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Yesterday = Tomorrow ?

By Jon Nadler       Printer Friendly Version Bookmark and Share
Dec 28 2010 11:35AM

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Spot gold prices opened at the $1,400 mark this morning as the US dollar’s most significant decline in two weeks prompted fresh fund buying. Bullion values soared $16.20 per ounce on the greenback’s fall showing larger than normal moves amid still thinning participation and a London market that was out of the action.

Silver commenced the Tuesday NY session’s trading action with a 32-cent gain, and was quoted at $29.60 per ounce. The noble metals continued to build upon Monday’s massive gains with…additional gains of $14 (to $1,749.00 in platinum) and $5 (to $772.00 in palladium) respectively. Rhodium remained unchanged at $2,360.00 on the bid-side.

The PGM sector has been white-hot as ETF and fund attention being paid to its components has been quite visible all year. Separately, China’s Ministry of Finance reaffirmed that current subsidies towards the purchase of small-displacement-engine-equipped vehicles will cease to be offered at current levels and that tax on such cars will return to the normal (10%) after the first of the year.

Earlier this morning, the US currency dropped mainly on perception that US home prices would show that there remains a weak link in the US economy. However, following the release of the housing data –which, indeed, showed an across-the-board retreat in the value of homes in all 20 metro areas that the Case-Shiller metrics follow- the dollar actually retook the 80 level on the index, turning positive, and showing very little in the way of the jitters that had sent it tumbling earlier.

There was a sense in the currency markets that the better-than-anticipated holiday retail bonanza (spending was up 5.5% and it made for the best such seasonal pattern since 2005) was able to offset the damage from the real estate sector, and then some. Some of the energy of those sales trends was likely tempered by the major snowfall that hit parts of the country over the past couple of days, confining mall visitors to their homes. US consumer confidence data (the gauge fell this month on persistent worries about jobs) and the sale of US 5-year notes were also part of this morning’s market-moving mix of factors.

Several significant market-impacting events have transpired since our last update on global economic conditions. First, the unsurprising (and now second in two months) Christmas Day interest rate hike by China disconcerted global investors and gave rise to apprehensions that the government’s anti-inflation move (now clearly part of a larger war on bubbles and rising price tags) could impact everything from share values to commodity prices.

Thus far however, commodities have not shown significant signs that speculators are too worried about the tightening trend emerging in the world’s second largest economy. Market analysts have opined that the PBOC will ‘front-load’ much of 2011’s interest rate hike campaign into the first half of the year as it makes an aggressive assault on inflation.

The second item that appears to have “slipped? investors’ attention somewhat is the fact that the US economy –for all the doom and gloom that has been offered in connection with it for quite some time now- is back to the same position it had been in prior to the Great Recession. That is no small feat. However, there seems to be something amiss.

One market watcher, Norman Fosback, was quoted in a Marketwatch article as sensing that “the lack of attention to the magnitude of the recovery has been caused by “the extraordinary pessimism enveloping the consumer investing population, fanned by a fear-mongering financial media. That skepticism, in turn, has played a big role in holding the stock market back from even bigger gains in recent months.?

Whether or not the stock market will indeed turn in a performance that Mr. Fosback anticipates might be on the order of 22% next year, or not, remains to be seen. Much depends on jobs and housing. Much also depends on the Fed’s signals to come and its second-half policy decisions. Predictions of all sorts are certainly not in short supply as we round the corner towards 2011.

While recognizing that year-end soothsaying orgies by economists are normally undertaken with the implicit knowledge that they mainly results in something that weather forecasters can (and do) make fun of, Bloomberg’s Matthew Lynn goes out on a limb and offers his own “Top ten for 2011? list of crystal ball insights. One of the items on Mr. Lynn’s list does appear to present something to at least think (if not seriously worry) about at this juncture; the species known as hedge funds.

It is an open secret that large hedge funds –chasing yields and extracting them from historically unorthodox places- have contributed to bringing gold to the front and center of investment talk (and performance to some extent) in 2010. Gold appears set to finish the year with a 28% gain while silver could top 77% in returns (not to mention palladium’s near 98% 2010 performance tally –there, we just did). However, it is precisely, the same type of “participant? that might make bullion (and other assets- soft, hard, paper or ‘real’) susceptible to certain roller-coaster-like rides in the coming year.

Veteran market analyst Ned Schmidt – in his most recent Value View Gold Report- notes that, when it comes to silver, for example, “[it] needs a continuous supply of fuel to keep the price elevated. With demand for silver so dominated by speculative demand, a continuous supply of fuel is critical. That fuel is the hype and talk of the imminent demise of fiat monies that keeps the juices of speculators flowing.?

Anyway, Mr. Lynn’s fast-forward into 2011 offers the possible scenario whereby “the alternative-investment industry crashes. The main driver of hedge funds and private-equity funds was the search for yield. With stock markets in the doldrums, interest rates cut to almost nothing, and bond yields at record lows, investors were desperate for any kind of meaningful return on their money. They were willing to listen to slick hedge-fund managers who promised to make 30 percent a year on high velocity yak-hide arbitrage.?

What could be behind such a turn in (literally) fortunes? Why, the same thing that more and more observers have been pointing to (and is beginning to be confirmed here and there as of recently): “Next year, interest rates will be rising, and so will bond yield and equity returns. Why bother paying a fortune to hedge- and private-equity fund managers, few of whom deliver on their promises, when you can get pretty decent returns from mainstream investments??

None of the above should obviate the need for the presence of a core 10% insurance allocation in gold bullion for prudent investors big or small; be it for 2011 or for 2111, for that matter. In fact, there is ample uncertainty around to continue making the case for such an earmark in a basket of assets. However, the operative word for return-seeking/yield-chasing gold (and other metals) players should be: rising caution. When (quite recent) headlines blaring “gold rallied on Monday as past gains lured investors? are the common ones rather than the exception, you know that the small-print axiom of “past performance is not indicative of future results? is now more applicable than ever. 

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Metals Inc.North America



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