In The Lead – Snapshot: Growing Piles Of Stuff, Few Takers


Precious Metals CommentaryThe midweek precious metals trading session started with a bit of a recovery effort following Tuesday’s price rout.

Market participants pushed the US dollar a tad lower on the index and lifted gold prices by about half a percent in the hopes that the Fed’s meeting minutes might contain a much-awaited hint that there will be some type of easing to come out of the next gathering of the FOMC on August 1st. More on that whole issue will follow below.

Suffice it to say that we have repeatedly warned that pinning hopes (and trades) on a single factor (easing by the Fed) that remains as nebulous as could be, is a market-unhealthy construct.

"Fedspectations" have been almost completely defining the tenor in this investment sector ever since the doling out of QE2 back in November of 2010. Then again, upon the unleashing of that stimulus package we were presented with "erudite" articles on why that action meant nothing less than the actual demise of the US dollar-based currency system and the imminent advent of a hybrid gold standard. We were also assured that the Fed had completely run out of stimulus ammo and that there was nothing else left to do but to wait for hyperinflation to take hold. We all know how those forecast panned out.

Spot dealings this morning saw gold advance by $8.5 to $1,575 and silver rise 27 cents to $27.08 per ounce. Platinum and palladium also climbed but by only a more modest $1 and $3 respectively. The former was quoted at $1,421 per ounce and the latter at $578 on the bid-side. One bit of good fundamentals-based news was available to parse as regards rhodium. The noble metal’s surplus is anticipated to shrink by 62% this year and dip towards the 53,000 ounce level, owing to record worldwide automobile sales. Analysts project a price tag of $2,000 to be attached to one ounce of the exotic metal by the end of next year, according to Bloomberg News. That would constitute a 62% gain from current levels, and, for gold to match that feat, it would have to be trading around $2,500+ per ounce.

Once again, the gold bulls attempted to reclaim the $1600 value level but their efforts proved quite unsuccessful by the early afternoon hours on Tuesday. After reaching a spot-offer high of $1,603 in lively morning dealings, despite a firm dollar, the yellow metal finally succumbed to the US dollar’s seemingly inexhaustible strength (and the euro’s on-going weakness) and it fell fairly hard, along with the rest of the precious metals, as well as with crude oil prices. On Tuesday, the Energy Information Administration lowered its projections for global oil demand for this year as well as next.

Lows in gold at near $1,563 per ounce on the bid-side were being recorded by the 3:00 o’clock hour in New York and the day’s former $11 gains turned into $24+ losses in a hurry, amid thin but volatile conditions. Gold closed $20.80 lower last night at $1,566.50 — only $3 from the session’s lows. Silver prices fell back by 2% to very near the important $26.50 pivot point and lost over 50 cents per ounce to close at $26.81 after darting across a $1 range during the session.

The white metal’s price prospects for the remainder of the year have been revised lower by Global Hunter Securities.

The firm’s analysts reason that they see more downside risk than upside potential in silver for the next six months as "accumulated supplies of silver in the U.S. combined with stagnant trends in the world’s industrial utilization of silver (especially in computers, photographic processing and other electronics) suggest to us that prices could trend lower, perhaps testing the low $20s during 2H 2012."

Silver has fallen 25% in the past 12 months and 15% during the second quarter of this year. It is a metal with anything but decent supply/demand fundamentals (i.e. ample supply and over-reliance on investment demand at a time when its essential industrial demand is flagging).

EW analysis issued Monday evening notes that unless the recent highs in gold (at $1,625) and in silver (at $28.50) are convincingly overcome — a paradigm that would require a reassessment of short-term trends in the two metals- the targets of $1,300 and $22 respectively, remain on the charts’ at this juncture. By the same token, the breakout by the US dollar on the trade-weighted index is undeniable and it looks as follows on this CNBC-sourced candlestick chart:

Of note is the beginning of the trend-line at 73.5 in September of last year (almost coincidental with the $1,927 high in spot gold). The greenback has been gaining strength ever since. However, the watershed point came with the breach of the 81.5 previous resistance level back in May and a subsequent retest of the same support shelf. The development yields low (or near nil) odds of any imminent break under 80.50 to 81.5 on the scale and it also possibly portends a more dynamic and accelerated upward push to a target of 89-90.

