The Price(s) of Tyranny – Thursday Kitcommentary


Bullion BarsWith oil prices well above the century mark despite reassurances by Saudi Arabia that it is willing and able to offset any potential disruptions of the commodity arising out of the Libyan civil war, gold prices rose once again overnight and came to within 1% of their all-time record high. Certain ‘safe-haven’ currencies such as the yen, the Swiss franc, and the Norwegian kroner also received augmented bids as global investors scrambled for shelter while they watched the playing out of Mr. Gaddafi‘s disturbing epilogue to his rule.

No need to mince words: the country that Mr. Gaddafi claims still contains "folks who love him" is in a de facto state of civil war. Several cities in Eastern Libya have fallen under the control of rebels and they are now seen advancing on Tripoli while footage from the Al-Jazeera network replays the images of summarily executed bodies belonging to those who refused to show their "love" for Mr. Gaddafi and chose not to shoot protesters. Unless outside military intervention or some covert operation removes the man from power, the climax of this ugly event is likely to become a replay of Comrade Ceausescu’s 1989 Romanian finale.

Gold spot prices opened with a $6.40 per ounce gain on Thursday, and they were quoted at $1,418.10 on the bid-side. Silver was off by 12 cents however, feeling the pressure of selling in the industrial and noble metals’ niche (see below). Platinum was down $11 to $1,771.00 the ounce, while palladium suffered an equal-sized loss and was quoted at $766.00 per troy ounce.  

We now bring you the excellent report by Standard Bank’s Marc Ground on the subject of platinum and palladium –through the lens of Swiss import/export flows- published this morning. Those of you who follow these markets closely (and we know you are out there in large numbers) will find this in-depth analysis quite valuable – which is why it appears here in its entirety. Take it away, Mr. Ground:

"This week’s release of Swiss Customs data for January indicates an improving outlook for both platinum and palladium demand. However, as has been the case throughout H2:10, the demand picture for palladium still appears stronger. Switzerland remains a net importer of platinum, with 24,011 oz flowing into the country during January. Off the back of December’s dramatic 163k oz of net imports, this continues the trend of net inflows into Zurich seen since August 2010 (there was a brief interruption in November 2010, with exports of 55k oz). The November figure was elevated by significant flows to the UK for Loco London settlements (94k oz); however, these flows have once again dropped off, with the last two months showing a 62 oz of net imports and only 248 oz of net exports.

Chinese demand for platinum from Switzerland, although relatively lacklustre, did see a slight pick-up in January. 28k oz moved to China, up from the previous month’s 19k oz, but still below the 2010 average of 50k oz. The slowdown seen in Q4:10 platinum demand from China can be largely attributed to reduced jewellery demand in response to higher platinum prices. The fact that China’s net imports rose considerably (49k oz) in November 2010 as prices weakened, reaffirms this view. Nevertheless, we believe that jewellery demand will continue to gain momentum into 2011.

We also note that Swiss Customs Data is only indicative and not necessarily representative of Chinese physical demand for platinum. China’s Customs figures for January (released this morning), although down 18% m/m, are still well above the 2010 monthly average and up 24% y/y, indicating relatively strong demand for platinum. After being an net exporter during H2:10, Germany posted a minimal 1.4k oz of net imports in January. While it is too early to confirm this as a trend, should this continue, it would bode well for platinum from an auto sector demand perspective.

Switzerland continued for the 9th straight months as a net exporter of palladium (290k) during January. The figure was considerably higher than the 2010 average of 91k net exports and marks the highest level since July 2010. However, it is important to note that a large part of this is metal flowing to London vaults.

China’s demand for palladium from Switzerland remains weak. In January, China imported only 124 oz, continuing the downward trend in demand. Once again, the negative effect of high prices is largely to blame. Although China’s Customs data reveals a 13% m/m drop, imports were up 57% y/y and well above average levels. Consequently, we could see even greater appetite for palladium after the recent drop in prices."

Gold’s initial gains shrank within one hour of the market’s 8:20 AM New York opening, despite continued slippage in the US dollar index (down 0.21 at 77.09) and likely due to the combination of decent US economic statistics (see below) and the fears that the Dow might have another not-so-good day and trigger margin-call selling. The yellow metal drifted in and out of red after the Dow opened for trading at 9:30 New York time.

