In The Lead – Withdrawal Symptoms


Precious Metals CommentaryThe midweek sessions in precious metals started off at sharply lower price levels in the wake of the sentiment that took hold post the Fed announcement that given current economic conditions it has opted to do nothing more than monitor the situation.

Gold prices traded as low as just under the pivotal $1,650 support level (to which we alluded last week as ‘being in play’) overnight and they opened with heavy losses that swelled to over $31 an ounce, with the yellow metal touching the $1,641.00 mark in New York within the first half hour of trading action. Such values have not been manifest in circa two months and bring into question the application of the "consolidation" label as no longer applicable to the market.

Silver spot quotes came in at the $32.77 per ounce bid level (down 64 cents) per ounce and the white metal was seen as possibly aiming towards a test of last week’s $32.50 low which is also a critical number on its charts. A close beneath the $33.08 mark could leave the white metal vulnerable to a test of the $29-$30.50 range and then possibly lower ($26 was mentioned by one technician in our Monday commentary).

Platinum traded $12 lower at $1,675.00 per ounce. The noble metal quietly turned its former near $200 discount vis a vis gold into a $33+ premium, vindicating our perceptions that an inverse price relationship between the two metals does not normally have a long lifespan. In this case, we had a gold-to-platinum premium with us since last September, yet such a paradigm unfolded against a background of falling South African production tonnage as well as intense labor strife at various mining firms.

Platinum has posted larger than 20% gains thus far this year and the latest news from S. Africa indicate that the world’s second largest platinum producer has ceded majority ownership to local black investors; a fact hitherto considered by many to be inconceivable. The ownership transfer (some call it an "asset seizure") immediately places similar pressure on other mining firms to follow suit. Palladium fell $5 to the $696.00 per ounce bid level. Rhodium remained unchanged at $1,475.00

Monday night’s Elliott Wave short-term market update opined that a closing in gold under the $1,676 level (we practically got that last night) could confirm the onset of a new down-wave; one whose downside target resides in the $1,300 range. If that number sounds "outlandish" to you today, then consider the mention of the $1,200-$1,300 range as a possible gold price target in 2012, as tendered by Swiss-based Tiberius Group fund manager Christoph Eibl at yesterday’s Bloomberg Precious Metals Conference in New York.

Mr. Eibl made some waves in 2011 when he cautioned the industry’s attendees at last fall’s Montreal LBMA Conference that the yellow metal had become overly dependent on investment demand and that it would be subject to sharp corrections owing to its weak supply/demand fundamentals, in the event fickle investment-oriented money proves to be… fickle. Yesterday, in a heated panel debate at the Bloomberg event, Mr. Eibl pointed over his shoulder and remarked that the large majority of the waves of recent gold investment were coming from the ‘family office around the corner‘ and the ‘hedge fund down the street.’

Mr. Eibl’s take on the gold market’s future prospects was diametrically opposed to the views being espoused by Bank of America’s commodity research head Francisco Blanch and panelist Michael Pento, both of whom remain super-bullish on the yellow metal and still envision $2K gold as possible in the wake of a putative QE3 (if and when such a thing comes to pass). Other participants expressed concern about what might happen to gold prices if and when the Fed finally heads for the exit door that leads away from accommodative policies. We recently alluded to "Panic in Needle Park" among those addicted to the Fed’s free money. Behold their withdrawal symptoms on display. To be continued…

Well, speaking of that elusive QE3, yet another Fed meeting came and went without the QE3-hopeful commodities-oriented speculative crowd getting its wishes fulfilled by the release of a fresh batch of nearly cost-free money. We have now arrived at a situation where 61% of surveyed economists expect no further increases in Fed’s balance sheet in 2012 and where the 14% minority that had expected more easing to take place by the time of Tuesday’s meeting has dwindled to… zero. Markets remain keenly aware that the ECB has already shown that it is done with easing and that the Fed’ own "twist" comes to an end in June. What now that stimulus is drying up on both sides of the Atlantic?

Coming on the heels of the most recent batches of US economic indicators (including yesterday’s release of stellar retail sales data), the Fed’s "inaction" and moderately less dovish tone should not have been a surprise to the anti-dollar speculative crowd that has become so highly addicted to easy money. The Dow ‘celebrated’ the retail figures and the Fed’s confirmation that the US economy is getting back on track with a 217+ point pop to its highest level since 2007. Meanwhile, the NASDAQ ended above the 3K mark for the first time since the dotcom/hi-tech ‘bubbly’ year that was 2000.

