In The Lead – Raise the Fediscope!


Bullion BarsThe portion of a headline that basically summed up this morning’s shaping up of the trading action to come was: "Oil Headed for Bear Market." Black gold traded below its 200-day moving average — in fact more than a full dollar lower- and it obviated the gains it had managed to achieve this year, while the 20% decline it has suffered since its peak on April 29 (the same day that silver reached its own pinnacle above $50) now places the commodity under "bear market watch."

The "X-factor" excuse that appeared to have made for much of oil’s spring rally — Col. Gaddafi’s loss of his faculties — now seems to have been completely forgotten and has been shelved for use perhaps another day (or never again). The scare-factor that Gaddafi presented once upon a time, is…no more.

Speaking of things very scary, you would be well-advised to watch this video clip hosted by Marketwatch’s Jonathan Burton. In it, correspondent Chuck Jaffe exposes the not-so-recent phenomenon of stock promotions built on the fear of hyperinflation. Scaring the unsophisticated reader with visions of imminent "Harare-on-the-Hudson" and/or "Weimar Republic in the USA" scenarios, promoters of certain gold and silver equities are in fact practicing little more than the classic "P&D" technique.

Pumping up and preying upon fears of dollar-destruction (while loading up on certain resource shares) and then dumping ahead of the crowd have made a big comeback in recent months. Much "credit" in such matters is due to the official-sounding National Inflation Association, and its scare-mongering, says Mr. Jaffe. Caveat Investor.

Over in Europe, the region’s finance ministers did not manage to produce anything resembling a resolution on the issue of a financial life preserver to be thrown in the direction of Greece. At best- it now appears- such a decision might come sometime in July. In the interim, Greece has been tasked with approving spending cuts and other financial reforms. To what degree the government will succeed in said task appears largely uncertain; especially in the wake of recently growing domestic discontent (see last week’s massive street protests in Athens).

The country’s Parliament will need to give its vote of confidence to PM Papandreou’s government before there is any dole-out of monies by the EU. As things stand right now, the formerly "taboo" idea of no participation by private investors in a second bailout program has also been done away with. "Anything that might work" is apparently the new motto that hopes to avert and implosion and potential contagion.

However, there was something else worthy of noting in the story that covered oil’s fall from grace; it was the combination of the European debt situation that is still resulting in US dollar strength, which, in turn, is pressuring the commodities that have hitherto benefited from its previous lack thereof. For the second time in three years evidence is mounting that when push comes to shove, the "shove" in global funds appears to aim towards the much maligned greenback as the haven of choice. As the dollar managed to retake lost ground, commodities speculators retreated from their previously occupied territory.

Spot metals dealings opened with assorted losses in New York this morning as the aforementioned decline in oil and concurrent rise in the US currency helped shape the trading patterns. Gold started the Monday session with a decline of $7.10 per ounce and it was quoted at $1,532.90 on the bid-side. Silver dropped 60 cents on the open and it started the day off at $35.30 the ounce. Whatever the situation may be price-wise in the physical metals’ arena, Frank Holmes (US Global) feels that "senior gold miners have seen the strongest gains, with average per-share earnings increasing roughly 67% since 2009 …

Frank also notes that "the average senior gold miner now has more than twice the amount of cash flow; mid-sized intermediate gold companies’ cash flow has more than tripled… One can purchase shares of gold mining companies at their second-cheapest level in nearly 30 years. The extreme was in 2008 during the depths of the financial crisis; many share values quadrupled off of those levels." Buy low, sell high. The message is pretty clear, so long as you evaluate what (today) is already "high" enough…

More selling was also manifest in platinum-group metals as well as the trading day commenced. Palladium lost $10 at the open, trading at $734.00 per ounce while platinum declined $24 to open at $1,727.00 the ounce. No change was noted in rhodium, where the bid-side indication was $1,950.00 once again.

Analysts at MF Global feel that "given that most speculative froth was removed from silver and other metals in early-May, gold, platinum, and palladium may fare the best [during the upcoming summer months]."

Later in the session, and underscoring oil’s driver-seat position this morning, metals rebounded in the aftermath of a price recovery in black gold.

The CFTC reports that spec funds cut their bullish wagers on some 18 commodities for the first time in one month after the spectre of the Greek crisis bringing about a global slowdown reared its frightening head. The IMF contributed to such apprehensions last week when it opined that the US will grow at a slower pace and that the eurozone’s "challenges" pose a material threat to global growth. Similar developments were noted by the CFTC in the precious metals’ niche. A loss of 28 tonnes in net-long non-commercial positions brought the total to 825 tonnes and underscored the loss of interest in gold ahead of the start of the summer months.

Some of the aforementioned loss in interest may be due to the taking of a "wait and see" attitude by market participants ahead of this week’s FOMC meeting and second Ben Bernanke press conference. The Fed meets tomorrow and Wednesday and the Chairman will speak shortly after the conclusion of the gathering of the Committee. While hardly anyone expects material changes in the US central bank’s current policy, the focus among Fed-watchers will be a better understanding of how the Fed is viewing the current slowing in the US economy and what (if anything) it intends to do about it.

Observers will also be dissecting Fed language for clues as to how far down the road an actual shift in Fed policy might be found (too bad that the two metrics which might help in characterizing the US economy’s current paradigm will only come on Friday). The advance report on durable goods and the estimates for Q1 GDP figures are both due at the end of this market week, but, perhaps the Fed has enough "advance knowledge" of both to include some sort of indirect reference to them in its communiqué.

Whatever slowdown the figures might reveal, they appear at this point not to be cause for the launch of a QE3 lifeboat by the Fed.

In fact, according to Marketwatch, "part of the U.S. growth slump reflects temporary effects: the Japanese-earthquake-induced supply chain disruption, and the bad weather in the South. And as oil prices recede, consumers should have more money to spend."

The IMF concurs on the issue and it feels that the "fundamental drivers of growth remain in place."

The agency envisions the global growth rate for the current year to be near 4.1% — albeit that is a "trimming" of its previously estimated 4.4% pace of expansion. The IMF scaled back its expectations for US growth from 2.8% to 2.5% recently. However, that figure is still better than that which is expected for the eurozone — a rate of growth of 1.7% – and much better than the anticipated 0.7% contraction envisioned for Japan due to the March quake.

Meanwhile, we can expect anything but growth in at least one hitherto white-hot space; that of Chinese real estate prices. The country’s government’s efforts to avert a bubble (which many say is already in full bloom anyway) have resulted in declines in home values in 23 out of 70 cities being tracked by the National Bureau of Statistics. No such patterns on display in Hong Kong, where values continue to add some 2% with each passing month and where home prices are characterized as "frightening." At any rate, you might want to watch for the Chinese real estate "brake-application" to have some effect of the consumption of "stuff" in coming months and years. Everything is but a cycle, and this Ferris wheel appears to have passed its zenith point.

Until Fed Day #1, enjoy the market rides of the day.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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