In The Lead – Till Debt Do US Part


Bullion BarsMost members of the precious metals team started the midweek session a tad higher this morning; however their initial gains did not endure and the complex soon slipped into the red (except in the case of palladium, as of this writing).

Spot gold opened with a feeble gain of 70 cents per ounce and was quoted at $1,589.50 in New York. Within the first 20 minutes of trading the yellow metal approached its overnight lows near the $1,582.00 mark however.

Silver started the day on the downside, showing a 29-cent loss at the $38.72 level per ounce. The near $2 swoon in the white metal on Tuesday was reminiscent of the early days of May when it fell some 8% in but a few trading sessions. Nothing new in the world of volatile silver; it remains investment nitroglycerine and needs to be handled with the same degree of care as an old crate of the stuff.

Copper fell 0.38% this morning while crude oil gained $1.14 per barrel, approaching the 98.75 level on the back of speculative fund purchases after reports showed a decline in US stockpiles of black gold. Some wrangling by the gold bulls versus the bears might well be in the cards as the $1,600.00 level presents a desirable attack target for each market animal. Thus, expects fits and starts, stalls and flights to remain on tap.

Platinum and palladium each added $3 at the market’s opening bell and chimed in with bid-side quotes of $1,769.00 and $789.00 per ounce, respectively. Rhodium showed no change, still quoted at $1,975.00 the ounce. We covered the noble metal in some detail yesterday, but we might add that the reader would also benefit from parsing market analyst Ned Schmidt’s latest article on it, to be found right here.

In the markets’ background, the US dollar was still lower this morning, slipping 0.26 to 74.88 on the trade-weighted index and losing ground against a firming euro. The latter climbed this morning on perceptions that tomorrow’s EU summit on the pesky issues of Greece and assorted other PIIGS debt might just yield some "big" set of solutions. At least, that is what several financial papers have come to expect/demand from the meeting. French President Sarkozy and German Chancellor Merkel will meet on the issues on the eve of the emergency summit slated to take place in Brussels.

Gold slipped to and remained under the $1,600.00 mark in the wake of rising optimism that the US budget ceiling talks might be coming closer to a positive resolution prior to the deadline of August 2nd. President Obama let it be known that he is supportive of a $3.7 trillion plan to cut US deficits. The so-called "Gang of Six" program is not yet certain to become approved, as US House Republicans continue to make much noise that seems to oppose anything resembling a compromise.

What the GOP was busy passing last night (aside from a lot of hot-air laden rhetoric) was the so-called "Cut, Cap & Balance" measure; a Tea Party-flavor infused set of proposals that has about as much chance of getting ahead in the US Senate as Rupert Murdoch has at convincing people everywhere that he was simply "unaware" of the goings-on in his media empire and that he tends to forget things. A lot.

The "CC&B" measure is seen by Accounting Today’s Editor in Chief as one that would ensure of only one thing; that the US Constitution would be folded, spindled and mutilated promptly. Fear not however; at least the state of Utah has already (no surprise) thrown in its support for the proposals. Mr. Obama formally threatened to veto it, on the other hand.

The wrangling on all things deficit and budget-related continues in DC, however, China has (once again) "suggested" that the US do something to "strengthen international confidence and to respect and protect the interests of investors." Roughly translated, the words mean: "Yo, American Dudes, y’all might wanna get your act together like… yesterday, so that Moody’s does not do what it has threatened to do, and we, here, start to buy y’all’s debt instruments once again because our reserves are still swelling with no place to go." The Chinese State Administration of Foreign Exchange (SAFE, huh?) was not so subtle in its words of advice for Washington.

However, SAFE also let it be known (to the chagrin of many a hard money publication) that the swelling reserves will not likely be seeking purchases of precious metals or industrial commodities. Awww… say it is not true. SAFE reiterated the "difficulty" of investing billions into such assets as "using official reserves to acquire such assets would only push up their price." What was not said by SAFE is that the opposite scenario — that of trying to sell some tonnage of such assets in a time of need- would cause untold price damage to those assets and hurt China’s balances remaining in the same.

The parallel is obvious: Gordon Brown’s ill-time disposal of a bunch of the UK’s gold did more damage to the remainder of its holdings (in value terms) than the proceeds of the sales yielded. That, folks, is the problem with small, relatively illiquid (when it comes to large amounts) markets. China knows it, but not, apparently, the aforementioned newsletter editors whose wishful thinking overrules their logic.

Logic did not enter into the game over at Goldman during the second quarter of this year. Despite the firm’s team of analysts correctly calling the massive drop in energy and other commodities, the firm got caught in the maelstrom of falling prices and promptly lost a bunch of money during the period. Outflows of money from commodities were quite hefty in the past trimester, despite what you might read in certain publications that would like you to throw your own money into the game in a larger amount than might be prudent.

Global investors pulled nearly $4 billion out of the net investment pile residing in commodities; that, folks, was the largest outflow of money from the niche in six years. It is hard to see how the recent EU-US debt panic-induced inflow of fund back into the sector will countervail or neutralize that sizeable exodus of money that was recorded in the April-June period.

Over in the USA, there was finally a bit of good news to report on certain housing-related fronts, but it was overshadowed by other developments in the same sector. Recall that the state of that sector remains one of the key watch items for economists (along with job creation and manufacturing activity). Housing starts climbed to a half-year high in the US in June and permits for new construction also multiplied nicely. In the ‘barometer’ state of California, the L.A. Times reports that the number of residents entering into foreclosure has fallen to the lowest level in four years.

Default notices dropped by 17% in Q2 and banks repoed nearly 11% fewer McMansions from Californians compared to one year ago. Market watchers however say it is too early to celebrate just yet, as US banks remain saddled with a plethora of unsold "shadow inventory." To wit, this morning’s report that fewer folks forked over cash for previously-owned homes in June. Every little step such as the developments in the Golden State is indicative of some progress on this front, just as every report such as the existing home sales data is indicative of persistent difficulties in the sector.

On the other, all-important front, that of the US dollar and its return to a safe, desirable status among a larger class of investors, currency guru Axel Merk offers some food for thought in his firm’s latest missive to readers. Going beyond the current arm-wrestling matches on budget ceilings, and various proposals being tossed around in DC, Mr. Merk suggests that

"what we are looking for, plain and simple, are policies that foster increases in savings and investment. In contrast, U.S. policies appear to promote growth at any cost and, if anything, act as a disincentive to saving. Policy makers talk about increasing savings and investment, but typically prefer that to happen once they are out of office: promoting near-term growth via ongoing spending programs and misguided policies aimed at propping the consumer up are perceived to resonate better with voters."

Moreover, notes Mr. Merk,

"savings may be promoted through higher interest rates. But there’s also a controversial fiscal tool, namely a consumption tax. A national sales tax or an energy (carbon) tax may provide an incentive to save. However, politically, such taxes are non-starters. To get the U.S. budget on a sustainable footing, mandatory spending must be addressed. Cutting discretionary spending to zero and taxing the "wealthy" at 100% simply won’t do the trick in the long-run. Mandatory spending, i.e. spending on Social Security, Medicare, Medicaid and other health programs must be reformed."

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. and

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