1. In The Lead Home
  2. Commentary Archive
  3. Jon Nadler Bio

Manufactured Gains

Wednesday February 01, 2012 10:23 AM

Several “best January starts since…” sentences were the material of financial headlines overnight. Tempting investors into the markets were sexy stories such as “Stocks Headed for Best January Since 1997” and “Stocks Best Start Since 1994 Better Than Commodities” right alongside other titles such as “Gold in Best Start to Year Since 1983.” How can anyone resist and not follow the ‘big guns’ into the money-making pits when more than $3 trillion was being added to stock values (last month) for example?

How can anyone not get drunk on…orange juice after it spiked 24 (twenty-four!) percent in January? And, how can small retail investors ignore the lure of the GLD – currently being recommended for purchase by twice (!) as many money advisors as even the most popular gold mining share? Well, read on.

If things were even close to being “normal” by historical standards in the investment universe, at least one of those two headlines ought to read “Worst Start Since XXXX” in order to be appropriate. As analysts at Standard Bank (SA) pointed out this morning, January’s performance –at least in the commodities’ space- was largely not underpinned by real demand and was based mainly on overcooked enthusiasm connected to expectations of growing liquidity around the world. The phenomenon continued this morning. At the opening bell the Dow was up 0.80% while gold was posting a 0.60% gain of its own. Go figure.

Spot metals dealings opened higher across the board on Wednesday as the specs extended that which they successfully carried out in January for yet another session’s worth. Gold opened near $1,745 with a roughly $7 gain per ounce while silver hovered near $33.80 posting a 60-cent advance. If and when a close were to occur in gold above the $1,803 mark a push towards a new high could unfold, according to EW analysis issued late on Monday.

Absent that development, the odds of a decline towards lower levels remain unchanged. In silver the closing level beneath which lower prices can be expected is $31.50 while the upside target of the countertrend push remains $35.70- the high from late October. As was the case on Tuesday, the early gains largely evaporated as the trading session wore on and profit-takers moved in to harvest their daily chips. On the physical side of things, it is worth noting that India (after it has already hiked its tariffs on gold and silver imports by a hefty margin) has just raised the base import prices of gold and silver by 5.7% and 2% respectively. The base import price is the minimum level at which imports are taxed regardless of purchase prices (in order to avert under-invoicing).

Platinum and palladium reversed course this morning and pushed significantly higher. The former gained $28 to touch $1,606 per ounce while the latter moved $9 higher to reach $698 on the offered side of spot quotes. US car sales have been surging and could be nearing the annualized sales level of 13.5 million units if analysts’ calculations prove to be correct. There is notable pent-up demand for autos among US consumers whose ageing car fleet presents a real need for replacement. Formerly bankrupt Chrysler (now owned largely by Fiat) has sold 44% more cars last month and has returned to profitability.

Stung by the staggering losses they incurred in the debacle of 2008 speculative funds were hard at work last month, throwing money at everything on the investment wall and trying to see what sticks. Pretty much everything did stick, especially after the Fed gave indications that cash equates trash as far as savers are concerned for perhaps a couple more years. Additional fuel for the “buy everything!”

syndrome being exhibited by the specs out there came in the form of this week’s flavor of the “solution” to the Greek debt problem and from an unexpected bump in Chinese manufacturing activities.

Such euphoria managed to drown out cautionary signals from the Fed’s own policymakers and other global financial and economic metrics that remain anything but euphoria-inducing. The Philly Fed’s President noted that his policymaking committee might have to hike rates this year and warned that many market participants don't understand that the 2014 date from the FOMC was not a firm commitment.” Six Fed officials believe that rate increases ought to commence in 2012 or 2013. Also drowned out (but only for a few hours) was the extremely disappointing US consumer confidence figure which temporarily halted the buying sprees in equities and commodities.

As for the debt crisis raging across the ocean, USA Today remarks that Europe's debt woes remain the main worry in the markets. A growing fear is that Portugal may also need to get private creditors to reduce their debts, even though Europe's leaders say Greece's debt-reduction deal is a one-off. Portugal's borrowing costs have been rising consistently to record highs over recent days as the economy shows few signs of improving.” All eyes now shift to Portugal and its potential debt woes as well as to the eurozone’s unemployment level –at its highest since 1998. All is not well in the Old World just yet.

All is well in China you say? Sure, if you interpret the bump in its PMI from 50.3 to 50.5 in December. But how about the readings that stories such as “Chinese home prices fell for a fifth month in January” (the longest losing streak since such data has been tracked) imply? Or the one about Hong Kong home prices facing a 25% drop in 2012? Ignored. For now.

However, even the fuse that lit the commodity market buying spree deserves a bit of a dissection as it appears to be..."manufactured" in some regards. Standard Bank’s economic analyst Steven Barrow took a scalpel to the data from Beijing and has concluded that: “The [PMI] gain occurred despite most factories shutting-down in the final week of the month for the Chinese Lunar New Year, which, on balance, manifests in a moderation of the PMI. However, whilst superficially perplexing, a closer look at the components suggest caution: it is telling that the slight rise in the headline figure was driven by increases in import prices (+2.9) and raw material inventories (+1.4) whilst output (+0.2) and new orders (+0.6) were broadly flat and new export orders fell sharply (-1.7).

“Furthermore,” Mr. Barrow adds,less than half (9 out of 20) the industries posted readings of more than 50. It is also notable that the HSBC PMI remained below 50 at 48.8. Therefore, we remain tied to an expectation for economic activity to slip below 7.5% y/y in Q1:12– the first sub 8% print since mid-2009 - and expect policy to engineer growth of 8.5% for 2012.”

Such “nuances” behind the speculation-inducing headlines prompted Marketwatch’s Paul B. Farrell to quote hedge fund manager Jim Chanos’ (as opposed to Jim Rogers’) take on matters Chinese: Jim [Chanos] has been reading the [Chinese] tea leaves for a long time and sees too heavy a government footprint in their economy: crony capitalism, state-owned companies favorites, massive municipal debt, overbuilding of luxury condos, stadiums, poor construction, environmental pollution, lax regulations, subsidized prices, bad accounting, currency manipulation, and more. Chanos has been warning investors to ignore the hype. He tells BusinessWeek investors to “Short China,” this bubble is collapsing.” Those of you in attendance at the recent Cambridge House Resource Investment Conference in Vancouver who did not miss the Gordon Chang’s presentation and debate already know what this is all about…

Speaking of China, it appears that perhaps so-called ‘rare earths’ are possibly set to become less ‘rare’ (they really are anything but) now that the World Trade Organization has issued a ruling against China's restrictions on raw material exports. Such an official ‘slap’ could force changes to some of its rare earth export policies. The WTO said on Monday that China had “violated global trading rules by curbing exports of raw materials like bauxite, coke, magnesium, manganese and zinc, which inflated prices and gave domestic Chinese firms an unfair competitive advantage.”

Until tomorrow,

Jon Nadler
Senior Metals Analyst – Kitco Metals

*****

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.

Week of January 16, 2012

Jon's 2012 Precious Metals Outlook

Watch now

Precious Metal Charts

Click to see this Precious Metal chart
  1. 24h
  2. 30D
  3. 60D
  4. 6M
  5. 1Y
 

Interactive Chart