The two noble metals traded at $1,850.00 and at $855.00 (a 10-year peak) just a few days ago, before apprehensions of $5/gallon gas or visions of burning Libyan oil fields worked their way into investors’ psyches. Lost in the rush of newsflashes coming from Libya this morning, the assurance (and warning) made by an unnamed Saudi Arabian oil official that:

"there is no reason for oil prices to rise because Saudi Arabia and OPEC won’t allow shortages to exist."

Well, we can think of at least one or two reasons for same; greed and opportunity. This, too, shall pass. If, indeed, OPEC is unable to fill the 0.05% gap that a total shutdown of Libyan oil flows would amount to, well, then, there is something wrong with OPEC. The cartel pumped nearly 30 million barrels of crude last month, and Libya contributed but 1.6 million of said amount. This, while OPEC appears to have a 5 million barrels per day (!) spare capacity. But it is all too easy to get caught up in the OMG! frenzy and abject fear being promulgated by insta-pundits appearing on CNBC.

Technically speaking, the events in Libya are anything but commodities-friendly. Part of the reason we’ve seen such deep turn-downs in platinum and palladium in recent days, is the attributed to the fact that $5 per gallon gasoline is seen as not quite the stuff that robust automotive sales are made of. The $120 price tag (seen in London earlier today) attached to a barrel of black gold could not come at a worse time for automakers, as well as the recovering global economy at large (and that of Europe, in particular).

General Motors just managed to post earnings of $500 million in the fourth quarter of 2010, and the US and global economy are still seen as on-track for a recovery, albeit one that is now turning more fragile with each day that passes and concludes with a growing body count in Libya. Just yesterday, Treasury Secretary Geithner asserted that:

"by really almost any measure you look at, the [U.S.] economy is just gradually getting stronger."

he spillover from the cave-in in noble and industrial metals could still impact silver even though the white metal has flirted with the $34 mark on the back of moves it made in sympathy with gold as the Libyan violence flared higher.

Something else that may not be all that commodities-friendly is…the concept of basic cycles. Someone who is well aware that "the tide" has this funny way of coming in, as well as going out, is Australia’s Reserve Bank of Australia Gov. Glenn Stevens. Mr. Stevens cautioned yesterday that the resource boom that is currently boosting the economy Down Under is but a phase. He advised that past resource booms didn’t go on indefinitely and that, thus far, they have all been followed by "a return to trend, or even a fall to well below trend." Just a minor…technicality.

Also technically speaking, the recent losses in the equity markets stand to trigger asset sales intended to meet margin calls.

"We are concerned that gold could turn lower at a moment’s notice, especially if the margin clerks begin to take aim upon the markets and begin to look for liquidity when and where they can find it," said Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, according to Bloomberg News.

And now, back to the (largely ignored, for the moment anyway) realities of economic statistics and posturing by central bankers. US jobless claims filing fell by 22,000 in the latest report from the Labor Department. The weekly tally was under the ‘magic’ 400,000 mark and it came in at 391,000 while the four-week average of that number fell to a two-year low (albeit it remained some 2,000 filings above the pivotal 400,000 figure).

Maybe Mr. Geithner (formerly the butt of many a joke) does have something valid to say about the US economy, after all. Separately, the US Commerce Department reported that US-made durable goods orders rose by 2.7% in January, and that it was the first such gain in four months, albeit it was largely on the back of sharply higher demand for civilian aircraft.

The Fed continues to start sounding a bit more hawkish and might turn that rhetoric even higher as the year progresses, unless, of course, Mr. Gaddafi pulls a fast one and derails the global economic train somehow. Marketwatch reported (albeit the news was well-buried) that:

"one of the most hawkish of the new voting members of the Federal Open Market Committee, Philadelphia Fed President Charles Plosser, on Wednesday said he’s considering voting against continuing the $600 billion bond buying program but is also concerned about undermining the Fed’s credibility."

Despite the weight that Mr. Plosser‘s words carry, the words of another Fed official – Mr. James "QE2" Bullard – are considered to be even more meaningful by Fed-watchers. Despite the fact that Mr. Bullard was indeed the first Fed policymaker to call for QE2, he is largely known as not only a monetarist, but as a sharp-clawed "inflation hawk." Thus, all ears are tuned in his direction and await what he might have to say about the Fed raising rates (or not yet). Will it do so in 2011, or not until 2012 rolls around? The FOMC meets on March 15.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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