What’s such an achievement by the supposedly (by now) "dead and gone" US currency might translate into in gold prices, remains to be seen. At any rate, there appears to be little in the way of support coming from the physical side of the market or the ETF space. To wit, India’s gold ETF monthly outflows hit a new record at the end of June. Observers have attributed a good part of the drainage of funds from those vehicles to the 34% gain that the local CRISIL Gold Index has experienced over the past year as well as to lackluster physical and speculative demand overall among Indian investors.

Further, the US Mint has sold some 40% and 30% fewer ounces in the form of Gold and Silver Eagles respectively, in the first half of this year as compared to the same period one year ago as the US investing public has apparently turned cautious on precious metals following the declines manifest since last September’s record in gold and last April’s peak in silver.

As regards the world of (hedge and other) funds, well, the news is pretty similar in nature there as well.

Bloomberg News relays that fact that [John] Paulson’s Gold Fund "which can buy derivatives and other gold-related investments, fell 0.7 percent last month and 23 percent this year. Losses in gold-mining stocks have contributed to declines in the Advantage funds and Gold Fund this year. The 59-member S&P/TSX Global Gold Index (SPTSGD) slumped 0.4 percent in June and 15 percent in the first half of 2012, including reinvested dividends."

Platinum dropped $20 to $1,419 and palladium fell $9 to $573 the ounce. Rhodium was not spared the sell-off either; it lost $25 to ease to the $1,225 per ounce bid level. In the background, black gold slipped 2.21% to $84.09 per barrel, the euro struggled to maintain $1.225 (ultimately it did not) and the Dow skidded nearly 125 points at one point (it closed with a narrowed loss of 83 points) as losses in crude oil and subpar profit reports being reported in the technology sector pressured it all day long.

Some of the sentiment that became amplified on Tuesday in the stock market had already been manifest during the afternoon hours on Monday. Bellwether Dow 30 component Alcoa’s shares lost ground in the wake of the firm’s reported swing to a loss of $2 million in the second quarter. Chipmaker AMD’s shares fell 11% as the firm cut its view on the semiconductor sector.

As far as the commodities’ sector is concerned, Wall Street Journal blogger and long-time reporter friend Simon Constable believes that their prices are indeed headed lower on account of at least three critical factors. Chief among them is the aforementioned bull phase in the US currency. Second, is the growing realization that demand for commodities is likely to fall (it already has to some extent). Static or growing supply combined with ebbing demand yields a lower clearing price. Lastly, credit appears to be becoming less readily available and credit is the life-blood of leverage-based commodity speculation.

Moreover, the commodity markets (and precious metals as part of them) will still need to grapple with the rising threat of deflation in the world’s second-largest economy — China. Unfortunately for that country, the property business represents a whopping 15% of GDP and with the various linkages upstream it might amount to a 40% slice of the economy. Twenty percent of China’s households are thought to own a second property and the parallels to Spain just a few years ago are worrisome, to say the least.

Some analysts opine that even if the real estate mega-bubble does not pop with a disastrous bang all at once, given two more years of adjustment, China might reach a GDP growth level of near 5% — which, for it, is a dangerously low rate of progress. Here you have but one of the reasons (yet probably the principal one) as to why Premier Wen sounded so extremely obsessed with the curbing of property-oriented speculation in his country in remarks he made over the weekend.

Further signs of the emergent Chinese economic slowdown were manifest this week in metrics regarding the country’s most recent import activity. Chinese imports rose by 6.3% last month and the number was almost half of what economists had anticipated. The Chinese Customs Authority — the originator of the report — does not believe that a rebound in trade is imminent given the troubles in the EU. On Friday we will learn about China’s second-quarter GDP and industrial output levels.

Estimates are that QII 2012 economic growth will track along a 7.5% level and such a figure would place China in the tightest economic spot since the most acute phase of the 2008 economic crisis. There are those who see an even worse decline in the making for the country, as they note record amounts of coal and iron ore that are piling sky-high in China’s warehouses. Waning demand for electricity, heavy machinery, diesel fuel, and large numbers of laid-off shipyard workers are all adding to the perception that something larger than a temporary slowdown is in the making. Analysts say that the government’s statistical ‘thermometre’ has simply not yet caught up with the reality on the ground.

