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Here's The Beef!

Thursday January 05, 2012 11:00 AM

Gold prices fell back to under the $1,600 pivot point once again as US dollar strength (and euro weakness that pushed that currency to a fresh 15-month low) combined with renewed jitters about Europe overcame the effects of geopolitical tensions arising out of the Iranian situation and sellers pressured commodities lower.

New York spot gold lost nearly $15 to ease back to the $1,597 level while spot silver traded at lows near $28.75 after maintenance of the $29 level proved difficult. At the very least, the New Year-flavored euphoria and “January effect” we saw on Tuesday and Wednesday has dissipated to a certain degree this morning after a few additional “reality checks” were made by market participants. Volatility is apparently set to continue despite the turning of the calendar’s pages.

The greenback climbed nearly 0.85% on the trade-weighted index (highs near 80.85) in the wake of the aforementioned euro-centric fears and on the back of a really robust improvement in US jobless claims figures ahead of Friday’s all-important Labor Department employment report. Filings for unemployment benefits dropped by 15,000 to 372,000 in the latest report released this morning. RDQ Economics opines that another component in the US labor landscape-the better-than-anticipated ADP employment report data- is offering yet another signal that the US economy is on the mend, slowly but surely.

France encountered higher yield demands as it went to auction this morning and market players are getting nervous about next week’s Italian and Spanish bond auctions. France, it is said, may have dodged an S&P downgrade bullet but it is not yet out of the woods on that front. Coming days will be quite telling. Meanwhile, the idea that Greece might face a disorderly default perhaps as early as March has also rattled market nerves after it was floated by Prime Minister Lucas Papademos yesterday.

Renewed anxieties surrounding European bank capitalization levels and the not-so-hot reception that France’s bond auction received conspired to push the common currency to $1.284 this morning. Not helping the euro much either, the Hungarian forint touched record lows against the euro as that country struggles to obtain a standby IMF loan without preconditions. As we have recently seen, such declines in the euro have frequently translated into gold price weakness, and this morning was no exception. Then again, the ‘sell everything’ syndrome manifest this morning also pushed copper down by 1.1% and crude oil down by .90% per barrel.

Over in the platinum-palladium-rhodium complex the going proved tough as well despite yesterday’s excellent US car sales metrics. The Big Three posted solid December sales figures and much-improved 2011 tallies as well. Total US auto sales are now expected to come in above the 13 million figure-that’s a roughly 10% gain over the numbers we saw in 2010.

For a fascinating –albeit quite technical in language-report on the emerging field of nanometals and related PGM applications, you might wish to read this latest press release from Nanomarkets. Platinum declined $10 to the $1,407 bid level while palladium eased by $7 to the $642 bid figure per ounce. US stock futures losses in the early morning translated into a 107-point decline within the first 15 minutes of trading today. Financials (BofA, Citigroup) and miners (Freeport McMoRan) took it on the chin in early action to the downside.

Notwithstanding what the projections by various Fed officials will be as regards interest rates when the first public release of such tallies is released this month, the Fed’s primary dealers expect the US central bank to raise interest rates by the second quarter of 2014. Odds for that adjustment to take place are currently running at 45% according to the survey of such dealers. However, even as these expectations appear to factor in nothing on the rate front until 2014, there is widespread acceptance of the fact that the Fed might very well alter the language surrounding rates – a factor often more important to the markets since they are anticipatory by nature. As we have previously stated, times, they are a ‘changin’ even if not yet in an obvious fashion.

There is one school of thought however that would like to alert you to the changing market cycles. That school belongs to nuclear physicist and author Nigam Arora, who is also the chief investment officer of The Arora Report and the ZYX Global Multi Asset Allocation Alert. Mr. Arora notes that when the end of a cycle is upon us, nobody rings a bell. Astute investors must identify such battleship turns if they are to stay one step ahead of the crowd and generate wealth. So far, so…cliché. However, consider what it is exactly that Mr. Arora is trying to tell you at the moment before you disregard the advice (even though his model portfolio performance speaks for itself since 2007).

He contends that the cycle of the weak US dollar, rising gold, rising bonds, and high inflation in emerging markets came to a close last year (circa September) and that we are now facing an era of high volatility, tame inflation in emerging markets, a relatively strong US dollar, and a reversal in the price strength in precious metals. He expects gains to come from technology stocks, and service companies while emerging markets are seen as slowing in growth. Yes, that’s one analyst’s opinion, but it has room for incorporation among the many others we come across on a daily basis.

Even the most vocal advocates of one formerly successful (or expected to be successful) position do shift their stance when market realities (or disgruntled clients) face them. We noted yesterday the about-face at PIMCO in the wake of more than $5 billion in redemptions. The mantra that Bill Gross had adopted and broadcast circa one year ago has now been altered. Mr. Gross no longer espouses the “new normal” platform and is, instead, advising clients to hedge with…US Treasuries, munis, and senior bank debt.

“The recommendations mark a departure from Gross’s call last year, when he advised buying higher-yielding emerging market debt as part of the “new normal” and cautioned investors to stay away from the U.S., noting that growth would be higher in developing economies, while excessive borrowing here, the U.K. and Japan would lead to inflation. To that end, Gross eliminated his holdings of Treasuries in February and had a net bet against the securities in the $244 billion Total Return Fund, missing the biggest rally in Treasuries since 2008. Gross issued a “Mea Culpa” to investors in October and boosted the debt to 23 percent of the portfolio by the end of November.”

Howler of the day: “Cows Trump Gold.” No bull. This is quite the truth. Ordinary feeder cattle turned out to be among the best performing commodities of 2011 according to ScotiaBank Group’s Patricia Mohr. Bloomberg News notes that “as gold futures fell 3.4 percent in the fourth quarter, its first drop since 2008, feeder cattle reached a record last month as the U.S. herd shrank and beef exports surged.” Such a performance shocker may have…legs (hooves?) as it turns out:

“You’ve got the whole issue of the expanding middle class around the world and increasing protein in diets, so that’s going to translate into more grain consumption, and ultimately that has put support under beef,” said Sal Gilbertie, the president of Teucrium Trading LLC, which sponsors exchange-traded funds for commodities ranging from natural gas to corn. “Food trumps jewelry. The last thing people will ever do is let themselves be hungry.” The price gains for both cattle contracts outpaced the 10 percent advance last year for gold, which posted an 11th straight annual gain.” Well, yes, you cannot eat gold –it has been said many times. However, you also cannot be without a modicum of a gold lining in your financial barn, Betsy and Daisy notwithstanding.

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 December 5, 2011

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