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Our Chief Weapons are Surprise and Fear

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jul 28 2009 3:48PM

Good Afternoon,

The congestive pattern that continued to frustrate gold market players of late, appeared to finally give way on Tuesday, as the precious metal saw a near 2% drop following a recovery in the US dollar against the euro. Earlier, the greenback sank to its lows for the year on the trade-weighted index. Today, we had as pure a dollar-oil-gold play as one can conceivably design on paper, albeit, given the 0.34 point rise in the dollar index, one would have expected smaller-scale losses in bullion. 

The US currency had also traded at two-month lows against the euro this morning, but it executed a fairly sharp U-turn following the slippage in the readings of US consumer confidence levels (and concurrent waning of risk appetite). Rising home price readings in various markets did not manage to keep risk appetite among investors at the levels we have seen over previous trading sessions.

In any case, not having had gold at something like $1050 an ounce at a time when the greenback was clearly scraping the floor of 2009's index levels, turned out to be...not too good for the former. This morning, on Bloomberg Radio, we indicated that we were starting to lean in favor of the projections that call for a possible $100 break in the gold price (that, from the $950 area) following the aforementioned intensifying rubber-band congestion and the metal's inability to sail smoothly higher, and past the $960s.

Crude oil prices started off the day by drifting lower as well, but those losses became more significant as the day wore on. Black gold was last seen at just above $67 per barrel, sporting a $1.21 loss and we (as others) are still looking for a rational explanation as to this value equation. For now, let's call it: go figure.

Some of the drop in oil was related to consumer confidence, some of it to BP’s 53% drop in profits (along with its opinion that it sees no major recovery in the commodity), and some more to the serious consideration that the CFTC is giving to requiring position limits for certain commodities. Ah, but who cares? Calls for $75 oil were still issued today, despite the aforementioned goings-on.

New York bullion dealings started the Tuesday session with a 0.45% loss in gold, which was quoted at $949.00 per ounce against the 78.58 mark that the dollar had then recovered to, on the index, and against lowered expectations of advances in equities as the trading day prepared to get underway. The US currency was last seen near 78.90 on the index, and was still offering somewhat of a surprise to the trade, dead-feline rebound or not.

The afternoon hours had gold off by more like $16 an ounce, and the bids were nearer $937 per ounce (after lows were touched near $933 earlier). We had cited trading sources in yesterday’s closing comment as wondering if gold could “sink back towards the $930s in a somewhat overdue correction? (or, an end to the narrowing congestion pattern that had developed).

Silver dropped a nickel on the open, quoted at $13.96 an ounce, and then proceeded to lose more than 25 cents on the day. Platinum, meanwhile, gave back more than $20 of yesterday's overeager gains by falling to $1198 per ounce. There was only a minor $2 negative change reported in palladium, as it began and ended the day near $258 per ounce.

Base metals continued to party with gusto this morning, with aluminium leading the way following a 1.7% gain. This represents the white metal's longest gain in about 22 years. Here, bully, bully. Copper declined later in the day, after US consumer confidence numbers put a damper on speculative enthusiasm.

Elsewhere, Lithuania reported a 22.4% (!) drop in its annual GDP -making whatever will come out data-wise from the US (expectations of 2.4% on the negative side) later this week, like Chinese-style growth. Or, consider the 23.6% unemployment rate seen in S. Africa before attaching any label to the near-10% rate of joblessness the US is experiencing.

Speaking of the Chinese, Mr. Geithner firmly reassured them yesterday, as regards the US' intent to shrink its budget deficits. This, in order that the Chinese delegation can return home without having to pop any anti-anxiety medication when looking at their $800 billion-plus balance sheet. Currency traders in London continue to see China buying US debt and not intending to do any material damage to their huge dollar holdings. Duh.

As far as growing anxieties are concerned, the impending curbs on commodities positions, their nature, size, etc. has the folks at Goldman fighting the regulators with some big ammo. Whatever the outcome, the new patterns of commodity trading will undoubtedly put a significant dent in the carefree world of commodity-oriented ETFs. Can you say: shrinkage?

Keep an eye on this 'recession is easing' type of talk. Keep two eyes on Treasury auctions. Keep your hands in your pockets as gold has now broken for lower ground. Also keep an eye on the Spanish Inquisition. Nobody expects it. Except those who are reportedly responsible for last year's mushroom cloud in the crude oil market. They will be given...the rack. The CFTC position-limit rack, among other instruments of torture.

So, where do we stand with US debt sales thus far? Remember that you’ve been assured that there will be no takers for this ‘junk’ –according to conventional hard-money newsletter ‘wisdom.’ Turns out, we already know that China has had bigger difficulties attracting takers for its own IOUs. Successful sales of offered debt will play a critical role in the Fed’s exit strategy from its hitherto accommodative stance. Now, Bloomberg sheds light on the topic, from the US angle, herewith:

“The U.S. had raised $1.046 trillion from debt sales this year to help finance a recovery from the recession, government data show. The budget deficit is projected to reach $1.85 trillion in 2009, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Demand for debt was boosted earlier after Treasury Secretary Timothy Geithner assured his Chinese counterparts the U.S. will rein in a record budget deficit, seeking to ease China’s concern about the value of its Treasury holdings.

The U.S. will ensure a “sustainable? deficit by 2013, Geithner said yesterday on the first day of a two-day meeting between U.S. and Chinese officials in Washington. China, the largest foreign holder of U.S. debt with $801.5 billion of the securities, bought $38 billion more Treasuries than it sold in May, according to Treasury data.

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.52 trillion of write-downs and credit losses at banks and other institutions and sent the global economy into its first recession since World War II. The government and the Federal Reserve have spent, lent or committed more than $12 trillion in a bid to revive the economy and credit markets.

Yields suggest the Fed’s efforts may be working. The Libor- OIS spread, a gauge of banks’ reluctance to extend credit, dropped below 30 basis points for the first time since January 2008. The London interbank offered rate, or Libor, that banks say they charge each other to borrow in dollars for three months fell one basis point to 0.49 percent, staying below 0.50 percent for a second day, the British Bankers’ Association said.?

As for the US economy, its current and near-term diagnosis and prognosis, we have heard quite a bit from luminaries such as Roubini, Bernanke, Feldstein, and others over the past couple of weeks. Today, we have the Fed’s Janet Yellen chiming in on the topic. She said that she finally sees the ‘first solid signs’ that the US economy is climbing out of the quicksand and that I could resume ‘painfully slow’ growth later in the year. Bloomberg goes on to state that:

“Fed officials anticipate the U.S. economy will contract less this year than they had projected in April, even as unemployment climbs to as high as 10 percent, according to their latest forecasts released on July 15.

Consumer prices are now forecast to rise by 1 percent to 1.4 percent this year, compared with April projections of 0.6 percent to 0.9 percent.

Excluding food and energy, prices are expected to increase 1.3 percent to 1.6 percent, up from a range of 1 percent to 1.5 percent three months earlier. The figures reflect the central tendency of projections, which exclude the three highest and three lowest forecasts.

Core inflation will probably remain below 2 percent “for several years,? Yellen said.

The Fed is keenly aware? of the need to tighten policy in time to avert higher inflation, Yellen said. “When the economy does come back, I can assure you that we will act decisively and appropriately to tighten the stance of policy and maintain price stability.?

So sorry to spoil the parties that are being planned for the arrival of the “Harare-on-the-Hudson? hyper-inflation scenario. The same organizers had to previously scrap plans to host “The End of the World as We Know It? parties, which were then to be followed by the “Greater Depression Part Deux? get-togethers. Best laid plans…and nobody expects…you know the rest.

Until tomorrow,

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.