That developing reality prompted NYU’s Prof. Nouriel Roubini to tell Bloomberg News that "The landing of China is becoming harder rather than softer. It’s the perfect storm. You could have a collapse of the Eurozone, a U.S. double dip, hard landing of China, hard landing of emerging markets and a war in the Middle East. Next year could be a global perfect storm.”

Well, they do not call Dr. Roubini "Dr. Doom" for nothing. Stay tuned and watch the "weather" channel.

We conclude today with a roundup of Fed-flavored news and related analysis. There certainly has not been a shortage of stories related to its team members’ recent pronouncements that have found their way into the media. But first, let’ get one thing clear; that is, that there has been a growing trend whereby the US central bank’s monetary actions appear to have been influenced by the statements of politicians and market speculators.

Such a tilt could — in the view of Carnegie Mellon’s Professor Richard Meltzer for example — undermine the institution’s critical attribute: its independence. Many an economist knows very well that what ails the American economy at the present time cannot truly be resolved by monetary policy. Yet, time after time, the Fed appears to have caved to the tantrums being thrown by politicians who demanded that it "do something" to rescue the economy and by market players who (via their trading actions) intimated that if the Fed does not "give" some more free money, then all bets are off. Literally.

And so, here we are. Once again, a US economic statistic came in at variance with expectations and, once again, we were deluged with a plethora of politicians and market players capitalizing on the figure and positioning it to benefit their ultimate goals (hint: not the improvement of the US economy) after they convince the Fed to ease some more. Last Friday’s jobs report, coming in at 80,000 as opposed to the expected 100,000 created this latest harvest of words in the media. Never mind that behind the headline figure things were not all that bad, actually.

A more than cursory examination of the Labor Department’s apparently "dismal" report (you know; the one that will "without a shadow of a doubt" force the Fed’s hand this time) reveals that actual demand for labor was relatively robust. While job creation was not adequate by historical standards, the jobs that were added run across a fairly wide spectrum of industries and sectors of the economy. Finally, the number of unemployed individuals no longer seeking a position because they assume they cannot land one dropped to a new post-crisis low. In all, not exactly the disaster that "the Rominee" or other critics of the administration would have you believe that it constitutes.

Now, enter the Fed’s "circuit" speakers. By Monday morning, no less than a trio of US central bank FOMC figureheads had apparently succumbed to the foot-stomping going on down on Wall Street and up on Capitol Hill and they promptly sounded the alarm on the US economy. Messrs. Williams, Rosengren, and Evans — doves one and all — reiterated not only their support of another round of QE but practically echoed the lamentations coming from the aforementioned US locations and turned up to pro-QE decibels. In fact, some parts of the media ran off with Mr. Williams’ statements and declared that the "groundwork had been laid for QE3."

Well, at least the hawks did not hibernate through this snow-white falling of [Fed] dove feathers. St. Louis Fed President Bullard tried to calm the escalating QE rhetoric by stating that Fed policy was actually "appropriately calibrated" for current conditions and that the Friday jobs stats did not move him to hurry up and act. Joining the ranks was Richmond Fed President Lacker — a perennial dissenter from accommodative Fed policies — by noting that while the US economy is experiencing a partially real slowing, the bump in the road is not severe enough to tilt it back into a contraction.

More importantly, Mr. Lacker also (astutely) observed that the USA may already be very close to its best achievable employment level and that the Fed can do very little if anything (in terms of monetary actions) in order to bring about more jobs. Mr. Lacker had probably observed what took place in Sweden after a similar crisis and learned that a given number of jobs are normally lost for good under such conditions and that simply hoping for a return to the past is a waste of everyone’s time.

"Given what’s happened to this economy, I think we’re pretty close to maximum employment right now," Lacker said on Monday in a Bloomberg radio interview on "The Hays Advantage" He also said, pre-emptively defusing his would-be critics, "That might be shocking. That might be surprising. [But] from the point of view of monetary policy, employment is close to maximum right now. Is it an ideal world? Should we be happy with it? No. But I don’t think there’s much that [Fed] monetary policy ought to be thought of as doing about it."

The above, is all just in time for today’s release of the Fed’s June meeting minutes. Let the cycle of tantrums, declarations, alarm calls, and the opposite commence again. It is routine by now. One would be wise to dismiss any and all market moves that occur on such occasions. They are part of the emotional "noise" that accompanies them.

Until Friday,

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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