In The Lead – Great Expectations May Lead To Great(er) Disappointments


Precious Metals CommentaryUnderscoring once again just how much of a premium Fed QE3-oriented expectations had added to certain market price equations, gold fell out of bed on Tuesday afternoon after the ritual parsing of the Fed’s March 13 meeting minutes left many a smugly hopeful bullish participant with nothing but… hope to hang onto, as their trades/bets (as well as sentiment) soured very fast.

Currency strategists at Brown Brothers Harriman had cautioned as early as yesterday morning that while many market players were expecting at least some kind of QE3 hint in the FOMC’s meeting minutes, there might not be anything in there but a summary mention of the fact that if conditions dictate, then such measures might be put into motion. The firm’s caution was then more than vindicated by a 0.74% rise in the greenback’s value on the trade-weighted index (@79.43) by the end of the trading day. Gold headed sharply lower and touched the $1640.00 bid level as panicked sellers pulled the "Bail!" trigger sen masse.

This morning, the meltdown continued in gold, but this time, unlike during yesterday’s after-hours electronic trading, silver and the noble metals joined gold and fell hard as well. Once again, the only green color to be seen on the trusty new Kitco iPad app was the net change in… the greenback. It surged another 0.47% to reach 79.80 on the trade-weighted index. In the futures market, the active June gold contract was actually off by more than $52 or 3% per troy ounce.

Reuters technical analyst Wang Tao projects that on the technical side of things in gold, the yellow metal has the potential to fall to the $1,392 per ounce level over the next 90 days. That figure represents the 100% Fibonacci projection level while the $1,447 mark represents the 38.3% Fibonacci retracement of the rise from $680 to $1920. The sub-$1,400 gold price target — according to Wang Tao-will be "confirmed when gold falls below the March 22 low of $1,627.68 per ounce.

A negation of this trend might only occur if and when gold is able to breach $1,790.30 on the upside. Wang Tao projects $22.96 per ounce silver for the upcoming three-month period; however, a break of that number could usher in a target of $13.99 per ounce for the white metal. On the other hand, a successful vault to above $37.46 could mark a double-bottom in silver and the path towards at $45.50 per ounce target.

Spot gold opened the midweek session in New York with a loss of more than $25 and a bid-side print very near $1,620.00 per ounce (a near 11-week nadir). This took place at a time when most projections for this week had called for much higher than $1,680 gold and a take-off to be underway in silver as well. Adding insult to injury, the Reserve Bank of India today turned up the heat one more notch on gold imports when it announced a new set of reporting requirements for bullion. Monthly statements from local banks are now required by the RBI as well as the description of payment methods used.

The white metal opened with a 3.4% or a 111-cent loss this morning, and it was bid at $31.55 per ounce. Platinum fell $29 to $1,608.00 and palladium slipped $5 to $647.00 the ounce. Robust car sales results by Chrysler (up 35%) and a quite decent showing by Ford (up 5%) and GM (up 12%) once again should provide support for the PGM complex, but for the moment, the mood is all about the Fed and its reluctance to please. To be fair, the annualized auto sales level shown in March (14.3m units) was below the 15m average that was seen in February and it was also just below analysts’ consensus. Copper declined 2.26% and crude oil lost 1.05% while US equity futures indicated that a grumpy mood was going to be defining the trading day ahead.

Analysts at Standard Bank (SA) report that they are "seeing that the platinum market has tightened up following the recent strikes in South Africa. We also believe that although the palladium market is likely to experience much greater structural deficits than platinum in coming years, at the moment, above-ground stock for platinum is lower than that of palladium (in terms of days consumption). This, at least in the next few months should support platinum, especially if more production is lost in South Africa.

The above is also consistent with our [their] view that we see good value in platinum below $1,600-$1,550 (less than 5% from the current price) and palladium around $600 (about 10% from the current price)." Such fundamentals prompted industry notable Brian Gilbertson to declare that he is "very, very bullish on platinum-group metals" in this Mining Weekly video interview. It is well worth your time to watch it.

The US dollar built on its early gains in the wake of the ADP private employment report which showed that 209.000 jobs were created last month in the USA. ADP also revised its February employment metrics to the upside. The trend plays into the hands of the now less accommodative stance that more and more are beginning to realize the Fed is adopting. So did the report on Tuesday that orders for goods produced in U.S. factories rose 1.3% in February, according to the Commerce Department.The ECB left interest rates unchanged this morning and the euro fell to 1.314 against the US currency.

