Thursday Kitcommentary – Livin’ on Easy Street


Bullion BarsWell, the Fed "giveth" less than some had hoped for, but it also "giveth" a roughly two-month reprieve to the dollar-carry/commodity-betting crowd. The parade on "Easy Street" thus continues amid noisy revelry.

Whilst stressing that markets can probably say "farewell" to the idea of any QE3 being loaded into the Fed’s missile silos, Mr. Bernanke let it be known that, at least he, is comfortable with current policy and that QE2 will live until it expires in some 60 days. The catalyst for the lack of an offer of a QE3 program was, in fact, the current "it’s getting hotter in here" reading of the inflation thermometer in the US.

Thus, to say that the Fed is not "aware" of the threats being posed by some of the very policies it has put into motion in recent years would be to ignore what Mr. Bernanke said and meant when he referred to the Fed "having to respond" in the event "inflation persists or inflation expectations begin to move [higher]." Implicit in the language that he used in front of the microphones on Wednesday was Mr. Bernanke’s take that the decline in the US dollar has been on the "orderly" side and that there is as yet no real need to change course when in fact such a decline has helped support gains not only in the economy but in equity markets. Market pundits described this as a de facto acknowledgement by the Fed chief of the pivotal role being played by the stock market in the grand scheme of things economic.

Mr. Bernanke also attempted to allay fears that the cessation of his institution’s bond-buying program will have much of a material impact on financial markets, when the end of June rolls around. Consensus among economists is that the Fed will begin to reverse its stimulus campaign, but not for at least a few months from now. The focus regarding any announcement of an exit from accommodation has actually shifted to the FOMC meetings slated to take place in August and September, at this point. The only thing absent from the press conference’s contents was any indication of exactly how and when the blow-up in oil prices might come to an end or begin to reverse course.

Meanwhile, other central banks around the world continue to be headed in a different direction of that which the Fed remains in, in part due precisely to the Fed’s "steady as she goes" posturing. Importing inflation continues not to sit well with Chinese officials, for example. While most equity markets initially gained following the parsing of the FOMC announcement, the regional ones in Asia began to lose value in the wake of fears that the PBOC could (read: will) tighten some more, and do so, soon. Grantham Mayo Van Otterloo & Co. CIO Jeremy Grantham is of the opinion that Chinese economic growth could slow to a level considerably less than the 9.7% pace it exhibited in Q1 of 2011.

Bloomberg notes that "Mr. Grantham, 72, is best known for his bearish outlook and for spotting asset bubbles early. He correctly forecast in 2000 that U.S. stocks would decline in the coming decade, and as early as July 2007 predicted that a large global bank would go bust amid credit market declines."

Mr. Grantham, whose views we quoted yesterday on the subject of the paradigm presently manifest in commodities, is ascribing a 25% chance to the prospect that the world’s second largest economy might "stumble" before next year is over, mainly on account of an overcooked real estate niche and as a result of larger-than-large capital spending.

Japan’s central bank rejected the idea of further easing via asset purchases, even as it slashed economic growth outlook for the country in the wake of the Sendai quake. The BoJ feels that it might be worth waiting to see what the effects of its previous accommodations might turn out to be, before "giving" just because of current readings on the economic front. Huge kudos, by the way, are due to the 8,500 engineers and thousands of other workers who have pulled of a feat that one can only describe as improbable; the resurrection- in just six weeks (!)-of that country’s most active bullet train line. This is a noble and commendable act of pulling together in the face of huge adversity, if ever there was one.

US dollar-selling swiftly reignited in the wake of yesterday’s "no change" Fed statement and the Bernanke press conference and it was the primary driver of the rally that brought gold prices to a fresh record at $1,535 during the evening hours. However, gold’s recent spike is now showing signs that the yellow metal is no longer acting as a reflection of speculative responses to the presence of liquidity in the global system, but, rather as a "knee-jerk/go-to" asset by dollar sellers.

In that regard, our friends over at Standard Bank SA opined in their overnight market commentary that we may have come too far, too fast, and that gold broke through the $1,500 level some two months ahead of previous projections, outpacing other metals, such as platinum, for example. BNP Paribas, for one, notes that certain currency market metrics (read: dollar shorts) are "looking extremely stretched" while MF Global raised its upper end gold price targets for the current year to the $1,650.00 level. Meanwhile, a veteran investment letter has started to fret about the yellow metal even as it envisions the bullish super cycle as remaining intact. Those types of divergent views will likely also be reflected in mushrooming volatility in these markets as the summer rolls around.

This is not to say that silver has not pulled off a similar feat and that its most recent vertical trajectory on the charts is anything more than pure speculative fever in action. On CNBC yesterday, Jim "Mad Money" Cramer remarked that the white metal is the new "" for day traders glued to their computer monitors, trying to outwit each other with bets on it. Even so, just a couple of days ago, and despite the gyrations we have all witnessed in the metal, Mr. Cramer advised buying…more of it.

Other market observers who appeared on the same financial channel yesterday also observed that silver is showing all of the indications of having turned into a…spherical object of speculative desire, far removed from its underlying fundamentals. None of that type of diagnosis stopped silver from leaping some $2.50 following the Fed events on Tuesday. Day traders lingered near their screens and turned into…evening and late-night traders.

Thursday’s precious metals markets opened somewhat on the mixed side, with gold showing a bit of fatigue and rhodium falling a little further, while silver and the other two noble metals added more value. The opening bid in gold was down 40 cents at $1526.90 per ounce as against marginal declines in the US dollar and crude oil. Silver advanced 47 cents to start at $48.24 the ounce.

As mentioned, rhodium slipped a tad, losing $20 to reach the $2,210.00 per ounce mark. Platinum and palladium climbed $5 each and opened at $1,829.00 and at $769.00 respectively. Little note was apparently taken by noble metals speculators this morning of the fact that Toyota’s as well as Honda’s car production fell by nearly 63% in March and that full output levels by at least Toyota are not in the cards until year’s end.

Several key bits of US economic statistical data were on the front burner this morning, and they offered a sufficient amount of excuses for further speculation and aggressive trading. The corollary to the findings was that the US economy has weakened rather sharply in the first trimester of 2011. Albeit the reading of the US real GDP for the period was higher than economists had anticipated, coming in at 1.8%, the decline in the figure from the 3.1% pace of expansion that occurred in the final quarter of 2010 marks a notable contraction and it is largely due to shrinkage in consumer spending. Concomitantly, the pace of US inflation accelerated. It is not hard to make the connection between surging crude oil prices and the Commerce Department’s findings that were released this morning.

Naturally, the US dollar took a further selling hit in the wake of the GDP data and its sellers were further emboldened following a rise of 25,000 in the weekly initial unemployment claims filings. The four-week average in that figure has now bumped up to near the 410,000 level and might become disconcerting if the trend persists. As well, the first quarter’s Personal Consumption Expenditure price index jumped to 3.9% from the 2.2% level recorded in QIV of 2010. This is the rough patch that sharply higher oil has resulted in. This is the bonfire that gasoline is stoking.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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