Thursday Kitcommentary – Gone With The Wind(s)


Bullion BarsThursday 05.12.11 Kitcommentary From Kitco Metals Inc. “Gone With The Wind(s)”

Amid further signs that not all is well in the world of commodities, values of various components that make up the complex continued to slide after having attempted a half-hearted recovery over the early part of the week. Yesterday’s fresh wash-out in silver (nearly 9%) was followed this morning by a second wave of aggressive selling that shaved yet another 7% off of the white metals previously lofty valuations.

Last week’s largest decline in commodities in two years and the loss of some $100 billion in this niche continues to play heavily on the speculative mind, commodity newsletter-originated clarion calls to "backing up the truck" notwithstanding. It could be that backing up the truck might result in a backing into a ditch from which it could take months to extricate oneself. For the time being, the urgings to bargain hunt remain visible, but the euphoric pronouncements (such as "fundamentals no longer apply") have dissipated in the winds of sentiment change coming from the very investors who are supposed to carry the flag in this market space.

Silver prices ahead of the New York opening this morning came within a hair’s width of touching support that is thought to perhaps emerge near $31.50 the ounce. A dip to under the $30 mark and a possible visit to $29 might potentially be followed by somewhat sizeable rebounds but, at the end of the day, some chartists are still pointing to the mid-$20s as the target that…beckons. Stay tuned, as they say. In some sense, it might well be worth watching whether or not Mr. Soros’ "early exit" from certain positions of his was in fact a "just in time" move.

Thursday morning’s metals market action was once again dominated by sellers; some more aggressive than others. Spot gold prices opened with a 1.12% drop and were quoted at $1,484.1p the ounce and on this round of selling it appears that the yellow metal might not be able to retain the $1,500 value crown and that the only thing that could change the now emergent direction in gold (towards trend-channel numbers such as $1,460, $1,390, and $1,327) would be a convincing demolition of the $1,550.00 barrier on the upside.

Silver started the day’s session with a $2.17 per ounce decline and might spend the rest of the day being buffeted by sellers and (some) buyers as the fairly important $31.50 – $33.50 zone witnesses fresh bouts of arm-wrestling. The one thing that participants (and observers) are fast-learning about "poor man’s gold" is that it can indeed render one poor in a matter of minutes, just as it enriched some in a relatively fast manner in recent months. However, more evidence has emerged that the "brother-in-law" syndrome had taken over retail buyers’ psychology as more and more of them piled into the metal on nothing more than hearsay, and perhaps with money they could ill-afford to lose.

Platinum and palladium fell this morning as well, as the sympathetic selling was unmistakable in the complex. The former lost $18 to ease to the $1,755.00 level and the latter slipped $13 to start at the $702.00 per ounce mark. Automaker Toyota’s profits suffered a 75% contraction following the March Sendai quake and the resulting production disruptions. Nearly 900,000 vehicles were not produced by the firm since the quake took its toll on plants, suppliers, and distributors.

Crude oil lost 2.7% and fell to $95.59 per barrel contradicting those who had promised $115 or $150 values by this juncture, just a couple of weeks ago. Black gold fell hard as the IEA trimmed its projections for demand for the current year by an average of about 190,000 barrels per day. The agency also noted that the US summer driving "season" could turn out to be a dud if $3.50 to $4 gasoline sticks around at the pump for much longer. US inventories, meanwhile, continue at the "ample" (and "rising") level. China’s on-going tightening moves also contributed to the price spill in the oil trading pits. Estimates place China’s economic growth levels to perhaps the 8% level for the remainder of this year (compare that to the 10.3% growth pace in the country’s economy that we witnessed last year).

It is becoming somewhat apparent at this juncture that perhaps something is "different" in global investor sentiment –if nothing else- and that the piles of cash which had found their way into commodities over the past months since August of 2010 are beginning to get up and walk out of the party room. Perhaps such an exodus might not take place at the furious clip we saw last week (or on Wednesday or this morning) but a freshly conducted Bloomberg poll among such individuals reveals that 30% of them do plan to raise cash positions and lighten commodity positions for the remainder of this year.

One poll participant noted that commodities have "become a bubble, with a lot of non- specialist investors," and that "demand cannot cope with the price rises that we have seen."

The principal culprit for such a paradigm shift in investor attitudes is the rising conviction that –as one fund manager opined- "the big [Fed and others’] stimulus game is over." Time and again, we attempted to point out in these columns that much (perhaps way too much) of the frenzy in this sector has been predicated on one single reality: that of ultra-cheaply available dollars with which to speculate in practically everything that walks and talks like an asset. However, there are also a few additional contributing factors to the departure in sentiment among global investors.

