Monday Kitcommentary – The Heretic Foundation


Bullion BarsMonday Kitcommentary from Kitco Metals Inc. – "The Heretic Foundation"

That which has been shaping up as the most significant bearish tilt in the commodities space since almost two years ago was underscored by yet another shrinkage in the pile of bets on the bullish side visible among speculators in recent trading days.

The most recently available CFTC position tracking data revealed that fund participants have slashed their cumulative net-long contract holdings by about $17 billion in value terms or by more than 13% in the period that ended on May the 10th.

This developing trend prompted on analyst at Citi Futures Perspective, Mr. Tim Evans, to remark that he would "view this as a bearish situation. We have a confirmed flow of selling with substantial remaining net long positions that can fuel an ongoing flow of that selling."

The loss of long gold contracts for example was on the order of 20,000 (or about 10%) while the advent of a paradigm in which only 19,000 contracts were long in silver matches a market profile that has not been present since early 2010.

If there was any "good news" to report in the trader positioning statistics, it would be that ETF holdings of platinum witnessed a modest increase last week and finished the reporting period at cumulative balances that were only slightly off from the year’s high water mark of 1,296 million ounces (at 1,292 million ounces) for the noble metal. However, the holdings of long positions in palladium fell rather dramatically, losing 256,000 ounces and scoring their second largest decline of the year.

Now, to be fair, one might also want to look at the position debacle in crude oil last week; the niche lost open interest on the order of 9.1% last week. Crude oil had led the marathon race in commodities this winter and early spring, following the developments in the MENA region and before silver took the lead from it, in what basically shaped up as a large spherical object of speculation in the entire niche. Commodity prices rose to levels that have begun to hurt the on-going economic recovery process and are now threatening to actually slow growth in 2011.

The results of the speculation in "stuff" became fairly obvious in a relatively short time; demand destruction once again resurfaced in black gold and in other sectors in the wake of sky-high valuations brought about by wildly intense speculative activity. Certainly, the "Gaddafi excuse" — as applicable to oil for instance — became just plain silly after a while, and the obviousness of the pure gambling in the niche became the main focus for many (including regulators).

Expectations that the Fed might not raise interest rates in the US remained the primary impact factor in the market niche as players availed themselves of the oodles of nearly cost-free money and hurled sizeable piles of it at the relatively small markets in discussion here, often spiking their daily trading volumes to levels higher than many a "conventional" sector (say, the S&P). Such expectations continued to fuel the feeding frenzy in commodities despite the fast-approaching expiration of the Fed’s QE2 program at the end of June, and despite the trend towards a higher interest rate environment already on display in the policies of other central banks.

On Sunday, Atlanta Fed President Lockhart said that, at least as far as he is concerned, he is taking a wait-and-see attitude on the US’ economic expansion levels before concluding that his institution has made a decision on how and when to "exit stage-left" from its hitherto accommodative monetary stance. Fed Chairman Bernanke is expected to possibly chime in on the topic in a speech due later today. Markets are still looking for any clues as to the possible timing of the Fed’s turning off the spigot of spiked punch that has filled many a sector’s bowl over recent months and years.

There has been no waiting for further clues on the inflation front by other central banks however. India’s RBI is continuing to battle price increases, and will very likely continue to do more of the same, especially in the wake of April’s inflation data (an 8.66% in the wholesale price index and a 9.1% rate of inflation). The eighth interest rate hike in a year now looms as a near-certainty in India. Ditto, over in Europe, where the rate of inflation accelerated to its fastest level in 2.5 years (to 2.8%) and is now pressuring the ECB to hike its key rates once again, come June. Last night, Chinese stocks fell for the third time in four days, on the back of apprehensions that the PBOC will likely also continue to tighten in the wake of unwelcome inflation figures. Slowing growth certainly plays on the minds of commodity players. At the end of the day, the Fed will not likely permit US inflation rates to get out of hand either, and thus, speculation about timing notwithstanding, the process of tightening will get underway in the US as well.

