Monday Kitcommentary – Picking up the pieces…


Bullion BarsMonday 05.09.11 Kitcommentary From Kitco Metals Inc. – "Picking up the pieces in the post-bubble war zone"

Commodities in general, and the precious metals we normally track stabilized overnight and showed some gains as the new trading week got underway.

Crude oil led the pack, notching a near-3% gain early on Monday, and nearing triple-digit territory once again. While the US dollar remained relatively stable around the 74.70 level on the trade-weighted index, the precious and base metals were still able to stage advances as a few tentative buyers returned to the smoldering landscape left in the wake of last week’s $100 billion collapse. Some $13 billion worth of precious metals flowed out of specialty ETFs over the course of the past week, but Goldman Sachs this morning suggested a possible recovery (sometime in the latter half of this year perhaps) in the commodities’ niche.

Well, a recovery-of sorts — is what we had on display in the metals’ space this morning in New York. Spot gold dealings opened with a $5 per ounce gain and were quoted at $1,500.50 at last check. Silver bullion traded $1.08 higher at the $36.70 level while platinum and palladium showed more modest gains. The former rose by $2 to open at $1,787.00 the ounce, while the latter climbed $7 to the $724.00 per ounce mark.

In the background, crude oil advanced $2.64 to the $99.82 value marker while the US dollar was down a tad, losing 0.33 on the aforementioned index. Of note in the PGM complex this morning was the announcement by SA platinum-producing giant Lonmin that it will spend about $400 million a year to boost annual production to 950,000 platinum ounces by 2015 from the 750,000 ounces it plans for this fiscal year ending Sept. 30.No question that volatility and fits and starts will once again define the trading action at least for a couple of sessions more, as the job of collecting the dead and aiding the wounded continues following last week’s carnage in the pits.

As is the norm at such junctures historically, there is ample yet divided opinion as to what might come next in this emotion-driven investment space. Some (Morgan Stanley and Barclays among them) continue to offer the prospect that nothing has changed in terms of fundamentals and that rallied will resume before too long in all of the assets that recently made for spectacular headlines. To any a hard money newsletter, the sell-off is nothing more than an ostensible opportunity to "reload" and not to "retreat." They see dollar weakness resuming before too long and continue to point to the largest short-dollar positions in place since 2007 as a validation for such a vision.

Others, such as noted analyst Michael Aronstein (Marketfield Management) who correctly predicted a similar crash in 2008 feel that the commodities’ space is entering a five and up to ten year bear phase specifically on account of a paradigm where "supply and demand is almost meaningless" and where the nature of recent trading reminds one of "the last days of the tech bubble."

Crude oil’s most accurate forecaster recently noted that black gold became "detached" from its fundamentals as well due to the manifest excessive speculative fever in the complex. Recall that almost $10 billion rushed into commodity funds in Q1 (an amount that was triple that seen in that period a year ago) and that commodities outpaced stocks, bonds and the US dollar for the five months that ended in April. That advance was the longest in nearly a decade-and-a-half.

The commodity rocket ride to outer space became most visible in silver however. An entirely new class of buyer came to the silver table in recent weeks; unemployed youngsters seeking a quick buck, day traders who still recalled the heady days of Webvan and, grandmothers who might hardly be able to sustain losses, etc. And, although silver ascended by over $165% since last August, and the daily contract volume in the metal doubled and exceeded certain other normally much larger market trading niches, the metal was still seen as the new "it" trade for many. One young trader declared, "Silver is the new stock market."

The advent of such — let’s not mince words — bubble conditions suddenly put silver on the CME’s radar. A team of six risk-management personnel at the exchange observed the emerging frenzy in the white metal and hiked trading margin requirements several times in order to ensure that losses could be covered by inebriated players in the event of extreme volatility.

When the cost of attending the silver party climbed by 80% a host of participants decided to stop quaffing from the punchbowl and left the small, retail investor in the proverbial ditch. "This time is different?" Yeah, right. One could venture a guess at this point, and it would not be a stretch to assume that similar future bubbles will turn up on the exchanges’ radars a lot sooner, and that similar measure intended to avert them from having to be popped (which, as you can plainly see, is quite a painful experience) will be taken.

It has been posited that silver’s massive price collapse is actually what precipitated the eventual haircut that all commodities took late last week. The rocket ride reached the end of its parabola and traced an arc that looks pretty much like it respected the laws of gravity at this point. Alas, the parachutes appear to be missing from the nose cone of this space vehicle.

Simply consider the more than 36 million ounces (that’s more than 1,100 tonnes of the stuff, folks) that gushed out of silver ETFs during the debacle that started on May Day (this time, living up to its other connotation in earnest). That’s an amount that is about a quarter of the size of the entire silver investment demand the market witnessed in 2010. It is an amount that comfortably overwhelms the total size of the American Eagle silver coins that the retail investors absorbed last year in the expectation that the dollar’s obituary would soon be written on the scrolling news tickers in Times Square. That’s the kind of "stuff of legends" that this market experienced last week, and it is sure to be written about for years to come.

Ultimately, as the New York Times succinctly summed it up in its most recent article on the matter, "the recent margin increases in silver and some other commodities may have been more of a psychological sign that the long bull market in commodities has run its course than a significant financial constraint for most speculators."

As usual, it is not the George Soros-type of player who gets hurt by such developments (he in fact exited the niche perhaps presciently, leading up to the epic events of last week) but the small, retail, trend-following investor who can ill-afford to bet on things he or she knows very little about, other than being blinded by the promises of "investment Nirvana" contained in way too many newsletters of late.

So, might we suggest, try to pay a little more attention to what central bankers say and do, to what folks like Soros say and do, and to what the CME, or CFTC, or other acronyms in a position of authority are trying to signal. You might just avoid a world of pain in the process. And now, for a change, do consider the various markets’ fundamentals as well. They still matter. Very much.

Hope to see you at the Hard Assets Show in NYC, even if certain assets are somewhat less "hard" than one week ago. Bring a friend, or two. Our team of Kitconians will is here to meet and greet you.

PS- Due to travel and to the show commitments, a commentary or two might not appear in the usual place during parts of this week. For that, we apologize in advance. Thus we say: "Until next time,"

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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