In The Lead – Fed to the Weimar Club: Honey, I Shrunk The Balance Sheet!


Precious Metals CommentaryPrecious metals opened lower for the midweek session this morning as market participants held back from making major commitments at or near six-month highs in gold ahead of the ECB meeting tomorrow.

The stronger US dollar resulted in gold backing away from major resistance at the psychological $1,700 mark and easing to lows near $1,685-$1,690 in early trading. It was the yellow metal’s first decline in four sessions. The most recent 14-day RSI reading in gold flashed the 70.3 figure — a level above which profit-takers are not an uncommon sighting.

Spot gold started the day down by $6 per ounce, at the bid level of $1,690 while silver fell 20 cents to open at $32.16 the ounce. Platinum declined by $7 to $1,559 and palladium slipped $4 to $636 per ounce. No change was reported in rhodium at $1,150 on the bid. In the market’s background, the US dollar held near 81.30 after having thus far held the pivotal 81 level while the euro was trading at 1.255 against it. Crude oil and copper experienced modest declines early this morning based on global economic growth concerns.

In the metals mining sector, the troubles in South Africa’s gold and PGM mining industry appear to continue without any respite. Yesterday, news reports told of police forces having fired teargas and rubber bullets at striking gold mine workers at Gold One International’s facility near Johannesburg. This morning, hundreds of the same striking workers marched to the Lonmin Marikana mine amid growing tensions. Meanwhile, platinum giant Lonmin has warned that the indefinite strike at its Marikana mine (where 34 workers were recently slain by police) is jeopardizing more than 40,000 jobs. More than 95% of Marikana’s workforce has not been in attendance at that facility. We have yet to receive fresh estimates of how much platinum production has been lost as a result of the on-going strife.

The abbreviated trading week got off to a positive albeit muted start on Tuesday as returning market participants continued to root for QE3 and as they also added hopes for a similar move by the Chinese central bank in the wake of the most recent data from that country. Echoes from last week’s GOP nostalgia-laden proposal to revive the gold standard in the USA are still reverberating in the financial media and they continue to generate emotional (if misguided) reader responses.

Meanwhile, physical offtake remains muted in India amid once again near-record local prices and amid reports that the country’s government plans to cut the current account deficit by raising the import duty on gold to 7.5%. The tax on bars and coins was hiked to 4% in March and Indian gold imports collapsed by 42% in the first half of this year. More on physical coin demand (or the lack thereof) in other parts of the world will follow later in this article.

Last week’s Jackson Hole statement by Chairman Bernanke is being treated as the de factoannouncement of another round of asset purchases by the Fed. On that note alone, gold prices were able to not only close at a five-month high last Friday, but, when combined with expectations of PBOC easing, to reach the $1,700 mark briefly on Tuesday. Relatively weak US manufacturing sector data contributed to resurging QE "Fedspectations."

Last Friday was a bit of a different story, on the whole. The initial reaction in gold was to run for the exit doors and sell as players pondered the passage in the Jackson Hole speech wherein Mr. Bernanke warned about the costs of "non-traditional policies." By the time the speech focused on America’s economic prospects and the ‘grave concern’ that unemployment poses for the Fed, the buyers prevailed and ran off in full QE gallop. Yet, some observers believe that the JH speech could not have been thereason for the $36 gold rally on Friday. This is what was seen in graphical terms that day:

Chart courtesy

One such (Seeking Alpha) commentator notes that behind such a chart is the fact that

"people simply heard what they wanted to hear. All Bernanke did was to confirm the preexisting ‘easing bias’, but it is not at all clear to us from his words that the current situation is sufficiently dire to surmount the ‘higher bar’ that according to Bernanke stands in the way of the implementation of ‘non-traditional’ policies. The stock market is close to a multi-year high, commodity prices have firmed and the US economy is officially still in expansion mode, even if the expansion is widely acknowledged to be weak."

Another market follower, Peak Theories’ Abigail Doolittle flat-out feels (she did, anyway, prior to the JH speech) that QE3 will not come in the current quarter at all and

"that we may not see another quantitative easing plan until we experience steep deflationary pressures since it cannot be easily remedied with a simple interest rate hike or drop. She also said that "it would seem more appropriate to keep that controversial policy option on the shelf until it is needed as it may sure be needed considering the slide in global growth and the continued pressures of deleveraging."