The US dollar climbed sharply on the trade-weighted index after the Fed statement, touching the 80.30 level this morning. The greenback had already traded at an 11-month high against the yen Tuesday morning ahead of the Fed meeting. Gold, on the other hand (and for once in a ‘proper’ reaction direction-wise) fell $35 to touch last week’s low near $1,660 again and then closed near $1,675 per ounce last night. Nothing like a reluctant-to-ease Fed to get the weak or wrong-way hands headed for the exit doors; this has now been the ‘mood’ for over two weeks.

Fed policymaker Jeffrey Lacker actually believes that some rate tightening will (or should) likely come before the end of 2014 and he once again dissented at yesterday’s rate setting meeting. We do not need too many reminders of the fact that a Fed pledge does not equate a promise in the classical, aside perhaps from what a dictionary might imply. A Fed pledge ought to be thought of as a flexible, best-guess-based aim that comes with a fine-print disclaimer which includes the keywords "subject to change."

However, now, and unless major negative US (or perhaps foreign) economic developments take the Fed by complete surprise in coming months, the odds of any further accommodation are beginning to shrink the closer we get to election time. A fresh round of Fed-provided stimulus shortly before the voters hit the polling stations in November would be seen as having clear political overtones and it would not therefore be very beneficial to the Obama reelection campaign. Thus, unless the previously mentioned "sterilized" bond purchase program is launched at the next FOMC gathering, we might just have to get used to the idea of no more gifts from Uncle Ben & Co.

Certainly, after the consensus among polled economists is showing that the next reading on inflation could come in at as high a level as an annualized 6% level for February, the only type of QE that the Fed would be willing to embark upon (and again only if economic conditions suddenly nosedive out of the blue) would be an inflation-neutral one. It may well come in the months ahead, but consider that it could actually be US dollar-beneficial (!). Already, spiking crude oil prices (thank you, specs) have engendered an unwelcome 0.4% rise in US import prices for February. It is worth noting that the increase in import prices was lower than had been anticipated by economists and that while oil did rise, the US also experienced the largest drop — (3%) in imported food costs in three years.

However, at the end of the day, the very question of whether or not any further easing might make any difference to the economy also has to be factored in. Several schools of monetary policy thought do not believe that "more of the same" would help matters much, if at all, for the US economy given its current rate of positive progress. Consider the latest report from staffing firm ManpowerGroup; it has found that American firms’ hiring plans are running along at the strongest clip since 2008. Or, you might consider the fact that a key missing element in the economic recovery’s profile thus far -the US housing market- shows signs that it could regain its lost footing as early as next year if not sooner.

On the other hand, the Canadian real estate market is now apparently displaying most of the signs that eventually resulted in the American one souring and then some (price declines on the order of 34% since 2006). The doubling of prices during the past ten years, the 41 and 29 percent jumps in British Columbia’s and Ontario’s home prices in recent years, and the rise in household debt as a percentage of disposable income (to 153% last year!) have all given rise to fears that the Great White North might be the next domino at risk of tipping over on the global list of severely overheated real estate markets. Here are some famous last words, last heard in the US, circa 2005:

"We see housing market slowing down, but we don’t believe there’s a bubble in Canadian market right now." — Benoit Durocher, senior economist at Desjardins.

Meanwhile, back in the US of A, something else that is regaining its previously (almost totally) lost footing is the much-maligned US banking sector. Remember when we were all bombarded with dire forecasts of a chain-reaction of imminent bank failures and the collapse of the American financial system? Why, it was just… last week (according to this writer’s special e-mail inbox dedicated to receiving only financial newsletters).

Well, according to the latest Fed-conducted US bank stress tests, the reality is that 78% of such institutions would be capable of maintaining adequate capital levels even in the event a really bad economic crisis (of the type often described in the aforementioned newsletters (complete with 13% unemployment and a 50% drop in stock values) were to now hit in America. Obviously, for a niche that was in bed at the ICU not that long ago, this is very good news. PIMCO spokesman Mohamed El-Erian characterized the stress test results as ‘credible.’ Doomsday newsletters will surely add the "in-"prefix to that word in a hurry. We say: "Look at the Figures" and see for yourself. Score: 15 out of 19 survive.

Until Friday,

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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