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October Surprise? In June?

By Jon Nadler       Printer Friendly Version
Jun 20 2008 4:31PM

Good Afternoon,

Friday's New York gold was once again range-bound and repeated yesterday's pattern of early gains followed by afternoon declines, although today's focus was a near $3 gain in crude oil following news of an ominous June 2nd Israeli military drill and current threats by Venezuela's Hugo Chavez to suspend oil shipments to the EU. The dollar traded lower most of the day amid newly scaled-back expectations of rate hike action by the Fed next week. It was last seen at 73.05 on the index but had fallen to 1.562 against the euro.

Stocks finished a week that is best forgotten, showing a 221 point loss (worst since March) and the Dow now finds itself flirting dangerously close with the pivotal 11,750 area. The "bright spot" for the day was a fairly decent estimate of US growth put forth by the IMF, which concluded that the U.S. economy has fared well "considering the severity of headwinds it has faced, and that its GDP should gradually improve" to around 2% in 2009 after being "roughly flat" in Q4 of 2008. The question, of course, is what Q2 and Q3 will be tallied up at; flat-to-negative, or starting to pick up?

At the root of such changing Fed punditry sentiment was the jittery week we saw in financials (worst showing in bank stocks in a decade) as well as the forecasts for bank earnings going forward. Merrill sees investors effectively throwing in the proverbial towel when it comes to bank stocks. With capitulation come buying opportunities - normally. A normal year, 2008 has not been thus far. The consensus among analysts therefore, calls for no Fed action next week. Perhaps more Fedspeak will be on tap. In the interim, showing that it is serious about inflation combat, the Mexican central bank sprang a surprise .25 bp rate hike on the markets instead of offering propagandistic jawboning.

The final trading session of the week had gold easing off its intra-day highs in the afternoon hours, and the metal once again came closer to the $900 area after a duo of attempts to take out overhead resistance at $910 on both Thursday and Friday. The precious metal might manage an above $900 close today (it did not achieve it on Thursday afternoon) but is still needs to vault above $945 to regain its stride. Participants focused mainly on crude oil and on geopolitical developments in the absence of data from the economic calendar. OPEC gets to together this weekend and will likely have participants pulling out some large wrenches with which to turn up the flow of crude oil to the world. (The price of black gold was -at last check - up $2.6 at $134.80 per barrel.) This, after weeks or protests, frustration, pleas, and - the latest - a major hike in domestic price by China.

Predictably, Iran's response to the de facto early June Israeli rehearsal of an air attack on its nuclear installations was stern, swift, and laden with a threatening retaliatory tone that included words such as 'heavy blow' to describe its potential actions. Our good friend, Roger Wiegand, sums up the tense situation as follows:

" What lies ahead in this radically changing environment? In our view, the primary news changing event is the forthcoming attack by Israel on Iran. Our European friends have been predicting this for months and we chose to think it might not happen. Now we are about 80-90% certain it will. This event, if it becomes true, will drive energy and precious metals prices to the moon. On the other hand, stock markets could severely crash. The disruptions in global banking and credit markets might receive immeasurable damage; perhaps some of it un-repairable. One analyst says it’s a partial ploy to keep [President] Bush in office after January based upon the War Powers Emergency Act."

Recall that we alluded to an 'outside' and 'outsized' event as the best (perhaps only) possible driver of another rally by gold to four digits in our last Marketwatch TV interview in May. This is one of those potential events, although we are still nowhere near as confident as Roger is about the percentage of its occurrence probability.

Silver also gave up most of its Friday gains late in the day, and was last seen up 1 cent at $17.33 while platinum recouped some of Thursday's losses with a $10 gain to $2051 and palladium climbed $1 to $470 per ounce. Poor US auto sales estimates drove the noble metals to lower levels during the week. Gold futures closed the week out with a 3.5% gain after losing about 2% last week. 

Also from the world of platinum, Johnson Matthey's Platinum Today reports that:

"The Tokyo Commodity Exchange will cooperate with the Tokyo Stock Exchange to develop exchange traded funds (ETFs) and Multi Commodity Exchange will now commence future trading in platinum. Platinum is now actively traded at Tokyo Community Exchange in Japan and New York Commodity Exchange as the metal is increasingly used as a catalytic converter in Japan.

According to reports from Reuters, TOCOM Chairman Masaaki Nangaku believes that the launch of commodities ETFs will have a good impact on developing the sector. Further reports from the Economic Times revealed that Joseph Messey, Chief Executive Officer of the Multi Commodity Exchange MS, said that platinum needed to be added to the offering.

"We were missing the presence of an important metal like platinum and now, since we have received approval, we are looking to start future trading activity soon," he explained.

"With the presence of a precious metal like platinum, investors will now have more opportunities for investment and the industry can hedge their requirements," he added."

Pre-Fed meeting trading floor chatter has begun in earnest and it points to rising expectations that the central bank will leave rates as they are (currently at an 88% probability level) and that it will also push potential rate hikes back a few months as the economic picture sorts itself out in the US. Marketwatch echoes the speculative crowd's latest sentiments and cites a few contrarian factor as well:

"Surging commodity prices and strident warnings from Federal Reserve officials about inflation have some in the market betting that the central bank will increase interest rates as early as this fall, according to closely watched federal funds futures contracts. Yet, five other indicators flatly contradict that outlook, suggesting that the central bank will instead opt to keep borrowing at currently low levels to prevent the ailing U.S. economy from experiencing even more pain.

Analysts point to at least five reasons the Fed won't rush to raise rates:

  1. lending rates show the credit crunch continues;
  2. the banking system is still fragile;
  3. rates hikes in election years are rare;
  4. the economy, especially housing, still poses a threat; and
  5. flattening the yield curve could pressure bank profits.

Falling home prices and continuing bank losses, along with market rates for short-term loans, are likely to hold back the Fed. That's despite the message telegraphed by the bond market's favorite interest-rate indicator: fed funds futures, which are used to determine market odds of a move in interest rates by the Federal Reserve."

The first three days of next week will provide enough fuel for trading action of all kinds. Aside from the Fed meeting, we expect position statements from OPEC and from the ECB. Geopolitics -largely absent from the scene since December- are back on the stage. Summer begins tonight. Will it be a long, hot summer?

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco 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 Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.