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Black Swan Dive

Friday March 18, 2011 10:50AM

The advent of the United Nations’ Libyan no-fly zone and the prospect of likely military action now being perhaps just hours away lifted crude oil prices in a hurry and that spark in the markets brought precious metals speculators back to the feeding frenzy trough equally fast overnight. Colonel Gaddafi’s machismo could be put to a severe “test” in coming days as British jet fighters are already being deployed as a prelude to efforts to remove the man (or at least his forces) from the scene in Libya. The situation has turned grave enough to warrant outside intervention (which, some say, was actually quite overdue).

The Colonel’s assertions that he would “crush” the last vestiges of the Libyan rebellion via some kind of civilian bloodbath to come in Benghazi was the last straw that the UN needed before it voted 10:0 (+ 5 abstentions) to impose the aforementioned no-fly zone, along with green-lighting all necessary measures (read: bombs away) intended to avert the strongman from making his apocalyptic visions of Benghazi a reality. It appeared early this morning that the several weeks of civil war could blossom into a dictator-removing conflict that harks back to the days of one, Saddam Hussein. 

However, the situation remained highly volatile and black as well as yellow gold halted their advances in the wake of one Libyan official announcing that the Colonel had ordered a halt to all military operations (presumably against the rebels holed up in Benghazi) following the UN resolution. Thus, $103 crude oil morphed into $100.00 oil, and $1,425 gold turned into $1,418.00 gold within the first hour of trading action in New York. This is all yet to be sorted out, thus the reader is asked to excuse the possible staleness of the story by the time it lands on the Internet. Moments ago, British PM Cameron told the BBC that Mr. Gaddafi will be judged “not by his (cease-fire) words, but by his deeds.”

The declaration of a cease-fire by Libyan Foreign Minister Koussa could drain the bullish energy manifest in commodities this morning. However, just as that announcement was being made, a report from Yemen revealed that at least 31 civilians had been killed by security forces which opened fire upon them during an anti-government protest. Meanwhile, the Bahraini Shiites who have lost one of their comrades to a government crackdown buried the man this morning.

Ever since Tunisian vegetable vendor Mohamed Bouazizi was slapped by a policewoman on December 17 and subsequently set himself afire, the MENA region remains a powder keg which could continue to provide support investor quests for any and all safe-haven assets and/or currencies. The incident has been called the “slap heard round the world” and has set into motion what is now known as the “Arab Spring” –a spreading revolt that has already toppled regimes in Tunisia and Egypt. Thus, wide trading ranges for all such assets of last resort will remain the order of the day, as international news flows continue to offer plenty of fuel to make for divergent trading sentiment with each and every hour that passes. The movements in the metals and other markets could yet intensify as pre-weekend book-squaring and the yet-to-come news from around the world make their presence felt among the speculative trade’s players.

Spot gold prices moved over a fairly broad $1,409 - $1,425 price range this morning, while spot silver quotes ran across a 75-cent price channel ( from $34.69 to $35.44) and the white metal was also seen as being buffeted by volatility and nervousness. Resistance in gold extends from near the $1,425 level up to the $1435 area at the moment.

The solid gainers on the day were platinum and palladium, each of which recorded $18 rises (1 and 2 percent, respectively) and climbed to highs at $1,738 and $733 earlier in the session. Automobile dealers in the US and elsewhere are already asking buyers to pay sticker (or above) prices for Japanese vehicles whose supply is likely to be tight in coming months as ports in Japan are out of order and as essential parts become scarce for auto assembly plants.

Indeed, Libya was not the only place where market-moving news issued forth from on this Friday that will cap a momentous week in global events. Japan remains very much at the front and center of global anxiety levels as the level of danger of its nuclear-plant crisis keeps rising. The latest reports indicate that the Japanese government lifted the severity rating of the Fukushima complex event to a 5 (out of a possible 7) on the scale of nuclear mishaps.

The 1,900+ metric tonnes of highly radioactive material that are said to be present at the complex (whether inside fuel rods or in spent fuel pools) pose an untold danger in the event they become fully exposed and begin to generate lethal amounts of radiation. As of this writing, Prime Minister Naoto Kan described the nuclear crisis situation as “very grave.”

The situation on the currency markets had also turned “grave” enough –for the yen at least- in order for the G-7 to decide that “intervention” was in order. The Japanese currency had risen to a postwar high in an absurd and counterintuitive move that threatened to impact economic and financial stability at the worst possible time. At last check, the yen was trading at 81.15 against the greenback, while the latter continued to face difficulties on the trade-weighted index as it exhibited a 0.15 slippage to the 75.86 level and headed once again into ‘oversold’ territory.

Currency speculators went into a mass yen-buying feeding frenzy of epic proportions this week, as they hoped to capitalize on potential yen repatriation trends in the wake of the trifecta of disasters that is affecting Japan at the moment. However, a too-strong yen was going to clearly hamper rebuilding efforts, not to mention the capability of Japan’s firms to successfully export that which they produce.

Now, the G-7 has basically told said speculators: “Not so fast, my friend,” and is effectively interdicting them from profiting from this unfortunate scenario. The 80-yen-to-the-dollar level is the perceived “line in the sand” that the G-7 nations have drawn in front of the speculative crowd at this time. Bring it on. For the first time since 2000. Yep, overt, concerted, market manipulation. Live with it –suggests the G-7.

More “manipulation” - of another type- was on display overnight, courtesy of the People’s Bank of China. The Chinese central bank lifted deposit ratio requirements for the country’s banks by half a percentage point this morning. This marked the third such tightening maneuver for the current year and is being interpreted as a possible precursor to a hike in key interest rates. As mentioned in yesterday’s article, China’s top priority at this point is the combat against inflation. As of March 25th, banks must set aside 20% of their deposits for the scope of reserves with the PBOC.

Thus we cap a week that offered more Black Swans flying overhead that anyone could possibly have imagined when author Nassim Taleb first coined the expression back in 2007. If there are ways in which one can survive such a deleterious avian assault, Marketwatch’s Chuck Jaffe thinks he has at least five for the average investor.

First: diversify (or die) – that’s a pretty obvious one, and one that is time-tested. A broad range of assets will better stand up to the type of surprises that Black Swans tend to bring. Second: Keep cash handy and in adequate supply. You’ll be surprised at how well it works in times of real need. Third: Second to cold, hard cash, the cold, hard(er) metal offers unparalleled comforts.

We suggest 10% as a core, sine-qua-non allocation to the shiny stuff. Fourth: Risk-mitigating hedge products. There’s a plethora of those on offer, but do your research to see what suits you best. Fifth: Mr. Jaffe suggests selling your winners and buying ‘losers.’ Sounds counterintuitive, but it apparently fits the “buy low/ sell high” mantra a whole lot better than the trend-following behavior that the average investor normally exhibits.

We leave you now with our wishes for a hopefully calm(er) weekend. The world could use it.

Jon Nadler
Senior Metals Analyst – Kitco Metals

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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.

Monday, March 14, 2011

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