There is something else however at play behind the US dollar’s muscle-flexing that just the shift in Fed-think. Many dollar morticians when they send out newsletters laden with fear and loathing about the fate of the US currency and that of America, simply ignore a basic set of manifest facts.

Marketwatch columnist Kirk Spano, founder of Bluemound Asset Management, writes that "the fear of imminent collapse of the dollar belies a simple, yet major, misconception about the dollar. It is not like other currencies. The value of the dollar is impacted by far more than balance-sheet numbers, which is why the U.S. balance sheet can be substantially more flexible than those of other nations."

Last week, in a post entitled "Word Power" we noted that the gold specs showed 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."

In Monday’s "In the Lead" we alluded to the fact that when and if the Fed does any kind of further accommodation, it might only be as a result of significantly unpleasant US economic statistics and that if a new QE ship is actually launched, that it would be one that has been "sanitized for your (inflation) protection." On Monday, certain clues to the Fed’s stance were fairly easy to divine by simply following one or two of its members in action. Dallas Fed President Fisher went on CNBC and said that while "it’s a little bit premature to talk about tightening" it is also the time to begin to consider that the Fed is done with easing.

Mr. Fisher then went on to note that he thinks that "the easy part for those that just rode on the jet stream of Federal Reserve accommodation is over now. Now they actually have to do the work, to do their analysis."

Part of said analysis is to figure out how much certain commodities might be worth if the Fed’s easy money had not been at some players’ disposal and if the "buy everything" syndrome had not afflicted so many fund managers. On the same day, St. Louis Fed President Bullard cautioned that, owing to global factors which could keep US inflation levels at higher than those warranted by the relatively slow pace of US economic recovery, further easing is not something he would go along with.

Similar, very telling "smoke signals" from the Fed were actually out there even earlier than yesterday however. For instance, last week, just hours after everyone got carried away with their bullish bets owing to sugar-coated visions of a certain-to-soon-be-launched QE3 (based on perceptions of what Mr. Bernanke said in a relatively unimportant speech), Richmond Fed President Lacker (also appearing on CNBC) flatly stated that US economic conditions were/are likely to pick up enough "steam" in order for the Fed to need to raise interest rates next year, and not at the end of 2014, as is still being assumed by many, too many.

Yet another Fed policymaker, Atlanta Fed President Dennis Lockhart, speaking yesterday on Bloomberg Radio’s "The Hays Advantage" with Kathleen Hays, chimed in on this most important topic and remarked that he "would have to see some pretty severe circumstances before [endorsing] another round of quantitative easing. The [US economic] outlook is positive enough that I am not sure I see the need for it."

The bigger issue here (and it certainly applies to gold as well) is that certain market players not only cannot live with the idea of rate hikes by the Fed, but that they cannot even stomach the concept of a "neutral" Fed that simply remains on hold. This is generally what happens when drug addicts need larger doses of ‘more of the same’ just to get the same level of "kick" they have become habituated to. Thus, we witnessed stock, oil, and precious metals market players throwing "tantrums" of varying intensities on Tuesday after the Fed merely hinted at cutting back (and eventually off) on the supply of market "marching powder" that it had so generously been doling out since 2008.

Thomson Reuters‘ "Inside Metals," in its most recent report, notes — and this is quite the observation that most hard money newsletter ‘producers’ really need to take note of — that "the gold market has been showing increased sensitivity towards inflation fears during early 2012, as it has become ever more attentive to statements, or inferences from statements, of Federal Reserve Board Chairman Bernanke. What could be seen as significant is that price falls in response to benign inflationary sentiment have been larger than any gains on heightened inflationary fears."

Great expectations can lead to greater disappointments.

Until next time,

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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You’re the smug one.


It’s easy to be bullish on the dollar. But I don’t understand why you are so happy about the value of the dollar going up. Do you think the “demise of the dollar” crowd has grown in popularity for no reason? Or is it that you actually believe the Federal Reserve when they say inflation is under 2%? Or maybe you just want inexpensive gold so you can get more for your money when you buy it from those “cash for gold” operations. Keep converting your freshly-printed debt-based assets into real ones and yeah, I can see how you will… Read more »