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Over Easy?

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 28 2010 10:23AM

Good Morning,

Precious metals headed lower at the start of the midweek session following yesterday’s Graeco-Portuguese debt crisis boil-over. Stock markets around the world continued to reflect the deepening anxieties and spreading contagion in a most obvious manner; no sooner had the Dow finished the day with a 213 point loss that the Nikkei average shed 287 points of its own and finished under the 11K mark as well.

Commodities also headed lower while Treasuries continued to climb and the euro actually broke to under 1.32, caught in the grip of the spreading debt virus. The IMF has told German lawmakers (you know, the reluctant ones) that somewhere between 100 and 120 billion euros might be needed to carry out a Greek bailout operation. Where the money might come from and in what proportion, -as in how much from EU members and/or how much from the IMF itself- still needs to be clarified.

A small word of caution: Greece and Portugal alone hold nearly 500 tonnes of gold in their reserves, while Italy sits on 2,451 tonnes of the same. Factor in Spain with 523 tonnes and the picture is complete and clear. What is not clear is at what point any one of these countries might have to reach for the ‘asset of last resort’ and ‘mobilize’ some of it for the very purposes it was placed into those basements to begin with; to serve as an umbrella for a rainy day. Right about now, the debt showers are pretty intense in the Old world…

This morning’s New York spot metals opening had the complex on the retreat as participants either scaled back safe-haven buying (in gold) or continued to skim profits off recently rallying metals (silver, platinum, palladium) in the wake of waning risk appetite. Goldman Sachs ‘reduced’ its gold forecast for 2010 by $100 – to $1165.00 as it envisions a continuation of a ‘broadening economic recovery’ which in turn will lead to higher US interest rates. The Fed’s decision (make that likely a non-decision) on rates is due later on in the day.

Spot gold fell back to the $1160.00 area (losing about $8 in the process) as the Wednesday session got underway and moved in tandem with…the dollar once again. The yellow metal moved to very near the $1175 figure on Tuesday.  Standard Bank notes that “there has been sporadic physical selling into gold rallies above $1,160. Support in gold is likely found at $1,152 and $1,136, while resistance is at $1,167 and $1,185. Overnight Indian gold demand remained (unsurprisingly) lackluster for a second trading day.

The greenback eased to 82.33 on the index after tallying a huge 1.10 move yesterday. Dollar morticians were themselves moribund last night as their previously incessant calls for the currency’s demise did not only not pan out, but been blown out of the water by the concurrent safe-haven bid that gold and the US currency received on Tuesday. Not that this might be a lasting trend, but…

In fact, we’d like to remind readers that buying gold as an anti-dollar bet (since 1972, to boot) would have resulted in losses some 73 percent of the time, as the correlation that gold has shown vis a vis the greenback has been but a paltry 0.27 over that long period. In other words, there are times when the two may move together as well as in opposite directions.

Long-range analysis courtesy of the sharp minds over at CPM Group NY. The idea is not to make guarantees to one’s audience that such and such paper currency’s decline will automatically yield a lunar launch for the yellow metal. On to the next chapter.

Silver fell by 30 cents at the open, showing a $17.88 spot bid price. Its move on Tuesday also contradicted a number of crystal ball-gazers who had prognosticated a move several order of magnitude higher than gold’s –when ‘things get going.’ Evidently, not. Or, at least not quite yet. The industrial demand and risk asset trade components of that metal appear to outweigh its fast-fading monetary attributes of yesteryear. ‘Evil bullion banks’ were once again singled out as the main culprits for such a dearth of performance…

Platinum and palladium both showed near $10 per ounce losses this morning, with the former being bid at $1707.00 and the latter at $537.00 in early going. Market analysts at Standard Bank opine that they “expect the euro to weaken further against the dollar. This could hamper sharp rallies in precious metals; especially PGMs. PGMs have a large net speculative long position, which makes palladium and platinum susceptible to deep pull-backs. However, should risk ease, we expect these dips to be bought. Palladium support is at $535 and $525. Platinum support is at $1,700 and $1,680.?

The Fed’s interest rate decision, and more importantly, the words it will come packaged in are today’s focus for traders. The reverberations of the 10-hourl grilling-over-hot-coals session of Goldman on Capitol Hill are now dying away and players can once again sharpen their focus on the eurozone and the US economy. Post-game analysis reveals a perception that both sides of the grill got their way on Tuesday. US lawmakers appeared to be doing their job of poking the Goldman executive with probing questions sharper than a meat fork, and, in turn, the Goldman suits manifested a hefty amount of Teflon coating which helped project an image of ‘we’ve done nothing wrong.’

Analysts believe that US rates will still remain low but are somewhat divided over whether or not the ‘extended period’ keywords will or will not be featured in the Fed statement due at 2:00pm today. The futures market sees a flat Fed funds rate as the most probable path in 2010. If rates are indeed kept flat, US markets could end today on a positive note. Such accommodative monetary policy should also support gold. However, lest some would like to pounce on Mr. Bernanke as an accessory to some kind of dollar murder, let it be clear that the man once again warned about the necessity of cutting deficits by addressing ‘issues’ present in US entitlement programs and by raising (gasp!) taxes.

The Fed Chief warned that ‘we [the US] cannot grow our way out of this problem.’ All that remains to be seen now is who has the guts to accept this two-pronged and anything but painless solution to the problem. Certain credit ratings may hang in the balance absent some gumption (on both the public’s and legislators’ parts).

That said, the path away from ‘easy money’ is clearly the one that the US Fed has already embarked upon and will continue to make footprints on, as it goes forward. The data that has come during the six weeks since the Fed's last policy meeting indicate an improving U.S. economy. Retail sales, as well as manufacturing activity and private-sector hiring have shown signs of unmistakable gains. The hard-to-crack unemployment situation (still near 10%) and inflation rates that are anything but inflating likely mean that today’s Fed meeting may not be the one to be recorded as having been the ‘watershed’ one. Yet, such an event is fast-approaching.

It may be a detection task as difficult as observing galactic drift but a reversal of the Fed's hitherto hyper-generous monetary policy (in the guise practically zero percent interest rates) is already on an ‘exit stage left’ trajectory. The US the central bank has already closed nearly all of its interim lending schemes and has ceased buying mortgage-backed securities. Mr. Bernanke recently stated that the Fed "has the option of redeeming or selling securities" albeit it would need to sell up to $25 billion of its holdings per month, in order to return its balance sheet to pre-crisis levels.

Thus, we are on Fed-watch now that the C-Span ‘entertainment’ channel from the ‘hearings’ is dark.

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.