In The Lead – Great Fedspectations – Part Deux


Precious Metals CommentaryPrecious metals prices headed lower this morning as the final trading session of the week got underway in New York. Yesterday’s "Fedspectations" turned down a notch as market participants had somewhat bigger news ‘fish‘ to fry this morning; specifically, the story out of China that there has been a sharper-than-expected slow-down in that country’s economy. While many commodity bulls and pundits had expected a surprise to the upside (9%+) in Chinese Q1 GDP, the reality-as relayed by Beijing-was that GDP eked out only an 8.1% gain on the quarter — the weakest quarterly expansion rate in three years’ time.

Do also note the fact that with the first trimester’s numbers having been filed, the world’s second-largest economy has now experienced a fifth consecutive quarter of slowing growth.

This week’s IMF warning on China and on commodities basically echoed an earlier report by the World Bank "which forecasts a similar [Chinese economic] slowdown, predicting economic growth will gradually slow from an average of 8.6% in 2011-2015 to an average of 5% growth per year in 2026-2030."

Spot gold opened with a loss of $4.30 at the $1,671 mark on the bid-side, while spot silver dealings opened with a 13-cent decline to the $32.25 level. For an explanation of what he interprets as a bearish market tilt for gold, and why, you might wish to view economist Dennis Gartman’s interview with Kitco’s intrepid reporter, Ms. Daniela Cambone. It is an engrossing clip and it brings up not only chart patterns but certain "official sector" players who did not mind selling some gold into the market at a time when everyone was asserting the opposite.

On the other hand, for quite a sobering view on silver and its trials and tribulations of the past year, do give this Oakshire Financial article a read. Platinum and palladium each shed $5 to start off at the $1,596 and the $646 price points respectively. No changes were reported in rhodium at $1,350 the ounce. The analytical team over at Standard Bank (SA) notes in its daily commodities report that "a platinum price between $1,600 and $1,550 is a level where downside [price risk] is becoming increasingly compressed."

While the team does not discount further downside beyond this [$1,580 support] level, they believe that price declines below the $1,550 level will be short lived as long as the ZAR doesn’t depreciate substantially against the USD. The Standard Bank analysts also believe that "the risk of the platinum market tightening up via production stoppages in SA this year remains high." In the background, the US dollar recouped 0.23% of its Thursday losses to climb to the 79.52 mark on the trade-weighted index and crude oil fell 30 cents to be quoted at $103.34 per barrel in NY. Copper players evidently disliked the Chinese GDP number as the orange metal dropped 1.44% this morning.

According to South Africa’s Business Day, "it is far too early to express confidence that global recovery is in sight. But it is becoming a possibility for which all but die-hard gold believers should be making a plan "The story quotes GFMS’ Paul Walker as cautioning that "we are now starting to see some of the inherent difficulties of maintaining momentum in the gold price, as there are signs of economic recovery and an expectation that at some point interest rates will have to move higher."

Mr. Walker notes that the level of investment demand required to just keep gold prices where they are must be as high as $10-$12 billion per month. In other words, someone had better step up and absorb the surplus manifest in the gold market.

He concludes that "we are at an interesting phase in the gold bull rally," Walker says. "If there was some miracle and the economic news flow became very positive then gold would be in difficulty. But I don’t think we are there yet. There are still legs in this market, but gold is becoming vulnerable. I’ve pointed out before that gold’s run in the past few years is unsustainable. There’s no asset class that only ever sees positive inflows."

Swiss Bank UBS AG which last week scaled back its average gold price forecast for the current year by18% now says that commodities overall are likely to experience a decline in the coming quarter as both the Fed and the ECB refrain from injecting further stimulus into the economies they oversee. Goldman Sachs Group Inc. also cut its 90-day outlook on commodities to "neutral" from "overweight" noting that many a raw material had reached "targets" in Q1.

Both firms appeared to echo the IMF warning issued earlier this week that the commodity-producing nations out there might wish to brace for price declines in "stuff."

UBS also noted that "statements from the Federal Reserve’s Open Market Committee suggest the likelihood of further quantitative easing is minimal. A more durable global economic recovery has heightened concerns about rising interest rates and a stronger U.S. dollar."

Speaking of such "statements," no fewer than a dozen Fed official speeches have been delivered this week, and they only served to confuse the investing crowd as thoroughly as possible. The markets could have sprinted into equally divergent directions based on the interpretation of the words coming from Fed Presidents Kocherlakota, Yellen, and Lockhart, or Bullard, Dudley, and Rosengren. And we have not even begun to cover the statements that were made by Fed Governor Tarullo or Fed President [Esther] George.

Many a commodities’ speculator tried to divine hints of QE3 in the pronouncements made by the aforementioned luminaries; some even tried (and succeeded) to push asset prices significantly higher. To wit, gold gained a hefty amount, so did crude oil. As for the Dow, well, it put in its second-best performance of the year. Curiously, it appears that if you ask economists about the prospects for any further significant accommodative steps to be taken by the Fed this year, well, they have a bit of a … different opinions than the speculators who added 1% and 181 points to the price of gold and the Dow, respectively, based on just such anticipation.

Namely, 71% of surveyed economists (by the Wall Street Journal) do not believe that the Fed will take such measures, most of them believe that the Fed will raise rates within about one year, and they also believe that the US economy will continue to grow at the pace that the Beige Book described the other day as "modest to moderate." What the US central bank’s fawn-colored book actually noted was the fact that certain regions in America (Cleveland, St.Louis) are growing at only a "modest" rate whilst others (Kansas City, Boston, Minneapolis) are showing "moderate" and even "solid" rates of progress on the economic front.

The "moderates" outnumber the "modests" by a wide margin, but at the end of the day, they are all exhibiting growth of the type that should embolden the Fed hawks (Minneapolis Fed President Kocherlakota among them) who wish to depart from the near-zero interest rate environment now in place of the past three years. For now, the Fed will aim to make rate change decisions or asset purchase decisions based on "incoming data" and many suspect that no radical or new Fed programs will be on offer inside of the two weeks left prior to its late April FOMC meeting, or even thereafter.

In the interim, US economic statistics continue to run hot, cold, and everything in-between. Yesterday, the perceptions that the Fed will "help" in some way were bolstered by the highest number of initial unemployment benefits claims in two months (380,000). Ignored inside the report was the fact that the US economy has in fact added an average of 212,000 jobs each month during Q1 and that such figures are well ahead of the averages recorded in 2011. Also apparently ignored is the fact that while overall US unemployment was at 9.1% just last August, it was down to 8.2% last month. The glum buyers of gold and silver thus also ignored the metric that showed US consumer confidence rising and holding at a four-year high last week.

On a final note this morning, certain tremors were reported at the tomb of the very, very late Kim Jong Il after his country’s rocket scientists failed to put a Tiparillo-shaped object (rocket? missile?) into orbit. Either North Korea misread the calendar and thought that July 4th had come around, or the folks with their finger on the "launch: button thought it would be nice to continue the tradition of celebrating the "power" of their regime with such a fireworks show. The rocket, dubbed "Kwangmyongsong" ("Bright Star") indeed turned into a bright… star of a fiery nature as it disintegrated over the ocean. Back to the drawing board. Final tally: one lost rocket, a bunch of (non-existent) money spent, numerous bruised egos, and the addition to global geopolitical jitters: a big, fat zero. 안녕히가세요(Goodbye, see you later)

Have a pleasant weekend.

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal 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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