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Jon Nadler

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Injectio Interruptus

By Jon Nadler       Printer Friendly Version Bookmark and Share
Aug 25 2009 2:33PM

Despite Chinese Permier Wen's remarks intended to keep the idea of lending cuts on the back burner, the Shanghai market lost nearly 5% and then settled for a 2.6% loss overnight, as worried investors opted to get ahead of such an eventual clampdown on hitherto...liberal funding. Their choice to sell was made easier by comments from...China Construction Bank's own chairman, who explained to those who still did not realize it, that vast sums of excess cash have made for the advent of asset bubbles. It's elementary, Mr. Guo.

Crude oil backed away from a 10-month high in the wake of the Chinese run for the exit doors, while the yen netted  1.2% gain as some investors chose to park under its relative safe-haven shade. “Backed away? turned into quite the euphemism later on Tuesday, as black gold had the profits sucked out of it in a major way.

After touching $75 and fulfilling someone’s targets, the commodity fell to very near $72 per barrel. The US dollar did not fare too well ahead of the NY session's opening this morning, losing 0.17 on the trade-weighted index, to touch 78.06 while oil sank only a tiny fraction, to $74.14 per barrel. Precious metals advanced amid these conditions showing various-sized gains whilst still defined by thin participation.

New York spot dealings started their Tuesday run with a 0.84% rise in gold (quoted at $950.10 bid), a 14-cent gain in silver (opening at $14.28), and a $4 advance in platinum (to $1241.00 per ounce). Palladium was unchanged at $282.00 an ounce. Gold appeared set to repair Monday's selling damage albeit traders remained wary of its ability to make a break-through run beyond the $960s just yet. In any case, our call for higher values this week appeared back on track, for a while anyway. A short while, indeed.

The Tuesday session saw gold rise to $955.40 per ounce before crude oil started to slide and the dollar lost some ground as well. Higher than expected US consumer confidence levels and home price data lifted the Dow to near 9600 during the day. The yellow metal gave up a large part of its $11-plus early morning gains and was ahead by only about $0.90 at last check quoted at $943.10 bid. About $0.80 from the day’s lows, that is. Despite the negative effect that consumer confidence and home prices had on the greenback on an immediate basis. Fingers pointed to oil’s decline for a change.

Silver maintained most of its gains for the day, and was last seen at $14.25 per ounce. Platinum remained ahead by $3 after having dipped into negative territory for a short while. The afternoon trade had palladium advancing by $4 to $287.00 per ounce. News that Swiss platinum stockpiles have risen to their highest level in a decade failed to affect the noble metal thus far.

However one slices it, the nearly half-million ounces added to the pile in the land of chocolate is making 2008's 375,000 ounce shortfall in supply look like it could tilt into not only balance, but a possible surplus. Platinum has gained more than twice as much as gold this year, rising 33% against a loss of 39% in 2008.

Analysts over at Barclays Capital beg to differ on the matter of gold’s advance to four digits, although they allow for such a run to only take place sometime next month - mostly on the back of stronger seasonal patterns. In any case, they envision a fall of the $1032.70 record set last March. This view appears to be dovetailing with contrarian gold sentiment as tracked by Marketwatch's Mark Hulbert. His flock of tracked gold timers appears so distraught by gold's apparent upcoming price prospects that he has no choice but to label the market as looking 'bullish' - at least for the short-term. Time will tell.

If last week's Jackson Hole presentation by Mr. Bernanke can be seen as a summary report on his job performance during what is shaping up to be the biggest economic debacle since the 30's, well, he has no worries that at this point could erase some more of his hairline.

President Obama reappointed the Fed Chairman and credited him with something that the appointee himself has already asserted: that his and his team's efforts have pulled the US economy back from the edge of the depressionary abyss. How's that for a hands-on lab on the very things Mr. B focused upon in his college years? Evidently, he passes the class - and then some. Not that it will stop detractors from continued name-calling.

While such megaphone-toting Town Hall screamers keep pointing to putative 'nekkid' money printing by the Fed, the facts -according to Marketwatch's Irwin Kellner- are showing an altogether different reality. One that will not sit too well with the hyperventilating hyper-inflationists and liquidity injection alarmists. This Fed, apparently, is pulling out. Withdrawing. Mopping up. Vacuuming the halls. In some subtle ways right now, perhaps, but you know what they say about the trend being your buddy…

So, what says Mr. Kellner?

“Guess what? The Federal Reserve has not only stopped depositing copious amounts of liquidity into the economy -- it now appears to be in the process of making a sizable withdrawal. A close look at quantitative measures of monetary policy reveals a sudden change in trend. After growing at unprecedented rates for well over a year, these aggregates stopped rising several months ago and have since declined, according to data provided by the Federal Reserve Bank of St. Louis.

For example, the monetary base -- the raw material for the money supply -- has fallen at a seasonally adjusted annual rate of 8% from early April of this year through mid-August, after soaring at a 187% pace during the previous eight months. And after ballooning from $100 billion to nearly $1 trillion between September 2008 and mid-May, adjusted reserves have since declined at a 43% clip, to just over $800 billion. As a result, the Fed's two measures of the money supply, M2 and MZM, have begun to contract. M2 has shrunk at a 3% pace since the middle of June, while MZM, the St. Louis Fed's measure of liquid money, is down by 2% over the same period. Both had been rising by rates as much as 15% earlier this year. These are sharp enough changes over a long enough period to suggest that our central bankers are more concerned about inflation developing down the road than you might think, judging by their public statements.

And with good reason. As I pointed out in my column of Dec. 28, 2008, the Fed can't wait for all the stars to align or for the umpire of the business cycle, the National Bureau of Economic Research, to make the official call that the recession has ended. It must act long before if it is to prevent another burst of inflation.

The markets are already concerned about inflation. The yield curve has steepened over the past few months, while the spread between the plain vanilla 10-year Treasury note and its TIPS (Treasury Inflation Protected Security) counterpart has jumped from zero at the beginning of this year to 2 percentage points today.

To be sure, no one expects the Fed to hike interest rates anytime soon. But some forecasters think that by the second quarter of 2010, the effects of these reductions in liquidity will result in the federal funds rate rising above the top of the central bank's current target range.

This will mark the beginning of what could be a rather aggressive tightening of monetary policy. After all, it would follow a period of aggressive easing. This V-shaped configuration for monetary policy is why I think the recovery will look like a W.  It is also a good reason to take some profits from the recent run up in stocks -- along with the fact that the two worst months for equities, September and October, are just around the corner.?

The poop deck is in serious need of being mopped, and the Fed appears to be bringing out some stealthy devices for the job, at the moment. Someone ought to take note. Even if John Lipsky, the IMF’s first deputy managing director, wrote yesterday that: “With inflation threats distant, there is little doubt that central bankers intend to keep policy interest rates very low for some time to come.?

Conclusion: although nobody expects an Israeli-like rate hike announcement in coming days, weeks, or possibly even months, it is this trend change that marks the beginning of "what could be an aggressive tightening of monetary policy" period (a public service announcement, just to keep things in perspective). We would also be mindful of the recent positive correlation that has brought two strange fellows to the same bed: stocks and gold. It ain’t supposed to be a love fest, you know.

Little doubts rarely become big doubts. Rather, they have a tendency to turn into expressions of surprise, post facto. In any case, the veiled words and not-so-veiled numbers coming from China and the US should serve as fair warning to the one-way street crowd.

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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