Tuesday Kitcommentary – You Wanna Bet?


Precious metals trading opened on a firmer footing this morning following overnight dips to near recently formed price support areas.

Bullion BarsThe market’s tenor was however on the nervous side as players eyed lingering profit-takers still in action and remained focused on the US dollar and oil values. Spot gold dealings started the Tuesday session with a minor, 90-cent loss per ounce, quoted at the $1,464.40 mark on the bid-side.

Without thus far providing details as to the allocation of funds, the Balkans News agency reported that the International Monetary Fund started discussions on how and to whom to dole out $2.79 billion of windfall profits that have resulted from its recently concluded gold sales. The IMF is said to be considering three options at this time.

At the 8:20 NY time, silver advanced by 43 cents to open at the $40.65 level per ounce. The white metal had dipped to one penny under the $40 mark in overnight trading after having raced across a $2 range on Monday. A gargantuan bet against silver values was placed into position yesterday with the initiation of a one million-share-large put on the iShares Silver Trust (SLV)- at the $25 level by July. The bet constituted the largest single options trade on US exchanges and came as silver was touching the 31-year high watermark near $42 per ounce.

The (as yet) unidentified buyer of said puts is in effect counting on a 37% decline in silver prices by that timeframe and is perhaps reinforcing the UBS-originated opinion issued yesterday, that ‘"it takes a brave investor to buy silver right now." Mind you, it also takes some guts to go up against the vertical wall of speculation currently manifest in the white metal. However, as they say at the Montreal casino: "Faites Vos Jeux!" — The bet is on and time will tell who walks away shirtless, or loaded.

ABN AMRO’s monthly report on metals projects 2011’s supply and demand tonnage figures and summarizes the still-in-surplus silver market conditions as follows: Mine supply of silver is forecast to rise to approximately 24,000 metric tonnes, secondary (scrap) supplies are estimated to reach 11,370+ tonnes, and government silver disposals are estimated to reach 350 tonnes (a 40% jump from 2010’s sales levels).

Meanwhile, silver demand from jewellery and silverware is projected to reach 7,218 tonnes while industrial demand for the metal is estimated to climb to 12,543 tonnes. Taking into account an investment demand level about on-par with that seen in 2010 (roughly 8,600 tonnes), the silver market in 2011 is projected to show a "residual" overhang of 7,333 metric tonnes. A shortage of silver, that, is certainly not.

Platinum and palladium both traded from unchanged-to-higher as buyers returned to that niche, despite the memo issued to US Toyota dealers by the automaker’s US manager, warning that all of Toyota’s US plants are facing shutdowns of various durations slated to take place this month, and that spot shortages of certain models will become a reality on US dealer lots. Toyota’s Japan-based plants are set to resume production next Monday but only at 50% of their previous output levels.

Platinum remained static at $1,779.00 per ounce, while palladium notched a $4 gain to reach $780.00 per ounce this morning. Meanwhile, US stocks were seen opening lower (87 points lower at last check) amid worries about Japan and about corporate earnings reports coming into the market. Aluminium giant Alcoa (traditionally the first "horse" out of the corporate earnings reports gate) reported strong Q1 results but its shares fell by more than 5% following what was being labeled as "disappointing sales."

The most recent ABN AMRO/ Virtual Metals overview of the metals’ markets offers a bit of a mixed picture for the platinum-group metals space. Analysts at the bank opine that "while the PGMs will receive support from the investment activity in gold and silver, the widening challenges to the auto sector and elevated energy prices will dampen sentiment." That said, the ABN AMRO team also feels that "the theme of dwindling Russian stocks of palladium will likely return to the fore of investors’ minds and propel the metal’s price in the coming months."

The analytical team’s short-term London pm fix price targets for platinum are: $1,760/oz-$1,835/oz; and they are $760/oz-$840/oz. for palladium. The latter traded at a high of $858 in February of this year, but that was ahead of the natural disaster that took place in Japan. Since that time, the automotive sector has had to deal with a series of worrisome news related to production (and thus, to PGM demand) difficulties.

In the market background, oil continued to slip, albeit at a lesser pace than it did on Monday when traders were seen running for the exits following an IMF projection of slower growth for the US and for Japan — an assessment brought about in fact, by…rising-through-the-roof oil prices. The IMF also issued a fairly stern warning on the property bubble in China and in Hong Kong. Black gold dropped to the $108.35 per barrel mark this morning and this fourth daily decline in the commodity was also being aided by confirmation of news that Col. Gaddafi having agreed to a ceasefire at the urging of the African Union.

Also in the background, the US dollar fell 0.33 in mid-morning action and was quoted at $74.74 on the trade-weighted index after it had advanced to above the 75 mark on the heels of safe-haven-flavored bids overnight. The quests for such safety were prompted by the Japanese government’s raising of the nuclear threat level from the crippled Fukushima Daichi nuclear complex to the rating of 7. That grading places the crisis on even footing with the 1986 disaster that took place in Chernobyl, the Ukraine. The Japanese yen also showed gains during the night as it has been the currency to mostly benefit from crisis-induced safe-haven purchases since mid-March.

Speaking of the US dollar and of its prospects to continue buckling under the pressure engendered by surging commodities (or, is it the other way around?), Fed President Janet Yellen reaffirmed the position taken by her institution that the current spike in "stuff" is transitory in nature and that it will not have long-lasting consequences on US growth, or on US inflation. Ms. Yellen not only exculpated the Fed from being responsible for the commodity bubble currently in progress, but also pointed to the fact that the values in that niche have leapt far higher than would be justified by the decline in the dollar.

The greenback has fallen roughly 10% since last summer, while certain commodities (can you say: silver?) have spiked anywhere from 40 to 70 percent or more. Ms Yellen, as if taking a page from this recently-published book, categorically defused perceptions that the Fed will somehow lose control of the process and allow inflation to spiral away in a fashion similar to the 1970’s.

On another factor that has been instrumental in bringing about aggressive US dollar selling in recent times, the US deficits, there appears to be further progress being made in Washington. American lawmakers have reached agreement on $38 billion worth of cuts to the federal budget for the remainder of this year. Details will be on offer in President Obama’s speech to the nation, scheduled for tomorrow evening. Targeted for the budgetary scalpel are agencies such as the EPA, the NIH, and programs such as high-speed rail and law enforcement.

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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