To be surely continued. September 13th is not far off…

In the meantime, tomorrow’s ECB-related news could yet be the catalyst for gold to make a quick visit to the resistance zone thought to exist between $1,710-$1,730 per ounce. On the other hand, commenting on the gold and silver markets’ speculative positioning side of things, Seeking Alpha contributor Chris Mack cautions that in the wake of Friday’s spikes "gold and silver may already have begun pricing in future intervention; however, commercial banks are not yet on board with the breakout in gold and silver.

Net commercial short positions in both gold and silver, at a time when prices are near resistance levels and overbought, are indicating that a short and severe correction could be imminent." If the breakout in gold proves to be a false one, then one might look for initial support to kick in at near the 38.2% Fibonacci level ($1,675) and then lower at $1,653. EW analysis sees the breach — if it happens — of support at $1,646 per ounce as potentially ushering in a larger wave decline.

As for China, and yesterday’s aforementioned news release, it appears that export orders for its factories declined at the steepest pace since the first quarter of 2009 last month. The official manufacturing index came in at the 49.2 level as compared to 50.1 in July. Such figures, when viewed in the context of the fact that, after the US, China is the second-largest global economic engine, are causing not only worry but are giving rise to the aforementioned visions of monetary policy loosening. However, some of the hopefuls among commodity speculators may yet be disappointed by what the Chinese government eventually does (if anything).

As with everything else we normally cover here, there is another side to every such story. Some of the instant reactions to the weak Chinese data are clearly based on historical precedent. Things slow down = central bank throws money at the problem sooner rather than later. Not necessarily so, argue some. In fact, the incoming leadership in China — while not ignoring the need for economic growth — is less likely to go scattershot on stimulus (as was perhaps the case hitherto) and it appears relatively at ease with a slower pace of growth.

Much of this new official approach to the problem of slowing may be on display during the 18th Chinese Communist Party Congress slated for mid-October. In a nutshell, the sunset of the lengthy era of double-digit expansion in China may not automatically yield spectacular, bazooka-sized easing moves by the PBOC. One recent estimate places China’s 2012 growth near the 7.5% level despite two rate cuts that have taken place since June. Perhaps it is time to get used to certain realities.

The again, when it comes to the Fed, there is also another, less often (if at all) covered side to the QE story. Aside from the fact that there are those on Mr. Bernanke’s FOMC team who still disagree as to the efficacy (not to mention the timing) of another round of bond purchases, and aside from the fact that there are plenty of GOP vocal critics of such a putative move, what if we told you that the Fed’s balance sheet has actually been shrinking? Yes, you read that one correctly: shrinking, as in: not expanding.

How can this be? Well, by the tally of the Financial Times, last week the Fed’s balance sheet was nearly $43 billion smaller than it had been one year ago. That same balance sheet is $115 billion smaller than it was as recently as the end of December. At an annualized 6% rate of contraction, the Fed balance sheet figures do not exactly presage that a fresh bond shopping spree is imminent. Could such a move still happen? Why, sure it could. Would it be the move that suddenly slashes US unemployment by a full percentage point and sends GDP to near 3%? Yeah, right.

Perhaps the better question to ponder is why gold specs/bulls are so over-dependent on the Fed, the ECB, and the PBOC to launch stimulus missiles in order to augment their bullishness levels and their actual bets? After all, QEs I and II have not resulted in either the long-promised demise of the US currency, or the sure-to-happen advent of Weimar Republic-level (hyper)inflation. Therefore, the assumption must be that, somehow, the Fed will lose control of the rudder and unwittingly set the course for a replay of 1980. That’s a heckuva leap of faith based bet to make. Yet, it is apparently being made, at least by the hedge fund teams out there.

When it comes to the retail public (at least the one in the US of A) at least up to the last week or two, the appetite for loading up on truckloads of gold in anticipation of a 1980 redux has simply not been manifest. US Mint August gold coin sales statistics were once again treated with a barrage of one-sided reportage, whereby we learned that such sales were up by 28% compared to July. Sounds like a good month, right? However, the fact that remains inescapable is that the sales figure of 39,000 coins is the lowest one since the pre-crisis days of 2007 and that it is 65% lower than the one tallied in August of 2011.

