum. The leaders were cotton and copper, up 96 percent; cocoa, coffee and orange juice, up 63 percent; and crude/heating oil and natural gas, up 58 percent. While gold was up about 43 percent last year, it may not lead in 2011, with energy prices rising and the possibility of a gold bubble."

Lacking an ‘honorable mention’ in the NYT piece was palladium. It "merely" doubled in value last year.

Speaking of New York, spot precious metals dealing opened the Thursday session with assorted losses; some larger than others, but most of them due to the combination of a sharply higher US dollar (up 0.61 on the trade-weighted index) and a slump in the commodities’ complex brought about in part at least, but the aforementioned signs that enough is enough when it comes to perpetually re-written price tags for various essentials.

Spot gold was bid at $1,356.60 at the opening bell, down $7.20 an ounce, but it later sank to the $1,350 mark as additional sellers made an appearance. At present, the $1,322.88 mark is being scrutinized as potentially pivotal for near-term support. On the upper end of the price spectrum, the $1,370 mark remains on watch. The return of Chinese traders has thus far not yielded the expected physical demand for gold that had been predicted to now be occurring, prior to the New Year holiday hiatus. Small ETF outflows continue to underscore the lack of investment oriented demand, as they have since early January.

Silver spot prices fell 38 cents per ounce to open at $29.82 –losing 1.3% per ounce- after having backed off resistance at the mid-$30 mark yesterday. Elliott Wave analysis is now watching for a potential break of the $25.52 level as a first sign that a possibly larger-in-scope declining wave is underway following what is being seen as "one last touch" of the white metal’s key trendline yesterday. Platinum and palladium also suffered losses in value as the trading commenced in New York this morning. The former lost a hefty 1.73% ($32 per ounce) to drop to the $1,823.00 mark, while the latter shed $12 per ounce to ease to the $816.00 level (a decline of 1.33%).

Background economic stories informed that the Bank of England (to no one’s surprise) left interest rates right where they were (0.5% if one can call that a ‘rate’). This of course prompted immediate calls that the expectations of an as much as 75 basis-point BoE rate hike prior to year’s end were as premature as cherry blossoms in February (not that they’ve never occurred). With an expected UK inflation rate thought to be approaching 4% in the latter part of the year, it might just turn out that such expectations were anything but ill-placed. We shall see. In the interim, all eyes remain fixated on Britain’s fits-and-starts in GDP.

Over in the USA, the real estate market is showing its own fits-and-starts patterns. About 27% of US homeowners, who owe, owe, owe (but not all of them "off to work they go"), owe more than their frame-and-stucco abodes are worth at this point. On the other hand, filings for foreclosures dropped once again last month (by a not insignificant 17%), for the fourth month in a row. Perhaps the drop was in part related to closer supervision of lender "practices" (more like mal-practices), however, after nearly two years of filings coming in at the rate of 300,000 per month (!), some see tiny glimmers of hope that the hosing situation is (ever so slowly) turning the proverbial corner.

The American job scene also saw some improvement, as indicated in this morning’s release by the Labor Department in Washington. Filings for new state unemployment insurance benefits dropped by 36,000 cases in the week that ended on February 5. The seasonally-adjusted 383,000 figure reported by the USLD was the lowest such filings level since July of 2008. One school of economic thought-one that Mr. Bernanke is sure to be "enrolled" in- contends that sub-400,000 weekly claims filings are needed in order to conclude that there is a material gain in job creation afoot.

As recently as the previous reporting period, that bellwether figure was up at 415,000 filings. Here is another proverbial "corner" that still needs to be turned in order to declare the "all-clear." Mr. Bernanke warned in Capitol Hill testimony yesterday that US unemployment might remain "elevated" (no timeframe given) despite the recent sharp drop to the 9% level. Despite such caution on jobs, and despite the fact that Mr. B also allowed for the fact that the Fed might curtail its attempts to [continue to] loosen credit through Treasury bond purchases if inflation risk increased, Republican Ron "End The Fed" Paul depicted him as ‘cocky’ (in a classic display of "kettle-black") during a US Banking Subcommittee hearing yesterday. Place your bets on who will prevail…

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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