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Curb Appeal

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jul 30 2009 3:54PM

Thursday's recovery in Chinese equity markets gave new meaning to the term 'hot & cold' as investors piled money onto the same table from which they has swept it just the day before. Chinese central bank comments stressing the efficacy of 'market tools' in order to guide lending and money supply were interpreted as 'Hey, go play in the market some more' and that's exactly what profit-hunters did. Even if they can expect the authorities to tighten lending selectively, in small increments, as time goes by.

While at it, they sold the dollar and the yen, and bought back a bit of the commodities they so liberally sold over the past couple of days. The SGE gained nearly 2% after Wednesday's 5%-7.4% free-fall. Reaction to the biggest one-year rise in Japanese industrial production (8.3% in Q2) was strangely tepid, over in the currency markets.

Gold trading started the day in New York with a modest $2.40 rise, with the metal quoted at $931.80 per ounce as the trade observed a 0.33 decline in the US dollar on the index (down to 79.28) and an attempt in crude oil to bounce back following yesterday's massacre. Black gold rose 82 cents to $64.17 per barrel. Base metals enjoyed a better day on the heels of rising risk appetite, and gained anywhere from 1.5% to 2% this morning. Not that anything has changed in the fundamentals for any of the above.

The afternoon hours found gold still on the offensive, showing a rise of $5.00 per ounce at $934.50 against the (largely similar) drop in the US dollar index, but also against a serious intra-day recovery in oil (up $3.73 to $67.08) – Guess some spec funds find it very hard to let go of this game at the moment. Get all those juicy trades in before regulation turns the tables.

Silver opened with a 12-cent gain this morning, quoted at $13.39 per ounce, and was trading some 21 cents higher at 3:30 NY time. Initially minor recoveries were also seen in platinum (up $6 at $1177.00) and palladium (up $2 at $255) but the bounces were largely seen as technical in nature, absent fresh news from the world of transport.

By the afternoon, platinum was showing a $16 gain (at $1187) and palladium rose $5 (to $258 per oz.). Honda's earnings beat estimates soundly, while VW's net crumbled by 83% on Q2. Not much else to watch today, although stock index futures were aiming higher in the morning and the Dow then turned in a very decent performance, rising by more than 150 points. It is at the year’s best levels as of now.

In economic news, housing continues along a difficult path, with many freshly added metro markets showing signs of rising foreclosures. Others, previously the poster-children for foreclosures, did show some curious drops on the other hand. Not so, Las Vegas. It continues to be the red dot on the foreclosure epicenter map. EVERY 10th or so house there has ‘phenomenal curb appeal.’ Complete with a ‘LIQUIDATION’ sign on the burned-out lawn.

Bullion sales from the largest gold ETF continued, with another 10.38 tonne disposal being registered, as holdings fell to 1,073 tonnes, - the lowest level of balances seen since March 17th. SPDR Gold Trust holdings have slumped 4.3 percent this month.

Emirates Business reports that the recent upswing in sentiment in the [equity] markets and the accompanying gains in the US dollar have diluted gold demand for hedging purposes. "The World Gold Council in its report said that the first signs of inflation, which is expected to support the demand for gold as a hedging tool, is yet to emerge. There are expectations that gold my now head towards a long talked-about support level of $915 an ounce, a price that is expected to trigger demand and bring in buyers wanting to buy jewellery." said the article.

Others were not quite so sanguine about 'expected' demand for baubles in the wake of the current drop in gold. UBS analysts in London concluded that: "We need to see sustained strong Indian demand to start thinking about calling for a strong support in gold, and suspect that this will only be seen a lower prices, or in a month or so." For the time being, gold's close under the 60-day MA indicates a turn-down in the longer-term trend, and a turn towards a support target near $918 an ounce. The $950 and $965 areas remain in place as ceilings needing to be decisively broken.

Finally, as this new-found fondness for "bubble prevention" takes hold, (see China and its lending moves, see the CFTC and its call for limits in commodity trading) so is the ringing of various alarm bells by the parties with vested interests in the game. Goldman Sachs opines that curbs on speculation might 'disrupt' liquidity in the markets as well as the markets themselves. Thus, we learn that all types of traders now want the stamp of 'exempt' pasted on their forehead if the CFTC does go ahead with restrictions.

Here is another example, as cited by Reuters, of major trading ‘attractions’ –otherwise known as ‘curbs’ of a ‘different’ appeal, coming to a market theatre near you:

“U.S. financial regulators would gain the power to restrict holdings of over-the-counter derivatives under legislation to be considered this fall, the chairmen of two House committees said on Thursday. Chairmen Barney Frank of the Financial Services Committee and Collin Peterson of the Agriculture Committee said antis-peculation provisions would be part of legislation to bring the $450 trillion OTC derivatives market under federal regulation.

The bill also clamps down on a type of derivative called credit default swaps (CDS), which have been blamed for magnifying global economic distress by spreading losses from bets on risky mortgages and other debt. The swaps are used to insure against debt defaults and speculate on borrower's credit quality.

A key question for the OTC bill is whether to outright ban "naked" CDS, swaps for which the trader or investor does not hold the underlying asset being insured. The alternative is requiring regulators to monitor CDS trading and restrict the size of holdings -- position limits -- by dealers and large investors.

"We will have in the bill, I believe, full authority to SEC and CFTC to impose limits, both overall position limits and (trading) time outs," said Frank, referring to the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC polices stock markets and the CFTC oversees futures markets. The agencies would split the workload of handling OTC derivatives under an outline by Frank and Peterson.

Frank said his committee would begin work on the bill after the August recess and he hoped for a floor vote this year. Peterson said his committee probably would hold its own drafting session to add some provisions. Their outline calls for OTC derivatives to go through regulated clearinghouses in most cases. By sharing risk, clearinghouses assure payment of transactions and bring liquidity into markets. They also set margin and reserve requirements for transactions. Investors would be encouraged to move OTC derivatives onto exchanges and electronic trading platforms.?

Tell you what, while all of these curbs are engineered and eventually enacted, why not also curb some really dubious practices in the bullion business? There are plenty of firms out there who would love to sell you high mark-up/ high profit-margin so-called 'rare' or 'semi-rare' coins with the lure that such items will be “exempt from government confiscation? (as if it were ever to happen again!) and/or that such and such small coins (sold with the equivalent of a 30 or 40 percent premium above gold content) will come in 'handy' when the hordes rule the street and barter among themselves. Mad Max trading his Krugerrands at 7-11? What an image.

We suggest a different metal for that wild, but oh so easy to sell by aggressive phone staff scenario: Pb is its chemical symbol. For that matter, perhaps various aluminium foil-bedecked clubs that constantly mislead the would-be buying public with wild stories of manipulation, price suppression schemes, concentrated short positions, and other assorted precious metals UFO theories could receive a bit of ‘regulatory’ attention. Such as requiring concrete, irrefutable proof for any allegation that sees the light of the Internet screens, or the printed characters in a newsletter. Just a thought. Lest we alienate would-be investors altogether from these markets.

Until tomorrow.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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