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In The Lead - Jackson Hole In One?

Friday August 31, 2012 10:15

Holding patterns that developed earlier in the trading week remained manifest for the past several sessions as well. Most precious metals market participants (as well as those in several other asset markets) appear to be holding their collective breath in anticipation of today’s speech by Fed Chairman Bernanke, the upcoming FOMC meeting, and the eventual German court ruling of the status of funding of the eurozone’s ESM. Yesterday, the US dollar turned higher in the wake of market chatter that alluded to the IMF working on a “financial assistance” package for Spain. The IMF was also said to hint that the ECB still has room to maneuver (read: ease and take the euro lower as such) in coming weeks/months.

Gold prices fell for a third day on Thursday as such uncertainties and themes sidelined any aggressive moves by either camp duking it out in the markets. Spot prices finished near $1,655 and near $30.50 in gold and silver and near $1,500 and $615 for platinum and palladium bids. News from South Africa continues to be of the troubling variety. The country’s Justice Minister wants to know why the National Prosecuting Authority has used a law that belongs to the apartheid era to charge 270 striking platinum mine workers with the murder of 34 fellow miners who were actually shot by police forces. Such “common purpose” charges have not been levied upon individuals since 1994 by the NPA.

The metals complex opened higher this morning as the pre-long weekend book-squaring ritual got underway and as players awaited Mr. Bernanke’s words from Jackson Hole. Gold advanced $5 to $1,660 while silver rose 20 cents to $30.70 per ounce. Gold market watchers such as Global Hunter Securities’ MD Jeffrey Wright offered a bit of level-headed commentary ahead of Mr. Bernanke’s speech today.

Mr. Wright noted that he is “feeling rather cautious going into tomorrow’s Jackson Hole speech by Fed Chairman Ben Bernanke. Gold has gone up about $50 in past 30 days; we see a bias to the downside unless there is a clear signal and movement for QE3. The run-up in gold is predicated in anticipation of continued easing; without it the afterthought will be ‘people bought gold all the way up and then sold sharply/quickly on the news’.

Platinum gained $12 rising to $1,512 and palladium climbed $5 to $619 per ounce. Rhodium showed no change at $1,150 per ounce on the bid. Background market indications had the barrel of crude up 67 cents at $95.29 and copper up 0.35%. Stock index futures were pointing to a higher opening after the Dow closed but 0.71 points above the 13,000 level on Thursday.

Meanwhile, over on the physical side of the gold market, as presumed before, India’s QII gold imports did show a significant tonnage decline. The planet’s biggest gold consuming nation imported 18.4% less gold in the second trimester owing to a combination of factors, the most notable of which would be the record or near-record local gold price, and the Reserve Bank of India’s overt attempts at curbing Indian appetites for the yellow metal. Large-scale gold intake has been a hitherto sizeable contributor to the widening of India’s current account deficit.

Towards the end of the last quarter, it can be assumed that the quite poor start to the annual monsoons has also been a tempering factor to the would-be buyer’s degree of willingness to buy the precious metal as heavily as in previous years. India’s government reported this morning that the economy in that country grew at a disappointing 5.5% in QII (versus 8% one year ago). Manufacturing activity ground to a virtual halt, growing by only 0.2% versus 7.3% last year during the same period.

Meanwhile, India’s food inflation accelerated owing to the aforementioned weak monsoon season. With such background conditions having developed, it will be well worth watching the patterns of upcoming seasonally-related gold demand from India. It is already known that April-to-June’s wedding season failed to spark demand for gold at anywhere close to historical levels.

The US dollar was sharply lower on the index this morning, trading at an indicated 81.12 and it appeared to be a victim of Fedspectations while not being able to benefit from rumors related to the possible resignation of German Bundesbank chief Jens Weidmann. It appears that Mr. Weidmann is so unhappy with the possibility of a bond-buying plan that he has already thought about quitting his job several times recently.

