In The Lead – Promissory Notes


Precious Metals CommentaryMomentum players pulled the "buy" trigger on precious and base metals, along with crude oil and equities, yesterday afternoon, after they concluded that the Fed’s offer to not hike interest rates until late 2014 was tantamount to a fresh QE program.

Lost in the euphoric buying spree (and again we draw your attention to the fact that this was a new display of the "buy everything" syndrome which is anything but healthy for one or another asset in the long-run) was the other side of the Fed announcement.

We are referring to the specificity of the Fed’s overt inflation and interest rate targets. The US central bank made it clear (for the first time really) that it is targeting the former at 2% and the latter at 4 to 5 percent. Neither figure is set at a level that would warrant runaway prices in inflation hedges or interest-sensitive assets. In fact, the interpretation that the Fed has hereby assured investors of destructive-level inflation to come could not be more incorrect. However, the knee-jerk reaction that if the Fed so much as appears dovish then we run out and buy everything stamped with the ‘asset’ label was more than obvious as the afternoon unfolded.

Spot prices opened with follow-through momentum buyers still in charge on the floor in New York this morning. Gold traded from $10 to $18 higher, in a range of from $1,720 to $1,730 but still beneath the 78.6% Fibonacci retracement level of $1,744 per ounce.

Analysts at Standard Bank (SA) pointed out in their morning report that "overnight in Asia, we saw some profit-taking emerge which kept precious metals from rallying further—remaining steady for most of the session. While physical demand for gold is largely absent in the Far East (due to New Year celebrations), current prices have scared away any potential interest from Indian buyers. For the first time since mid-November 2011, Standard Bank’s Physical Gold Flow Index (available on SBHF) has dipped into negative territory, indicative of net selling."

Dovetailing with the above, The’s Alix Steel reports that:

"the one downside to a [further] big rally in the gold price is if Indian demand slows further. According to GFMS, the first half of 2011 saw very strong buying from India as consumers rightly anticipated higher prices in the future and loaded up on "cheaper" gold. As gold soared in the back half of the year, demand slowed to a crawl. The World Gold Council said that jewelry demand tanked 28% in the third quarter. From July to December gold prices in rupee terms were up 25% as the dollar appreciated against the local currency and as inflation ballooned to 10% making gold too expensive to buy."

Silver gained 36 cents and orbited near the mid-$33 per ounce area. Fresh gains above $33.66 could meet resistance near the $35.70 level if they were to materialize. Platinum added $35 (2.2%) and was the best performer in the complex this morning. Aside from the present from the Fed, the market appeared to be benefiting from the news that the labor action at Impala Platinum will result in higher-than-anticipated production losses in the noble metal.

Palladium rose $5 to the $702 mark on the offer side of spot. In the background, the US dollar was off by 0.43% at the 79.14 level and could encounter support near 78.30 if selling pressure persists. Crude oil advanced $1.75 and its gains too, showed that fundamentals are second-tier in importance when Fed-induced euphoria rules the trading day. The Dow gained 71 points and took its cues not only from the greenback’s seven-week lows but also from the 0.4% rise in US leading economic indicators and from the 1% gain in European markets earlier in the day (those also largely courtesy of the Fed announcement)

Speaking of equities gaining on a weaker dollar, you might consider reading this study by Schnidman and Nadler (not this Nadler) that reveals just how strong the inverse correlation (since 2008) between the USD Index and the SPX (S&P 500) has been. The relationship has perhaps been more consistent than the historically weaker -0.27 that the greenback versus gold has exhibited (a figure which comes as a shock to many who equate buying gold with the most effective anti-dollar bet).

In the period since 2008 there have been numerous occasions on which gold and equities made tandem advances despite the historically inverse correlations they had been exhibiting. Until the Fed made easy money available to speculators and until the losses sustained in 2008 — following which buying everything in sight was the only way to try to make back such losses — gold was supposed to be (and was) a fairly effective hedge against declining stock portfolios. Now, the Dow finds itself at its best level since… 2008 and gold is nearly $700 higher than its best price of that same year…

CPM Group NY-sourced metrics in fact reveal that conventional betting against the dollar with gold — in view of that correlation figure (and even the more recently higher one) — results in losses half to two-thirds of the time. As for the buck and the S&P or the Dow, well, the relationship could dissipate if and when the European situation shows signs of abating. Consider that the next time you hear Mr. Gingrich assuring you of a robust dollar (in the same breath as promising a moon base by 2020).

As for commodities, well, certain nations (indeed, entire continents) have become so dependent on their offtake and continued gains in prices that (almost) existential threats would be posed to them in the event of a sizeable downdraft in values. From Davos, intrepid Marketwatch reporter Polya Lesova fills in the blanks as follows:

"South African President Jacob Zuma said on Thursday that a sharp fall in commodity prices poses the biggest risk to resource-rich African economies. "This could cause a severe shock," he said at a panel discussion on Africa at the annual meeting of the World Economic Forum in Davos.

Whether or not the Fed made an "elemental mistake" with its Wednesday promises, even as it sought to balance the equation with inflation and interest rate targeting of the explicit variety, remains to be seen. For the moment, the risk remains multi-faceted: bubbles could still over-inflate, investors could still bet incorrectly, and the Fed (as the ECB in the other direction recently) could be made to eat its own press conference words. Well before the end of 2014. That, provided the engravers of the Mayan calendar were not under the influence of too much coca leaf chewing-induced "inspiration" and could be proven correct in their take of how 2012 ends…

Until tomorrow,

Jon Nadler
Senior Metals Analyst — Kitco Metals

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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