In The Lead – Curbing Your Enthusiasm


Precious Metals CommentaryAgainst a backdrop that included burning buildings and flying stun grenades in the streets of Athens, the Greek Parliament voted to pass a tough new round of austerity measures that might just make for a new definition of ‘Spartan.’ The image and video that accompany this story speak of anything but optimism on the part of the Greek citizenry.

There is a school of economic thought that now envisions the country stepping closer to a full-blown depression while another one projects that Greece will possibly morph into what one labels as a "third world country."

A German economist has bluntly warned that "what politicians refer to as a ‘rescue’ will not actually save Greece. The Greeks won’t ever return to health under the euro. The country just isn’t competitive. Wages and prices are far too high, and the bailout plan will only freeze this situation in place. So it’s in Greece’s interest to leave the euro and reintroduce the drachma."

Thus, although the markets greeted the news of the passage of the austerity measures with the enthusiasm that one might have expected, the ‘celebrations’ were rather half-hearted as reflected in the gains in various assets. Worrying about Greece is clearly not off the table, despite the sigh of relief engendered by its government’s vote and the soon-to-materialize disbursement of rescue funds from the EU.

The fleeting optimism kind of situation was also mirrored in gold’s tepid advance to $1,734 overnight and by its shrinking gains within the first half hour of trading in New York this morning. The latest indications on the bid-side showed the yellow metal trading at $1,717 the ounce, actually down $5 from Friday’s close. According to EW-think the penetration of the $1,709.94 level in gold could usher in a resumption of its previous downtrend and only a rally above $1,763.71 would signal that the counter-trend climb has not yet concluded.

The Standard Bank (SA) daily commodities report notes that, according to CFTC data, speculators boosted their long positions in gold albeit at a lesser clip than they did in the preceding reporting period. Notably, the amount of short positions resumed its gain for the first time in four weeks.

The development prompted the report’s authors to opine that due to "the tentative nature of the past week’s moves affirms our suspicion that the aggressive moves of the week before last were largely as a result of overexcitement after the Fed’s dovish announcement. Consequently, we are cautious of gold’s near-term prospects, and would not be surprised to see further weakness emerge this week. ETF buying also slowed markedly." contributor Michael Gayed has been studying the gold-dollar relationship and is cautioning that we could be in for a change in that relationship given recent trend developments in the two assets. The peak in the gold-dollar (GLD to UUP) ratio took place in late August last year. Now, the potential for a reversion to the mean in the ratio between the closely watched pair points to a possible period of gold underperforming the greenback. Just something to consider the next time a US dollar obituary lands in one’s e-mail inbox.

The other metals in the complex posted modest gains as well but the advances were lacking the energy one might have anticipated in the wake of news that had been so long in the making. Silver traded as high as $34.15 but was last shown as bid at $33.54 per ounce, down a nickel from Friday. Key support in silver is thought to reside at the $32.82 level. Platinum and palladium climbed a tad higher as well initially, but then lost steam, with the former declining $1 to $1,651 and the latter losing $3 to $696 per ounce.

The noble metals continue to receive support from on-going South African labor strife which is resulting in estimated platinum production losses on the order of 3,000 ounces on a daily basis at Impala Platinum –the world’s second largest producer. Interest levels among speculators in PGMs have been on the rise as evidenced by the latest CFTC market positioning metrics. In platinum there was an increase of more than 18,000 ounces on the long side and in palladium there was a rise of more than 11,000 ounces noted.

Standard Bank (SA) analysts opine that the rise in net speculative length in PGMs indicates that perhaps players have "shrugged off their skepticism of January." Albeit they see the current upside in these metals as relatively limited, the Standard Bank team members feel that $1,500 platinum and $600 palladium are both too low from the point of view of the cost of producing them. The PGM markets are still not witnessing very robust levels of demand from primary users although such offtake could materialize in the second half of the year.

Something else that could also become manifest as the year rolls on is the realization by the Fed that it is perhaps being a tad too pessimistic on its economic outlook. Mr. Bernanke’s team projects US growth rates ranging from 2.2 to 2.7 percent this year. Economist Allen Sinai, on the other hand, envisions US growth rates near 3% and a jobless percentage of 7.7 towards the end of 2011. Among the positive US economic metrics being cited by various other economists are improving employment and related consumer confidence levels, a robust rise in automobile sales, applications for mortgage refinancing, and the gains visible in the equity markets. However the remaining threat of an external shock such as a spike in crude oil prices on the back of a potential Iranian ‘event’ (see Israel’s warning aimed at that country issued this very morning) might still present a potential watch-list item for the US economy.

Well, here is a metal we do not often cover, but one which generated quite a buzz this morning. Let’s not make ‘light of it’ as the saga might have some ‘legs.’ For once, we can bring you a semi-credible conspiracy theory, courtesy of the sharp team at RBC Capital Markets. It goes as follows: Cancelled warrants, especially in aluminum, have captured the attention of many in the market (and the press) in recent weeks. While only a select few really know what is going on, we thought we’d add our two cents worth.

Slow load out rates (permitted by the LME) and rising cancelled warrants (up 574kt in aluminium so far this year) have helped support physical premiums for the light metal particularly in the US. The premium for Midwest P1020 hit 9.5 cents last year and currently stands at 7.9 cents (its averaged 5.8 cents over the past 8 years). While many think that the slow load out rates and rising cancelled warrants means you can’t get your hands on material if needed for up to 12 months, this is not true. You can get metal out of LME warehouses immediately if it has never been on warrant (the load out cap only applies to metal that was once part of the LME stock).

You just have to be willing to pay for it. Add to that the fact that the warehouse operators are offering incentives to owners of metal (up to $150 per tonne in Detroit) to put metal on warrant and you can see why Midwest premiums are at their present levels. Whether owners of "off-warrant" material are helping to perpetuate the problem by buying exchange material and cancelling it, we don’t know but it would certainly seem like an easy thing to do if you want to control the premiums at which you can sell metal. Just a conspiracy theory." No ‘mystery trades’ here. Then again, no ‘shortages’ either.

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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