The emergence of this potential pivot point in the interest rate environment (and investment cycle) presents daunting issues to retail commodities’ investors. Marketwatch’s Chuck Jaffe (who, by the way still sees scope for the maintenance of a core position in commodities) notes that:

"this is the time in investment cycles where fund investors typically make their biggest mistakes. Unlike the sharpies who are in early on market moves, most buyers were late to decide that they needed more exposure to commodities than they might get through their ordinary fund. In fact, they were content until they saw the oversized gains commodities were putting up. At that point, they decided it was time to make an allocation decision."

As trading action got underway in New York this morning, the commodities’ sector was still exhibiting some weakness and a predilection for selling among players, despite a largely dormant US dollar (parked at the 75.75 area on the trade-weighted index). Crude oil was off by about 1% and was trading at very near the $98.75 per barrel level at last check.

Silver continued to lead the metals’ complex to lower ground, losing about 2.2% or nearly $0.90 and trading at $34.49 at opening time after having touched $33.85 in overnight trading overseas. The white metal is now beneath its 100-day moving average at $34.85 and might be slowly (or not so slowly, on certain days) aiming for the 200-day one at the $29.32 level, a number at or near which analysts expect support to hopefully emerge. That level would be 58% off the pinnacle recorded at $50.35 not too long ago…

Gold remained fairly steady and was seen near $1,496 (up about 90 cents) after it too had traded at lower overnight prices, near $1,485.00 per ounce. Current support in gold is thought to be found near $1,479.00 and $1,464.00 while overhead resistance remains visible at the $1,512.00 and $1,531.00 markers. Platinum and palladium were a bit mixed at the open, with the former shedding $7 in value to trade at $1,758.00 on the bid-side, and the latter climbing $5 to reach $711.00 the ounce. Rhodium remained static at a quoted bid of $2,030.00 per troy ounce.

The on-again, off-again saga of automaker Saab continued to unfold this morning, with another Chinese firm, Pang Da, offering a financial life preserver to the beleaguered brand. On the other hand, Japan’s Nissan reported a 77% gain in profits recently, as well as its highest annual sales figures in its history despite the effects of the March Sendai quake.

Since we are on the topic of noble metals, we now bring you the latest in fundamentals-oriented findings in the niche, by industry giant Johnson Matthey. The firm notes that the surplus in the platinum market shrank to only 20.000 ounces in 2010 and brought it to being almost in balance.JM projects a potential high of $2K for the noble metal in 2011, and that would be a $100 higher level than has recently been projected by analysts at StandardBank (SA).

The palladium market, on the other hand, has witnessed a record high level of offtake last year and the deficit in supply versus demand ballooned to nearly half a million ounces, according to Johnson Matthey. The large swing from a 680K ounce surplus in 2009 to the 490K shortage last year represents the first such development since 2000. Russia, it turns out, did supply metal to the market — contrary to certain perceptions that it had not- selling about one million ounces from state stockpiles. JM projects palladium to trade somewhere between $715 and $975 in the coming half-year period. The upper end of the range is pretty much in line with the projections we were recently offered by StandarBank (SA) as well.

We close today not with sordid tales of alleged attempted hotel trysts by certain high-visibility financial officials (the tabloids can have a field-day with that one) but with a "thought you have heard it all?" question on the topic of US deficits and how to solve them. The Heritage Foundation thinks it has the solution to the problem. Yes, "that" solution, you know, the one that will elicit inevitable howls of disapproval from certain quarters. To have such a "proposal" come from the bastion of all things conservative in America, the pillar of all things free-enterprise-ish, limited government-ish, and traditional American values-ish, is rather …thought-provoking, to say the very least. One would think the HF would be the first one to urge just about…the opposite. Oh well, this is what strange times beget. [Not that there is a chance that the US — still valuing its 8000 tonne gold stash at $42.20 the ounce! — would sell any of that metal, anytime soon, and for such purposes.]

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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