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Advise & Dissent

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 8 2010 11:31AM

Good Morning,

Gold remained near the three-month highs it managed to reach on Wednesday but overnight price action saw a tempering of additional buying following words from the ECB’s Mr. Trichet regarding Greece that temporarily calmed markets. The ECB left rates unchanged at 1% as it finds itself unable to withdraw the stimulus measures currently in place due to the threat of a Greek default.

The euro-region remains in suspense regarding the fate of its southern member’s financial fate as the recently cobbled-together plan to help it appears to be coming apart at the seams and as local banks cry ‘help!’ Greek bonds slumped this morning, signaling apprehensions that the life preserver that was tendered to the country last week is deflating before it could be of use.

The euro thus took a couple more on the chin in early trade and slumped back towards the 1.33 mark after having recently (barely) touched the 1.35 pivot point. The beneficiary of the recurring jitters was once again, the US dollar. The greenback was seen approaching the 81.80 level on the index, and at some point gold players chasing technical buy points may not be able to withstand the pressure coming from its show of strength.

Clearly, that was not the case yesterday, and the very early action on Thursday pointed in a similar direction for gold, as spec funds are apparently still gunning for higher levels and of course their money has been plainly visible in the commodities complex over recent sessions.
Curiously, gold EFT holdings appear to once again be…holding out on the yellow metal’s rally, as their balances have not shown growth for over one week now. Between that and locals in India also sidelined for a second day due to gold’s climb, we are left with the funds as the prime movers here.

New York precious metals prices opened mildly lower this morning as the aforementioned dollar gains sapped a bit of the enthusiasm out of the market and some opted to turn to profit-taking after a three-day run of healthy proportions. Spot gold started with a $2.40 loss, quoted at $1145.60 per ounce, while silver shed 17 cents to open at $17.96 this morning.

The noble metals retreated to just under the significant pivot points of $1700 and $500 the recently managed to climb above. Platinum fell $6 to the $1795.00 level and palladium dropped $8 to $499.00 the ounce. The only metal able to (thus far) maintain at round-figure levels appeared to be rhodium, which was last quoted at $2700.00 bid.

Signs that Fed Chairman Bernanke’s apprehensions about the vigor and make-up of the US economic recovery are well-founded emerged this morning, as the Labor Dept. reported an 18,000 initial unemployment claims figure for the week ended April 3. The gain in filings was unexpected and the statisticians pointed to traditionally ‘volatile’ conditions for such data around the Easter holiday. The Fed boss reiterated his concern that the recovery has (thus far) been mostly one that has not created, save for last week’s decent report of 162,000 positions being added to the US economy in March. While Mr. Bernanke is well aware of employment levels, jobs creation, and their importance to the US recovery, he is also keeping an eye out for the potential challenges posed by the very processes his institution initiated when climbing out of the crisis became job #1. Moreover, the Fed chief is also looking at broader, structural issues facing the US, as it- in his words-must start to prepare for challenges posed by an aging population with a credible plan to gradually reduce a soaring public debt.?

Meanwhile, one of Mr. Bernanke’s teammates, the NY Fed’s William Dudley, said yesterday that the damage caused by financial-market bubbles should bring about a sea change in the way the central bank acts, with the Fed needing to move toward active efforts to reign in financial market excess.?

"There is little doubt that asset bubbles exist and they occur fairly frequently," and when they burst the economy frequently suffers. While it can be difficult to discern the existence of a financial-market bubble, "uncertainty is not grounds for inaction" on the part of central bankers, Mr. Dudley said.

The above begs the question as to when, and in what fashion, China’s central bankers might act to prevent the bursting of the country’s obvious property bubble. Will it be pre-emptive action, or a mopping up operation the likes of which the world has not seen since certain tulips wilted? While we do not have the answer to those questions, the signs that China’s spherical floating real estate object is stretched beyond the limits of what the laws of physics permit, are apparently in plain view. At least, according to hedge fund manager James Chanos, the man who correctly predicted the Enron debacle back one decade ago.

Bloomberg quotes Mr. Chanos as fretting about the fact that “the world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction.? Mr. Chanos sees China on “a treadmill to hell? and says that the mega-bubble could demise as early as late this year, and that it is “the only thing keeping economic growth numbers growing.?

Just last week, it was speculated that the Chinese economy might have recently grown at a 12% pace, but it was also noted that the government has been able to do very little to cool the speculative frenzy despite imposing taxes and hiking bank reserve requirements. If the country falls off the treadmill it may put a serious dent in to the rosy scenarios of never-ending commodities consumption (gold included) being offered by China-centric commodity fans – a species not at all in short supply these days.

On the US front, dealing with the aftermath of liquidity injections remains the obsession of at least some Fed officials. Thomas “Lone Dissenter? Hoenig, for example, who –as expected- said on Wednesday that “the Federal Reserve could increase key rates toward 1% from near zero as a ward against inflation and possible bubbles in financial markets without hurting the nascent economic recovery.?   

Mr. Hoenig went further than that, and also opined that the Fed policy, which still contains the “extended period? language as regards ultra-low rate maintenance “is no longer needed.? Interest rates set near zero for too long could lead to a new bubble and an inevitable bust, or even financial collapse, he said.

Meanwhile, the near-zero cost dollar available for playing in the commodities market is giving oil, gold, and a host of other “stuff? the opportunity to record gains such as the most recent ones we have witnessed. In fact, reports, in a technical analysis piece written by Alan Farley, “the crude-oil breakout may induce sympathetic rallies in other commodities, triggering a broad "melt up," like the one we saw in 2008. Unfortunately, the world economy is far more fragile now than it was two years ago and could suffer badly if raw-material prices go through the roof. In fact, it might trigger the long-dreaded double-dip recession.?  

“When it comes right down to it, gold futures are the place to watch for a lockstep commodity rally, given the precious metal's longstanding reputation as an inflation measure. However, there's really no easy or logical place to jump aboard this incomplete pattern.? says Mr. Farley, and he concludes that: “For now, one should just sit back and watch. Since a good measure of last year's gold breakout reflected fears of hyperinflation, driven by massive government-induced liquidity, this contract should emanate all sorts of early warning signals, if and when raw materials start to translate into higher end costs.?

Is there a solution to the emerging melt-up (a bubble by any other name)? Why, sure there is. It was last employed in spectacular fashion by one Mr. Volcker, back in 1982. Mr. Farley describes it as “one relatively easy way to get all sorts of commodities to behave themselves again: Raise interest rates. Under the hood, the recent commodity breakout reflects a high level of hedge-fund cynicism for the Federal Reserve and its ability to manage liquidity in the post-crash environment.?  

We thus leave you in suspense. Central bankers are at the poker table and the next move is theirs. The Fed, the ECB, China’s central bank, - all eyes (and speculative trigger fingers) are converging on their next set of actions. It’s only about timing, at this point. And, as they say, when it comes to that, if anyone knew…insert your favorite tropical island to live on, ….here.

Happy Trading.


Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
Direct: 1 (514) 875-4820 ext. 1360
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