Wednesday Kitcommentary – Betting the Farm (and the gold mine, and the…)


Bullion BarsLingering selling pressure persisted in silver overnight and the white metal sank very near to the $45 per ounce bid quote as the US dollar rebounded from fresh lows ahead of today’s Fed meeting and Bernanke press conference.

Apprehensions that the recent, eight-session-long rally in metals may have been overdone, and nervousness surrounding the possibility that the Fed may indeed indicate that it plans to take away the party platter from which commodity space speculators have been feasting for a couple of years now contributed to Wednesday morning’s early patterns of volatility and indecision in the precious metals complex.

Spot gold dealings started the midweek session with a modest, $1.70 per ounce gain, quoted at $1,508.80 on the bid-side and, while still maintaining above the round psychological figure, the metal was being held back from further advances by players keeping a wary eye on the greenback (up 0.27 or .036% on the index at 73.78) and on any pre-Fed market posturing. In the interim, we had US durable goods orders coming in at better-than-anticipated levels for the month of March.

The 2.5% surge in DGO underscores US economic vigor and could provide another catalyst for a shift in Fed monetary policy. However, one might wish to wait for US GDP figures due later in the week before concluding that the "all-clear" signal should be given to the US central bank. Projections are that Q1 US GDP might show a slightly lower than 2% rate of growth, as opposed to the more than 3% expansion level that was recorded at the end of last year.

Silver fell by 33 cents on the open and was quoted at $45.27 per ounce. Overnight highs in the white metal were noted $1 above that level but the market’s temperature has shown a noticeable decline from its torrid readings seen on Monday. Yesterday, one veteran market observer, William O’Neill, a principal with Logic Advisors remarked that as far as silver’s 10% drop was concerned "the market was getting close to $50, and that’s just an accident waiting to happen." Tuesday’s action may have been a fender-bender, at this point.

"The speculative element has driven this market to prices that are just unrealistic" said Mr. O’Neill. The name of that "element" you likely know already: hedge funds. Average daily trading volume in April for silver futures contracts has witnessed more than triple its levels recorded in 2010. Such impressive market statistics prompted another analyst, Michael Gross over at to note that "this has been a market of wild speculation."

The picture is hardly different in many other commodities at this juncture. Record levels of net bullish positions have been spotted in cotton, copper, and, obviously, crude oil. Precisely amid such manifest euphoria for "stuff" there are some, such as Boston-based GMO’s Jeremy Grantham, who warn that the entire niche could experience a cave-in of epic proportions. Mr. Grantham places the odds of such a collapse as high as 80% (!). But, fear not; following such an "adjustment" the GMO contrarian envisions "the buying opportunity of a lifetime." Mr. Grantham is a huge commodities bull, by the way. A study he published on Monday was titled "Time to Wake Up: Days of Abundant Resources and Falling Prices are Over."

Marketwatch’s Brett Arends concedes that crystal-ball gazing is a dangerous and quite imprecise practice, but notes that Mr. Grantham’s bearish short-term clarion call has some valid foundations:

"This isn’t purely subjective. Data from the futures market back it up. Speculators, as noted above, are now sitting on huge bullish commodity bets. That frequently precedes a serious correction. A fair number of these speculators are semi-pro hedge fund managers who are back in the game and gambling, once again, with borrowed money. They are frequently paid to take big gambles, and they will have to buy back positions, quickly, if markets turn."

Platinum and palladium started off on the mixed side this morning, as the former gained $2 to advance to $1,806.00 per ounce and the latter remained unchanged at $752.00 on the bid-side. No change was reported in rhodium which was quoted at $2,230.00 at last check. Automaker Volkswagen AG reported record profits for the first quarter of this year, with special thanks to the sales success of its Audi and VW brands over in China. The firm is counting on continued growth in auto deliveries in the BRICs and hopes to claim the number one global spot in car production by 2018. Toyota Motor currently retains that title.

Since it is not possible for us to wait for the 2:15 PM hour and since there will be plenty of post-game Thursday morning analysis on offer, let us take a look at some previews of words and "body language" to possibly come from the Bernanke press conference today. Of the 44 economists that Bloomberg surveyed recently, 75% believe that the US central bank will show that it is nearing the time when it veers away from its hitherto highly accommodative monetary policy and start heading in the same direction as its EU, Chinese, and Indian counterparts; a direction that leads to higher rates, that is.

The first "baby step" on that trail will likely be the ending of the by-now-familiar "extended period" label that has been applied to interest rates at or near zero. Following that "omission" of the "extended" term, the Fed will likely take other steps, perhaps not of the baby variety, but in the same direction. For example, the portfolio of its assets might begin to be reduced. It is an open secret that the Fed has been "shopping" during recent month for counterparties who might play a role in such sales.

Thereafter, the expanded Fed balance sheet might be allowed to also shrink. Finally, the first interest rate hike will round out the process, with more on the horizon; but the timing of the latter is as yet uncertain. At any rate, the bottom line here is that the process is thought to be nearing a launch and that the fact that no interest rate adjustment might be made before the year runs out does not mean that the exit strategy will not already be underway. The mere ending of reinvestment and the tweaking of language that has been used up to this point will already mark the shift in Fed policy.

Well ahead of the press conference hour, namely at 12:30 PM, the US Fed will release its FOMC statement and the financial media will waste no time in parsing the announcement. There are observers who do not, on the other hand, expect a whole lot from the dual meeting-conference events today. Since "Fedspeak" is a fine art and is expected to frequently say the least possible so as not to move markets, the conclusion is that if in fact markets move a lot in the wake of the Q&A session, it will have been possibly due to a slip of the Bernankian tongue.

We end this morning with a quick glance at the core driver of many of these aforementioned markets: the good old buck. Currency analysts are also jockeying for pole position on who will have called it right before and after the Fed event. Elsa Lignos, Sr. currency strategist over at RBC Capital Markets notes that:

"A total lack of guidance on future tightening steps would be knee-jerk U.S. dollar-negative. But any firmer-than-expected indications of an exit policy will catch a market short the dollar."

Indeed, "short the dollar" is a vast understatement of the market "conditions" we have witnessed that pushed the US currency to its recent lows. "Ultra-short" perhaps begins to describe it all.

Until tomorrow, do stay tuned to the Fed channel.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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