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Monday Jun 06, 2011 12:29 PM

The reverberations of Friday’s weak US jobs scene data were still being felt this morning as trading action got underway for the new week in New York. While precious metals initially opened mixed as the US dollar refused to apparently succumb to selling in the wake of rising perceptions that the Fed might “give” in the wake of the aforementioned labor statistics, they did recover their footing and pushed to higher price ground in the first couple of hours of trading.

The near-1.2% drop in crude oil and a rather feeble start to the market day in the Dow kept somewhat of a lid on the vigor of the advances in metals. Gold traded as high as $1,554,10 while silver touched levels near the $37.40 area. Platinum and palladium remained firm and showed gains of about $7 apiece while rhodium retreated to the tune of $50 to the $2,225.00 mark per ounce.

The analytical team at Standard Bank (SA) noted this morning that while platinum and palladium have both rallied nicely in recent sessions, at least the former might have a bit of a tougher time rising towards the $1,900 target that has been projected to become reality prior to year’s end, unless physical demand shows signs of a “significant improvement.”

On the other hand, palladium could see its progress towards the $900 bulls-eye that forecasters have envisioned for it within the same timeframe being less difficult. This, as the market is in a better physical flows and futures contract positioning. In addition, palladium’s cost of production (nearing $700 at this time) also presents a bolstering factor to mitigating potential sell-off related damage in prices.

Curiously, the some of the same players who gave us all kinds of ‘signals’ during the past week that the Fed will have to remain in a virtual state of suspended rate animation due to “weakening economic conditions” bought a plethora of commodities this morning under the official excuse that “the global economic recovery will remain resilient and boost demand for raw materials.” Okay, then.

Place that little headline right alongside the one that argues that crude oil “fell for a second day on signs the slowing US economy my crimp demand” and you have the makings of not only investor confusion but also of the fact that a large swath of them is actually…out of the market altogether, preferring to remain in cash, until the picture clears up just a tad…

At any rate, the picture we are referring to keeps being on the murky side precisely because of the rising amount of contradictory statements coming from various quarters –official or less than so- with regularity. Some have opined that the Dow’s fifth week of losses (and recent hiccups in commodities) reflect an early ‘gimme, gimme, gimme tantrum’ by speculators who have gotten so used to the Fed’s ‘easy money’ that they are warning it not to take away the ‘punchbowl’ just because QE2 comes to a close in three weeks’ time.

Others parse the words of Fed officials such as Charles Plosser and are less than sure that the Fed will cave to such “requests” and extend the “buy everything” party for months to come. Mr. Plosser said this morning that the jobs data released on Friday –poor as it appears at first blush- will not alter either the fundamental outlook on the US economy, nor, more importantly, Fed monetary policy over the medium-term. When queried about a possible Fed rate hike and its odds of taking place during the current year, Mr. Plosser indicated that it is “certainly possible by the end of the year” while hedging that signal with an “it depends on how the economy performed [by then].”

Mr. Plosser also noted the dramatic swing in sentiment from deflation fears to inflation apprehensions that has taken place during the past year in the markets by saying that it is “troubling that the public’s inflation concerns can be so volatile.” Certainly, such “concerns” owe a great deal to being notable due to the fact of their being part of the numerous price spikes that the markets have witnessed in certain commodities during the same period of time. As for the jobs situation, well, Mr. Plosser is among those who argue that the Fed ought to begin exiting from stimulus-flavored monetary policy “long before the unemployment rate is down to what people would like to have.”

As regards commodities and their rising disconnectedness from supply and demand fundamentals, on the other hand, the latest voice to sound a cautionary note comes from the...United Nations. The agency’s Conference on Trade and Development warns, in a scathing report published on Sunday, that increased “investment in commodity markets has encouraged herding behavior” and that “it creates bubbles.” In plain English, the UN finds that “anticipation of the global economic recovery played a disproportionate role in higher commodity prices.”

Yes, and the same could be argued for the levels of inflation that the same spikes in certain assets appear to be ‘baking into the equation’ for the not-so-distant future. The UN advises that due to such speculation “commodity prices do not always provide correct signals about the relative scarcity of commodities.”

The agency finds that at the present time there is a clear case to be made for the presence of “widespread herd behavior” –the syndrome that investors succumb to when they are seen flocking into an asset simply because of what others are seen and heard to be doing. Sound familiar? In fact, one of the signs that bubbles are floating around us at this time is the very denial of the existence of same by those who claim that we will “recognize” them when really they do occur – you know, usually months, or years down the road, but not now. Not by a long shot. We are nowhere near a top in…X (insert your favorite commodity here).

The “cure” the UN recommends might be found in more oversight, more transparency, and-if needed- active official intervention that would deflate said bubbles before they actually threaten to undo the very recovery that stimulus programs around the world were intended to bring about in the first place. The UN report notes that “excessive speculation” has added about 20% to oil prices for example.

Such emergent global conditions and the intensity of market “sentiment” should make for an…interesting summit as OPEC ministers gather for their meeting next week. The word “quota” might just be a “heavy-rotation” one at that gathering. The meeting rooms in Vienna will at once be filled with the highest level of intra-member hostility since the Gulf War (thank you, Mr. Gaddafi) as well as the highest level of “visibility” and scrutiny surrounding the cartel as mentioned within the context of the UN’s report. The IMF and the OECD as well as the IEA have all warned that triple-digit oil is…flammable.

No certainty as to whether the UN intends to do the commodity bubble-popping or the global commodity price vigilante job on behalf of presumably less-than-vigilant regulators present (or asleep) at various “switches” around the world, but a least the “whistle” has been “blown” by it for the time being. Meanwhile, the CFTC reported in its latest market positioning report that “speculators [mostly] returned as buyers to metals last week.” As is well, then.

And now, back to our total immersion into the world of resource-seekers and their stories, here at the Vancouver Cambridge House World Resource Investment Conference. Despite the spectacular weekend weather and the Canucks fans-clogged streets of downtown VanCity, the turnout for the show appears to be heavy.

However, due to all-day travel on Tuesday, there shall be no commentary produced until Wednesday morning. Thank you for your understanding.

Until then,

Jon Nadler
Senior Metals Analyst – Kitco Metals


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals 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 Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

Week of May 30, 2011

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