Last week’s wide price swings continued to befuddle and frustrate speculators in the commodities’ space and for a fourth consecutive week the results revealed that hedge fund players placed their bets incorrectly in these markets. The China ‘factor’ remained the principal drag on prices and that country’s prospects for a less-than-soft economic landing appears to have "petrified market speculators" — in the words of one US money manager.
In fact, if the recent data compiled by the International Strategy & Investment Group is correct, the world of hedge funds now appears to actually be giving up on bearish bets on equities and they are diverting money into them at the largest clip in two years’ time. For once, the "buy everything" syndrome (stocks and commodities in tandem) appears to be finally exhibiting some signs of dissipating. In part, such a shift is based on rising convictions that the US economy — recently expanding at 2% or so (a circa five-fold jump from levels seen one year ago) — will be very good for the performance of stocks.
The market "jury" appears to remain very much "out" on the degree of hardness that China’s landing is going to be defined by, but analysts warn that even the soft variety of same poses the threat of a lot of potential pain for commodity-exporting nation (Australia, Canada, Brazil come to mind) that have become heavily addicted to Chinese intake for "stuff" in recent years. The conclusion is — according to one ING commodities researcher — that "the idea that commodities are just a one-way bet as an asset class is over."
Standard Bank’s latest tally on metals market speculative positioning reveals that players in gold and silver remained wary and that net selling of both metals occurred in the week ended March 23rd. Speculative longs in gold trimmed positions by nearly 81 tonnes and increased short bets by nearly 13 tonnes. In fact, the net sellers outnumbered net buyers for the first time in circa two months in gold.
ETFs shed balances as well for the first time in eight weeks, as they let go of more than eight tonnes of the yellow metals. In silver, the situation was largely similar but more so, as the data showed the addition of over 128 tonnes of short bets while long ones lost contracts totaling more than 213 tonnes. Meanwhile, silver-based ETFs sold roughly 30 tonnes of the white metal.
Precious metals opened firmer this morning but once again revealed just how over-dependent they are on practically every word that Mr. Bernanke utters (or does not utter) when he makes a speech. The mere mention of the fact that ultra-low interest rates are helpful to an economy that is trying to grow, and that such growth is what will stimulate US jobs creation, sent gold prices soaring by nearly one percent in early trading in New York, touching $1,680 in the process.
To be sure, all that the Fed Chairman actually said was that it is not yet clear that the recent positive job metrics will endure and that low rates are helpful, but the truth is that precious metals players remain desperately fixated on any promise of a QE3 by the Fed, or even the hint of one. Also helping the early price action to the upside this morning was the warning by Italian PM Mario Monti that the EU debt crisis could witness a fresh flare-up in the event that Spain’s financial situation veers out of control.
Mr. Monti noted that Spain has "not been paying a sufficient amount of attention to its public accounts." On the other hand, after having lost more than 3% on the month thus far, repairs in the gold market are still the logical order of the day, and thus, the extension of Friday’s gains and the rebound in general ought not to come as too much of a surprise. Gold is off by 5.5% on the 30-day change counters at Kitco.com and silver is down 12.4% on the same indicator on a year-on-year basis. Friday night’s late update from the teams at Elliott Wave opines that while gold could be in the early stages of a "significant" decline, there are decent odds in place for a test back to $1,700-$1,730 at this juncture.
Physical markets remained relatively quiet as the situation in India remains tenuous for gold importers, fabricators, and would-be investors. While additional tariffs on finished goods in gold have not yet materialized and while the country’s jewelers continue to show their displeasure with governmental proposals related to the above, there is one concrete tax on gold that has actually been placed into effect. The Indian government is now levying a one percent tax at source for transactions in gold that involve cash. The move is seen as attempting to avert the flow of "black money" into the precious metal.
Silver gained 44 cents in the first half-hour of trading and was bid at $32/75 per ounce. The EW team’s opinion on the white metal is that it has now undergone seven downward waves and that the $33.09 level remains the one to watch as a pivotal one for the moment. A firm rise above that price marker could lift silver as high as the $38+ level before a downtrend resumes, while a breach of same could usher in additional price weakness.
Platinum and palladium each added $14 this morning to rise to $1,637.00 and to $670.00 respectively. Rhodium remained bid at $1,425 after having declined modestly last week. Platinum market speculative positioning showed additional short positions in the latest reporting period and a rise in same to well above last year’s average of 158,000 ounces. Palladium players appear to still be confident in the market but their optimism has been brought into question with the noble metal’s recent corrective action in prices.
In the background, the US dollar slipped by 0.20 on the trade-weighted index (last seen at 79.06) after the Bernanke speech unnerved dollar longs just a bit. Crude oil moved 20 cents higher to trade at $107.05 per barrel Barclays Capital analysts this morning wrote that they "expect the U.S. dollar to do well against funding currencies (yen, Swiss franc and euro) in a world where U.S. economic growth remains stable and Fed policy is little changed." Stocks opened higher in New York and the Dow was ahead by nearly 70 points mainly on optimism related to the Bernanke speech and to previously released German economic confidence data.
Irrespective of what Mr. Bernanke said this morning in his speech, those who share similar positions on other important institutions overseas basically warned him not to try to keep interest rates at near zero for too much longer, or else he risks a situation wherein "a risk that the balance sheet costs against the benefit could significantly worsen." That take came from the Governor of the Bank of Japan, Mr. Masaaki Shirakawa, and the GM of the BIS — Mr. Jaime Caruana.
As evidence of the aforementioned risks, Mr. Shirakawa reminded Mr. Bernanke that commodity prices have been spiking. Meanwhile, Mr. Shirakawa’s institution is still grappling with how to lift Japan’s inflation to its targeted 2% level as supply continues to overwhelm demand and as the country remains mired in deflation. The BoJ’s new inflation target has now been lowered to 1%. There is no question that speculators drunken on the Fed’s easy money have been boosting commodity price tags and that they were exhibiting some forward-looking inflation-based concerns in the process as well.
In addition to such words of caution and advice, the Fed’s own team members have now shown some doubts about the very effectiveness of balance sheet-based monetary policy. Philly Fed President Charles Plosser is of the opinion that the US central bank ought not to conduct monetary policy via its asset basket as it risks losing its independence in the process. Mr. Plosser noted that the Fed’s actions may have made the distinctions between monetary and fiscal policies somewhat fuzzier in recent years, and that such a paradigm is not very desirable.
There is a risk that fiscal discipline is dis-incentivized in a situation where a central bank creates its own form of "moral hazard" and that the public will come to view such policies in a very critical manner. Such views are now quite common in the business community, which, albeit giving high marks to the Fed for what it has done to resuscitate the US economy and for becoming more transparent in its policies, is obviously leaning towards the ending of the current low rate strategy sooner rather than later.
Bloomberg News reports that "most economists said the central bank’s pledge to keep interest rates low through late 2014 had gone too far. Just 6 percent of those polled said the rate should be kept low for that long or beyond. Twenty-six percent said the pledge should extend through mid or late 2012, 29 percent favored mid or late 2013, and 3 percent said through mid-2014. The remaining 36 percent said the Fed should provide no guidance."
Thirty-five percent of those polled also said that the Fed’s current fiscal policy was too "stimulative." This, despite certain rumblings that the Fed might offer an "inflation-sanitized" QE program when it next meets on April 25th. On the other hand, the survey also revealed that practically no one was afraid that the Fed might lose control and let inflation out of the bag and that its plans to keep prices climbing at around 2% per annum will assist in making monetary policy become more effective.
Senior Metals Analyst — Kitco Metals
Kitco Metals Inc.
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