The situation is no different in the area of silver coinage sales. While reports late last week trumpeted a 26% increase in August Silver Eagle sales (to 2.87 million units) the bigger picture points to a 22% decline in sales vis a vis 2011 to the lowest August silver coin sales figure since 2009. Underscoring the habitual trend-chasing behavior by small retail investors, one US coin dealer remarked that

"What we need to get business going is for gold prices to go higher.”

Buy high / sell low and sit it out at all other times. What a concept.

Now, lest you think we are using the US Mint data to a certain "advantage" and/or to make a "certain" point, consider the fact that aggregate demand for gold coins is down globally. Other major producers of gold bullion coins — the Royal Canadian Mint and the Austrian Mint- also reported a sizeable decline in sales to the investing public. The RCM’s gold coin sales drop was on the order of 46% while the Austrian Mint’s tally was 39% lower in gold coins and 27% lower in silver coins.

The above figures cover the first trimester of 2012 and are computed against Q1 of 2011. We have already reported here that global Gold demand fell to its lowest level in more than two years in the second quarter, (according to World Gold Council) owing to the decline in buying by pivotal top consumers- India and China.

Such retail gold investment market developments have prompted World Coin News writer Richard Giedroyc to remark that

"The gold rush brought on by the Great Recession appears to have tapered off."

Others, of course, argue that said gold rush, Part Deux, is just beginning. Yet, a quick roundup of Q3 and 4 price projections by various institutional players and analytical firm (TD Securities, Global Hunter, GFMS) shows gold only as high as between $1,750 and $1,800 and talk of new records continues to be confined to the doomsday-oriented newsletter niche.

As the clock ticks towards tomorrow’s ECB meeting (and its aftermath in terms of market reactions), we turn to a very frank discussion on the trials and tribulations of the European common currency by our friend Philip Burgert who is over at Futures Magazine. Philip writes that three painful years have passed since the emergence of European debt issues and related economic woes, yet the euro continues to struggle, possibly for its very existence, as,

"despite a flurry of activity ahead of a European Central Bank (ECB) meeting in early August and promises to do everything possible to save the euro made by ECB President Mario Draghi, foreign exchange traders and analysts were left with the conclusion that little had changed in the slowly unfolding Eurozone drama."

Tomorrow marks yet another act in that drama. It is not likely to be the final act. European financial bailout fund (EFSF, soon to become the ESM) chief Klaus Regling estimates that the crisis could be over in one or two years — if member states stick to their pledges. Mr. Regling, a German, also bluntly stated that if it had not been for his country, places such as Portugal or Ireland might not call themselves eurozone members these days.

On September 12, Germany’s highest court will rule on the legal challenges facing the ESM. Meanwhile, the region is almost certainly sliding into a recession if the latest survey of business activity is correct. The euro just cannot win at this juncture. Sources say that even if Mr. Draghi pulls a big, bond-loving rabbit out of the ECB’s magic hat tomorrow, the positive market reaction will be quite short-lived. In fact, a Draghi departure from the strict monetary approach and influence that the Bundesbank has hitherto exerted upon the ECB will likely spell anything but the German mark-like vigor that many had hoped the euro to be able to mimic.

Of course, there can hardly be any discussion of the euro without bringing the US dollar into it as well. The greenback has been, and continues to be, the principal recipient of the safe-haven quest that the euro’s troubles have brought about. Noted currency expert Marc Chandler (author of "Making Sense of the Dollar") explains that the European turmoil has resulted in a situation where not only is the buck not poised to turn into a brown furry creature with giant claws, but one where

"the dollar is in a bull trend or a rising cycle, which probably still has a bit more time to run. It just so happens that there are uglier sisters at the ball. If I were to bet on what country can reinvent itself, I would bet on the U.S. over Europe and Japan."

Keep that in mind as you read the latest harvest of (once again premature) US dollar obituaries.

Until next time, a special greeting to our new, Arabic language-speaking audience at

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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