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For (No Longer) Richer Or (Much) Poorer

By Jon Nadler       Printer Friendly Version Bookmark and Share
Aug 21 2009 3:10PM

Good Afternoon,

This week's dual theme - China and oil- continued to still exert the primary influence on the precious metals complex during the overnight hours. As crude values approached $74 per barrel, the dollar lost more on the trade-weighted index, sinking to $77.95 ahead of the NY open.

Warning-type noises from Beijing indicate that officials plan to require bolstered capital positions for banks - in so many other words, still an effort to curb the wild lending sprees that have engendered a 60% moonshot in the local equity markets this year. Trouble is, pricking a balloon rarely results in slow and/or orderly leakage of hot air.

In any case, the two conflicting themes du semaine combined with the upcoming end of the C4C auto programme gave metals players sufficient reason to go into different directions prior to the start of Friday's New York session. Gold gained on the oil up/dollar down combination, carving a path towards $950/$955 an ounce ahead of options expiry next week. It appears set to finish the week just about where it started it, pricewise.

Silver managed to recapture the $14-per-ounce level, but the noble metals slipped in early going, as perceptions of 'what next' came into the picture with the aforementioned 'clunkers' programme ending on Monday. In any event, car wheeler-dealers will have all staff on-call for what promises to be a very, very long (but perhaps their best in years) weekend.

The final session of the week started off on a positive note for at least part of the metals we normally track within the complex. Gold opened with a $6.40 gain, quoted at $947.20 per ounce as participants were emboldened by the near-$1 rise in black gold and the dollar's difficulties versus the euro this morning. The common currency got a boost from better-than-expected readings in the German service and French manufacturing sectors.

Following the US dollar’s slippage to its 2009 low against the Swiss franc and crude oil’s rise to its own 2009 peak in dollars-per-barrel terms, gold players took off to the races and propelled the yellow metal to very near $960 per ounce during the morning hours. Also seen helping matters today was the jolt offered by better-than-expected existing US home sales data. This new signal corroborating the recovery that is thought to be underway in the US, added fuel to the fire in the crude oil pits, poured more cold water on the greenback, and ultimately also helped gold too.

However, bullion remains essentially range-bound ($925-$975) and its progress to higher ground continues to be somewhat hampered by the on-going slippage in Indian imports as well as the state of hibernation that the largest gold-oriented ETF continues to exhibit for the better part of two weeks now. Weekly statistics from our friends at show that the gold-ETF niche added some bullion to the grand total -again, except for the SPDR fund, which remained unchanged:

"The largest movement in absolute numbers and percentages was seen ETFS Physical Gold trust, where 278,628 ounces or 8.67 tonnes were added to its holdings. The Swiss based Julius Baer Physical Gold ETF saw holdings increase 39,200 ounces or 1.22 tonnes over the reported period. Holdings in the South-African listed NewGold Debentures ETF rose 27,340 ounces or 0.85 tonnes. The London-listed Gold Bullion Securities was the only monitored gold-backed exchange-traded fund to announce an outflow, with 24,590 ounces or 0.76 tonnes being removed from investor’s holdings. All other monitored ETF’s reported no changes over the monitored interval."

Silver showed a 17-cent addition to values, starting the morning off at $14.09 per ounce. Platinum dropped $3 to $1237 while palladium fell $2 to $271 per ounce. Analysts feel that it is the metals which could be most impacted by the curtain falling on the auto stimulus programme. Rhodium was seen unchanged at $1500 per ounce.

The morning pop in metals engendered a flurry of ‘to da moon!’ howls once again, albeit there was a much simpler cause-effect situation at work, as characterized by market comments from one NY trading desk: “Despite a sudden flurry of activity following the NY open with stops being triggered, the day was fairly uneventful. Moreover, the violence of the move higher was more reflective of the lack of liquidity than actual interest. Once the stops were cleared, the boredom resumed. (Gold) sellers were on vacation during dollar weakness and short covering, as open interest decreased. Delivery notices for this month were also very light and prices of metals ended on weekly highs. Stronger equities and a weaker dollar meant no gold selling by money managers.?

A quick check of this afternoon’s market conditions showed the following changes in place among precious metals: Gold was posting an impressive 1.32% gain at $953.20 spot bid, silver was quoted up 23 cents at $14.15, platinum was ahead by $11 at $1251 per ounce, and palladium was seen climbing $7 at $280 per ounce. Cash for clunkers programme end-related apprehensions were replaced by mounting concerns over possible labor action at Impala Holdings Ltd. next week. The euro continued near 1.43 on perceptions that the ECB will be the first to pull the rate trigger and hike sometime next year.