For one, while they are fairly convinced that most central banks have now embarked on the "exit game" (and that more, including the Fed, will follow suit), they are also becoming rather doubtful about economic growth levels going ahead. In that sense, the fact that stock have been taking it on the proverbial "chin" along with raw materials and precious metals indicates that the "buy everything" syndrome is possibly slowly morphing into a "sell everything" one; all to the benefit of the formerly beleaguered US dollar. Also on the list of contributing factors to the perhaps broad, "battleship turn" we might be witnessing unfolding here is the tightening of not only the interest rate environment but of the very requirements to participate in the commodities’ casino.

We know what happened when the CME took several consecutive steps to hike margin requirements for silver market speculative participation. Now comes word that the Shanghai Gold Exchange will raise its margin requirements for silver futures as part of risk-control measures. This hike would be its third round of increases in less than a month. Players will now need to pony up 19% of a contract’s value in order to be allowed to the card table, while, at the same time, the daily price limit for the one kilogram silver forward contract will rise to 13% from 10% above or below the previous session’s close.

Meanwhile, China’s PBOC undertook a hike of its own once again; it raised the requirements for reserves for that nation’s banks for the fifth time this year. The action added to fears that the Chinese economy will indeed slow in the wake of such less accommodative policies by the central bank and that by doing so, it will require less "stuff" to be consumed. Inflation combat now appears to be a globally-spreading agenda item for central banks. This is what has brought about the possible pivot point in the markets and this is what is clearly contributing to the aforementioned turn in global investor sentiment.

In other market-impacting news, that which had been feared to become a certainty by this time – a Greek default (or, perhaps the country’s departure from the EU) appears not to have happened. Actually, the IMF has come out and remarked that Greece’s debt appears to be "sustainable" and that the country could well avoid a restructuring of its debt. Greece’s $71 billion privatization program (not to mention its repeatedly general strike and protests-inducing austerity programs) could result in the potential sale of assets. Perhaps as much as 280 billion euros’ worth of real-estate assets could be up for sale and other assets as well.

Speaking of real estate, the market for same in the USA has just recorded its seventh consecutive month in which foreclosures fell. April, in fact, witnessed a dramatic, 34% contraction in the number of properties going ‘belly-up’ and being foreclosed upon. None of that changes the fact that nearly a third of single-family homes are "underwater" as regards the loan-amount-to-current-home-value equation their occupants find themselves in at the moment. However, the situation only underscores the same thing we focused on in the beginning of today’s posting: that which goes up (and then some) inevitably succumbs to the laws of gravity, no matter how emphatic the "this time it’s different" sloganeering becomes. Now, some analysts do not expect a fully normalized US real estate market until circa 2014.

As we go to posting, the US Labor Department reported a drop of 44,000 in US initial jobless claims filings for last week. The figure partially reversed the previous spike in filings seen earlier in April. Also in the US, retail sales gained traction for the tenth month in a row and underscored a still-marching-ahead (if not at break-neck speed) economy. The twin statistical releases buoyed Treasurys and the US dollar and contributed to the maintenance of the selling pressure in the precious metals’ complex for the moment. And, it is a ‘moment’ of some potential importance. Read on:

Last Friday’s Forbes’ contributor Mark Sunshine’s blog "Great Speculations" noted that "the recent plunge in commodities prices confirms what everyone knew all the time — inflation is being driven by commodities speculators who are profiting from everyone else’s collective misery. The evidence of a speculator driven bubble was unmistakable by the end of the week…If margin rule changes for a minor commodity can trigger a general price run, imagine what would happen if a series of broad based rule changes were implemented."

The author remarked that the Fed:

"has the regulatory authority to stop bank holding companies, and their subsidiaries, from being the "house" at the commodities casino" but went one step further and suggested that the US central bank actually avail itself of that power and do that which (in the writer’s opinion) needs to be done; pop the commodity bubble. Such action, Mr. Sunshine contends, would "stop financial speculators from using liquidity that was actually intended as economic stimulus from being diverted into legalized commodities gambling."

He concludes by noting that:

"punishing everyone by raising interest rates, or waiting until inflation overtakes the economy, isn’t a rational choice. Bernanke has the power to pop the commodities bubble right now without hurting the rest of us. Let’s hope he uses it." No telling how much hate mail the inbox of Mr. Sunshine was flooded by in the wake of such well-intentioned "heresy." Very likely, he was instantly accused as a person in the putative employ of Mr. Bernanke.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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