Friday Kitcommentary – At The Core Of It All


Bullion BarsFriday the 13th (!) 2011 Kitcommentary From Kitco Metals Inc. “At The Core Of It All"

Commodities staged a modest comeback late on Thursday and into Friday morning as a slightly weaker US dollar drew a few courageous bargain hunters into the ring looking for an opportunity for a short-term buck-making opportunity.

It has been two weeks now since the sector has recorded certain epic valuations that were followed by a pattern of price action that best resembles the happenings at a bungee-jumping festival. And thus, we come to Friday the 13th, hoping we do not get the next installment of the movie playing out on the world’s financial screens.

During this period of tumult, small retail investors have learned some difficult lessons (or, did they?) about timing, emotion, and market behavior. Some are now wiser in the aftermath of recent events, but also poorer at the same time. Others, on the other hand, continue to sit things out on the sidelines, as evidenced by the tens of trillions of dollars (perhaps as many as 63) that are ‘parked’ around the world, and are not participating in markets that are best described as an exercise in sword-swallowing.

"The environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So, now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which…means having substantial cash reserves around a base of high-quality blue chips and emerging-market equities" is the advice currently on offer from Boston-based GMO head Mr. Jeremy Grantham.

Albeit the financial guru acknowledges that he might be a tad too "early" on such a caution-induced asset reshuffle, he feels that it might be a better approach that having to later be sorry.

Sharply rising commodities prices have only reinforced Mr. Grantham’s cautious views. Even though crude oil and precious metals in particular have given up some sizeable ground over the past fortnight, the broader trend towards higher prices still continues to unnerve him. Thus, Mr. Grantham advises, sell your riskiest investments, and do so now, even before the trend turns.

Perhaps the "best" (read: telling) headline on offer this morning was the one that the Wall Street Journal carried on the topic of black gold. "Crude Rises On Weaker Dollar; Fundamentals Still Weak." If that does not aptly describe the orgy of commodity speculation that arose in the wake of last fall’s "gift" of QE2 to the speculative crowd, well, nothing really does."Fundamentals? We don’t need no stinkin’ fundamentals!" has been the one and only slogan in this space and the commodity vigilantes have been putting the Fed’s money to "work" ever since it became available (at nearly no cost).

As a result, they got to a point where their actions are now threatening to either derail the recovery the Fed tried to stimulate with its asset-purchase program, or are motivating the Fed to begin to exit from accommodation due to the speed with which inflation is potentially approaching US shores. In a sense, the commodity specs have sowed the seeds of their own "destruction" with the aggressive betting they undertook with "OPM" (other people’s money).

The "clues" are mostly all out there, but speculative-induced "ignorance" is still offering financial "bliss" for some. When was the last time one has read that "X [insert your favorite commodity here] rose this morning despite poor demand and ample supplies as the US dollar was the prime price-moving agent" in a financial publication? How about the entire period since last August?

Spot gold dealings opened their final session for this week with a 50-cent drop after they had retained smallish gains in prior hours on account of the aforementioned weaker greenback. Book-squaring activities (or, as our friend, RBC’s George Gero likes to say: "Get me out before the weekend!") could play a role in upcoming intra-day volatility in the gold and silver pits; something that the trading desks we surveyed this morning fully expect for later in the day.

The spot bid price for the yellow metal was quoted at $1,506.40 per ounce as players regrouped in anticipation of the release of core US inflation data this morning. That little figure held the potential for larger-scale market action later in the day, and not just for gold. Food and fuel costs were anticipated to have added substantially to expenses for US consumer this spring, albeit core inflation levels have not yet unnerved the Fed.

As it turns, out, the inflation figure was not so "little" after all, albeit it came in in-line with economists’ former projections and a good portion of them might still label it as "tame." The US CPI showed a 0.4% gain in April, while the so-called "core" rate climbed by 0.2% on the month. US consumer prices have experienced a 3.2% gain on an unadjusted basis over the past year, and that makes for the largest such increase since late 2008. This level of price gains might just put the Fed "on notice" that it might not only achieve its "target" for inflation sooner than expected, but that it might have to do some "tweaking" in certain areas (read: monetary policy) in order to avert having to take more aggressive steps in a hurry, down the road.

Inflation, as we have recently been reading, is causing problems and central bank actions of a concrete nature (not just jawboning) across the world, from India to Europe, and over to China. The European Commission this morning raised its inflation forecast to an average of 2.6% for the year while projecting that it might slow to the 1.8% level in 2012. The ECB took the first step towards exiting accommodative monetary policy last month, with a 25 basis-point interest rate hike.

The pivot point for the global interest rate environment appears to be coming into sharper definition as the summer approaches, and it is doing so in concert, in various part of the globe. The only remaining question is not whether or not the Fed will join its colleagues in other countries and begin to enact similar, inflation-averting policies, but when it will do so. The ticking of that countdown clock is the central theme for commodities’ players to concentrate upon from here forward. This is the core issue to take into account.

Spot silver started the Friday price action with a 76-cent gain and a quote on the bid-side at $35.38 per ounce. Platinum and palladium each fell by $1 to the $1,769.00 and $714.00 level respectively, while rhodium showed no change and was still quoted at the $2,050.00 bid price per troy ounce. Little in the way of news from the automotive sector was on tap this morning, save for the fact that beleaguered automaker Saab might finally be reaching the end of its troubled road following the falling through of a possible deal with a Chinese auto firm, and that Chrysler is idling some of its plants as it tries to cope with a shortage of Japanese-sourced parts.

Meanwhile, Mr. Bernanke does see a threat to the economy of the US- albeit not from rising commodity prices as yet. His warning to US lawmakers is not to try to use the advent of the federal debt limit as a "bargaining chip" during upcoming US budget talks. Such wrangling and public displays of muy macho political grandstanding could unhinge markets and harm the recovering US economy, Mr. Bernanke cautions. Thus, when you hear certain recognizable politicians hammering away at the topic of the US debt ceiling and threatening to let the country default (presumably for its own good???) do bear in mind that Mr. Bernanke has depicted the following scenario:

"Even if the debt is paid, there’s the issue of market confidence and how the market would respond to the risk of default or even the default of non-debt obligations," he said. "The worst outcome would be one in which the financial system would again destabilize. Such an occurrence "would have extremely dire consequences for the U.S. economy."

Others, on the other hand, see clues that the entire world and not just the US will come to a complete end on December 21, 2012. They have been snapping up survival bunkers all over the world, at some lofty prices (how about $400,000 for less than 800 square feet?) in the hopes that burrowing underground might mean salvation. The fad is most prominent among wealthy Russians. Cottage industries that produce bunkers (even some floating ones in case Noah’s you-know-what repeats itself next year) have been thriving.

Until Monday, at least, try to resist the temptation of buying your own Armageddon shelter. Go out and enjoy the sunshine.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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