In the Lead – When, Then, Mr. Wen?


Bullion BarsThe US dollar picked up a significant amount of steam on Wednesday and its rise helped push precious metals values back down following their tepid attempt at a gain recorded on Tuesday. The main impetus for the greenback’s gains came from the on-going European dawdling on the issue of how to tackle the pesky Greek debt situation. The additional upward driver of the dollar was the lack of notable change being recorded in US inflation levels in the month of May.

At the core of the impasse seen among Europe’s various leaders is the idea (pushed by the ECB and France) that private sector involvement in the resolution of the Greek debt crisis would be desirable (which is something that Germany does not quite seem to be cozying up to). The stalemate depressed the euro and the US currency advanced by 0.70 on the trade-weighted index (reaching the 75.17 level by early this morning). As for Greece, the domestic situation only aggravated this morning as that country’s third and largest general strike brought thousands into the streets in protest of additional austerity plans. Clashes between striking workers and police forces were reported in Athens.

Violent encounters between ordinary folks and police were not confined to Greece however. Reports indicate that "scary" riots in China’s Guangzhou area have put leaders of that country on-edge as they came on the heels of several weeks’ worth of intensification of such unrest. Chinese society currently witnesses untold numbers of protests and riots each year as the ire over government corruption and social inequality appears to be boiling at a disturbingly high level.

Yesterday’s higher-than-anticipated reading of China’s inflation levels (edging ever closer to 6%) only adds fuel to the fires of Chinese discontent and has shown that perhaps Premier Wen’s three-month pause in raising interest rates (following four such hikes since last September) was a gamble that went sour at this point. The markets are all but ruling out an extension of this hiatus by the Chinese government in raising interest rates (it did raise bank margin requirements on Monday) now that inflation temperature readings are about as uncomfortable as the readings being recorded in the social mood temperature in that country.

Speaking of inflation, the US Fed’s efforts to stimulate economic growth while reducing joblessness levels and at the same time averting an increase in inflation to dangerous levels appears to be not only on track (despite way too many vocal critics’ assertions) and could pick up speed in coming months. This, as there is now quasi-official talk that the US central bank might set an explicit inflation target and then go about carrying out policy that results in its’ execution and sustainment.

Inflation targeting has long been an effective policy practiced by several central banks around the world- Canada’s and New Zealand’s among them. Mr. Bernanke and several Fed Presidents have in fact recently argued that such targeting might very well bolster the Fed’s credibility as well as finally silence the crowd that alleges the "imminence of hyperinflation" and the corresponding "death of the US dollar" in the US.

We have pointed to the benefits of so-called "desirable levels of inflation" concept that is taking hold among central banks numerous times in these columns and noted that is was first visible as a concept in Japan, circa 2003. Japan, up to this point anyway, has not quite succeeded in lifting inflation to the BOJ’s "desirable" target but observers feel that the Fed could succeed not only in approaching an as-yet-to-be-set inflation target but also maintain an orbit around it.

While on the subject of the Fed, we must also note that Chairman Bernanke has once again warned US lawmakers not to play with the debt ceiling hand-grenade since the pin has already been pulled and time is running out on options. Mr. Bernanke reminded Congress that not raising the US’ debt limit could have an extremely damaging effect on the country’s economy. August 2 now looms as the deadline by which the US government could arrive to a point where it might not be able to pay its bills. Meanwhile, Messrs. Boehner (Speaker of the House) and Reid (Senate majority leader) continue their WWF-like display of posturing and politicizing the issue.

The gunfight of words at the "Not-So-O.K. Capitol Hill" has now lasted far more than the 30-second allotted time needed to decide what gets cuts and which party gives up what sacred cow. Mr. Bernanke cannot tell the folks what to do (while they tell him what to do quite often) but at east he (and Treasury Secretary Geithner) can show them the path that leads off the debt cliff.

Stay tuned, but do note that (as has been suggested here previously) some $1 trillion in US tax increases is likely to be "baked into" the currently being worked-upon bi-partisan budget compromise plan being cobbled together in Washington. Prediction: the US debit limit will be raised, and so will taxes. Prediction: some entitlement programs will invariably be "trimmed." Prediction: each side (the GOP as well as the Dems) will claim "complete victory."

And now, on to the markets we track in these posts daily: spot gold dealings opened the midweek trading session in New York with a loss of $10 per ounce and it was quoted at $1,514.10 on the bid-side. Half a dollar’s worth of losses were recorded in silver at opening time, as the white metal was touching the $34.89 mark on the bid-side. In the background, crude oil was struggling near the $98.50 area, losing nearly an additional dollar this morning. The Dow futures action pointed to possible triple-digit losses to come in the equity market this morning. As it turned out, the Dow opened at 11,976 with a…99-point decline.

Platinum fell by $14 to reach $1,780.00 per ounce and palladium lost $9 to touch the $782.00 mark as the on-going correction in the platinum-group metals complex unfolded. Rhodium did not show a change this morning; it was still quoted at $1,850.00 the troy ounce following its recent dip that obviated last week’s sizeable gains.

The initial market trend in gold and in silver quickly reversed however following the release of statistics related to the New York area’s manufacturing activity for June. The so-called Empire State index actually fell to below the zero level (-7.8) this month, from a positive 11.9 recorded last month. Polled economists had actually expected an improvement in the index to perhaps as high a level as 13 or more.

The divergence in actual versus expected readings in the aforementioned index was therefore quite sizeable and immediately raised questions as to the nature of the "soft-patch" that the US economy is reportedly experiencing momentarily. Commodity speculators were quick to jump on the news and they gave us yet another splendid intra-day display of "See this? The Fed MUST give us a QE3!" Spot gold traded as high as $1,535 following the news while silver quickly bounced to as high a level as the $35.80 mark per ounce.

There was much more hefty money to be made out there today, however. Take Pandora, for instance; many did. Its shares leaped 40% (!) higher after the IPO hit the deck on Wall Street this morning. Insta-wealth for some. Cries of "overvaluation" by others. The streaming media firm’s initial public offering was priced at $16 last night. You could have sold your shares at as high a level as $22.41 within minutes of today’s inaugural trading of same. Hello! This Pandora’s box — now open (for trading anyway) — is a somewhat…different one than the "old" one, some say.

Until tomorrow, stay…tuned.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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