This morning’s focus was the keynote speech offered by Mr. Bernanke at the Jackson Hole tete-a-tete of the world’s financial who’s whos. We have distilled Mr. B’s remarks down to twenty abbreviated points in order to save you time. The recap of the crisis by the Fed boss was sobering as well as valuable. In a nutshell, he concluded that the sky -as we knew it- did fall in 2008. TEOTWAWKI has come and gone, and it could have been much grimmer. And now, for the top 20 bullets of the day quoted as close to possible to the original text:

  • The crisis has been global, with no major country having been immune.
  • We must urgently address structural weaknesses in the regulatory framework.
  • The strong and unprecedented international policy response proved broadly effective.
  • Critically, it averted the imminent collapse of the global financial system.
  • Concerted policy actions avoided much worse outcomes.
  •  The financial shocks nevertheless severely damaged the global economy.
  • The crisis affected economic activity by pushing down asset prices and tightening credit.  
  • Central banks cut rates to very low levels and implemented unconventional monetary measures.  
  • Actions by central banks augmented large fiscal stimulus packages in the United States, China, and a number of other countries.
  • Overall, the policy actions implemented in recent months have helped stabilize a number of key financial markets, both in the United States and abroad.
  • Critically, fears of financial collapse have receded substantially.
  • After contracting sharply over the past year, economic activity appears to be leveling out.
  • The economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.
  • The events of September and October 2008 exhibited some features of a classic panic.
  • Liquidity risk management at the level of the firm, no matter how carefully done, can never fully protect against systemic events.
  • The world has been through the most severe financial crisis since the Great Depression.
  • The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.
  • As severe as the economic impact has been, however, the outcome could have been decidedly worse.
  • Although we have avoided the worst, difficult challenges still lie ahead.
  • We must build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years.

And now, for a more direct take on the effects of what the twenty Bernanke bullet points were all about. The stark reality that emerges from a New York Times article published this morning as regards the evaporation of wealth. While the severe shrinkage of the balance sheets of the very-well-to-do might engender bouts of schadenfreude among the merely well-to-do, the implications of this green rabbit disappearing into the magician’s hat of the crisis of 2008 may yet come to haunt all of us eventually:

“The rich have been getting richer for so long that the trend has come to seem almost permanent. They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.

But economists say — and data is beginning to show — that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may now be ending.

The relative struggles of the rich may elicit little sympathy from less well-off families who are dealing with the effects of the worst recession in a generation. Just how much poorer the rich will become remains unclear. It will be determined by, among other things, whether the stock market continues its recent rally and what new laws Congress passes in the wake of the financial crisis. At the very least, though, the rich seem unlikely to return to the trajectory they were on.

In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about $4 million, from a peak of more than $100 million. Mr. McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks. “I had no clue,? he said, “that there would be this tandem collapse.?

Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. “We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten,? said Neal Soss, the chief economist at Credit Suisse. “Since the early ’80s, incomes have tended to get less equal. And I think we’ve entered a phase now where society will move to a more equal distribution.?

Economists say that the rich will probably not recover their losses immediately, as they did in the wake of the dot-com crash earlier this decade. That quick recovery came courtesy of a new bubble in stocks, which in 2007 were more expensive by some measures than they had been at any other point save the bull markets of the 1920s or 1990s. This time, analysts say, Wall Street seems unlikely to return soon to the extreme levels of borrowing that made such a bubble possible.

Any major shift in the financial status of the rich could have big implications. A drop in their income and wealth would complicate life for elite universities, museums and other institutions that received lavish donations in recent decades. Governments — federal and state — could struggle, too, because they rely heavily on the taxes paid by the affluent.

The United States economy experienced two such bubbles in recent years — one in stocks, the other in real estate — and both helped the rich become richer. But if the rich have done well in bubbles, they have taken enormous hits to their wealth during busts. A recent study by two Northwestern University economists found that the incomes of the affluent tend to fall more, in percentage terms, in recessions than the incomes of the middle class. The incomes of the very affluent — the top one ten-thousandth — fall the most.

The possibility that the stock market will quickly recover from its collapse, as it did earlier this decade, is perhaps the biggest uncertainty about the financial condition of the wealthy. Since March, the Standard & Poor’s 500-stock index has risen 49 percent. Yet Wall Street still has a long way to go before reaching its previous peaks. The S&P 500 remains 35 percent below its 2007 high. Without a financial bubble, there will simply be less money available for Wall Street to pay itself or for corporate chief executives to pay themselves

There have certainly been periods when the rich, the middle class, and the poor all have done well (like the late 1990s), as well as periods when all have done poorly (like the last year). For much of the 1950s, ’60s and ’70s, both the middle class and the wealthy received raises that outpaced inflation. Yet there is also a reason to think that the incomes of the wealthy could potentially have a bigger impact on others than in the past: as a share of the economy, they are vastly larger than they once were.?

Have a restful weekend.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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