Talk of post Jackson Hole and post FOMC meeting mega-rallies continues to swirl in the newsletter niche and in the gold bug forums. Almost every type of news –even the implausible kind, such as the GOP’s crackpot idea of bringing back the gold standard in the USA- has generated tomes of uber-bullish writing about gold’s near-future price prospects. After all, who needs Bernanke’s QE package if we can get $10K gold courtesy of the US government and a “simple” Constitutional amendment? Fortunately, there are still sources of balanced and well-researched information on that now hot topic available to the investing public; the most recent one being the excellent CPM Group analysis to be found here.

The bullish sentiment’s buildup has been quite notable and, once again, much faith has been placed in the idea that, perhaps this time around, following several previous occasions for disappointment, the Fed will finally “give” the markets something tangible and make the commodity specs happy in some way.

This, despite the most recent reading on US GDP, which, at 1.7% during the second quarter, reduces the odds that the Fed will feel compelled to once again expand its balance sheet in an automatic manner.

At this juncture, following the frustrating price patterns of the summer, the bulls do not care about some of the larger questions related to a potential QE3, such as its perceived political overtones, its efficacy, its timing, etc. – they just need to hear that it will happen, lest a good number of bets (and the money riding on them) are bound to go down a certain hole (hint: not the one related to the Wyoming locale).

Fed watchers do not expect a clear-cut pledge of a QE3 by Mr. Bernanke in his speech to be delivered shortly. They remind us of patterns such as those we saw in 2010 when the Jackson Hole speech was followed by an actual easing move only in November. The difference, of course, is that US elections will take place that month this year, and that US economic metrics are not what they were in previous years.

The bottom line here is that there is not a whole lot that the Fed will be able to directly do in order to improve the rate of job creation in the US by the waving of the magic QE wand. It turns out that the rate of job creation has been quite close to historical post-crisis recovery levels, and that it is in fact the economy that is “stuck” at growth levels that are deemed to be subpar. QE packages have shown a clear pattern of diminishing returns ever since they were launched in the wake of the Great Recession.

There are not too many economists out there who would currently advise Mr. Bernanke to go “all-in” and hand out some more virtually free money to speculators while financial institutions could continue to sit on same and clutch it tightly. They would however advise him to once again not-so-gently prod the President and Congress to act in the matter and come up with programs that result in folks getting jobs. The Fed has more than done its part, apparently.

As for what kind of a job could be done by a hypothetical President Romney on the balancing of the US budget, well, the calculations are already being churned out at a heavy clip. Mr. Romney is promising to balance the budget without raising taxes and without affecting the country’s senior citizens. The math being proposed by Mr. Romney however adds up to what Bloomberg News calls “substantial pain for middle-class and low-income Americans.”

For example, with Social Security remaining untouched, with defense spending up by $150 billion, and with taxes left as they are, the total amount of other US government expenditures would need to take a 29% hit. Translation: “8,000 fewer employees to staff and maintain the national parks, about $35 less a week in food stamps for a family of four, 35 fewer offices to forecast the weather and track storms, and $8.9 billion less for research to battle cancer, Alzheimer’s and other diseases.” Mr. Romney has thus far failed to explain precisely how he would achieve his balanced budget goals but the one thing we can count on is that the exclusion of tax increases will make his plan a non-starter with Congressional Democrats.

Regardless of today’s likely post-Bernanke mini market storm and all the noise the speech will generate, you might just look ahead and start enjoying the long weekend and the last of the summer’s lazy days.

Consider the peaceful sounds coming from this meadow in Jackson Hole, instead:

Banker boots on the ground in Jackson Hole. The Kansas City Fed-hosted conference in Wyoming was to have featured ECB President Mario Draghi as well as Fed Chairman Ben Bernanke. After Draghi's demurral, all eyes are on the Fed chief, who is to speak Friday at 10 a.m. Eastern time.

Until next week,

By 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 August 6th, 2012

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