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Good News/Bad News/ No (Inflation) News

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jun 12 2009 4:24PM

Good Afternoon,

Gold prices fell as low as the $935 area of support following the dollar's success at turning back to well above the 80-mark on the trade-weighted index. Crude oil prices easing back from their lofty $73 levels (but not quite snowballing into a meltdown) also helped drag the yellow metal to lower levels. The recent spectacular advance in oil (complete with forecasts of 'imminent' $85 prices) came amid an absence of positive fundamentals (sound familiar?) and clearly bears the fingerprints of speculative funds at play (also sound familiar?).

This is precisely why we are paying a lot more attention to the forecasts calling for $40 and sub-$40 oil following this papier-mache price spike. It's as real as a theatre set. Thus, the inevitable headline in this morning's news flows: "Oil Drops on Speculation Rally Went Too Far, Too Fast." Would have been enough to just say: "Oil = Speculation." But that would just state the obvious. Kind of like saying a month ago that the swine flu was clearly turning into a pandemic.

The dollar's climb Friday was in large part aided by news from Euroland that industrial production there fell by a record amount in April. Records are made to be broken? Hope not. This morning's figure came in at 21.6%, and it would have statisticians looking back to 1986 for any point of reference. Ouch. However, most beneficial to the greenback's ascent today, were comments from Japanese Finance Minister Yosano who declared that confidence in the U.S. currency in the Land of the Rising Sun is 'unshakable' and that (in his opinion) the status of the dollar as the global reserve currency is 'safe.'

The dollar's reaction to consumer confidence numbers was fairly muted today. Whatever confidence was being highlighted in the numbers this morning, however, must be projected against a continuing bleak background -one that reveals the fact that US household wealth declined by $1.3 trillion in the first quarter of this year. Impoverished US households can only look forward at this point; there is no going back to the carefree good ol' days. At some point, housing and stock market values will bounce and the (already in progress) easing in the rate of declines in net worth will turn into a gradual augmentation of same. However, it might take some time before the malls once become a beehive of cheery spenders at play.

The dollar/oil combo was, thus, still the story of the week, as regards gold prices. This syndrome is being carried over from the May maelstrom. Silver dropped 53 cents, and was last quoted at $14.85 as the speculators pondered how much longer the white metal might remain at such (still) difficult to justify (in terms of fundamentals) levels. Platinum narrowed its earlier $25 losses to only $11 per ounce, to fall to $1251.00 and palladium declined $4 to $251.00 per ounce.

Relatively steady patterns in the noble metals, despite these daily gyrations and an absence of solid news from the auto front. Saab may have been rescued by Koenigsegg. Raise your hands if you have heard of that automaker. Anyone? Did not think so. Think extremely fast, extremely sexy, and extremely costly pure sports bullets. Million-dollar plus transport. The good thing? They're Swedish. They understand what made Saab tick all these (pre-GM) years. This could be the start of a wonderful marriage. Slide-rule geeks rejoice!

New York spot dealings headed into Friday afternoon session's late hours with roughly the same  $16.50 per ounce loss with which the had opened. Gold bullion was quoted at $938.00 at last check, as participants were seen book-squaring and scrutinizing what's on the agenda for next week. This week concludes with a 2.3% percent loss for the yellow metal, and bring it to its lowest value level in three weeks. REGBs are silent and offer no excuses. The weekly Bloomberg gold price survey shows most analysts expecting lower values next week - the first such negative group outlook since December- as the "summer doldrums" turn up the heat, and as investors turn to other, higher yielding assets.

Focus now shifts to the G-8 meeting and in turn, the spotlight at that tete-a-tete has already become the 'how' and 'when' of dealing with the deficits and the mopping up of the liquidity injections in order to sterilize their potential inflationary effects. Expect more positive-flavoured jawboning about the topic in coming days. Resolve to deal with the issue will not be in short supply, even if the tools to take care of it with will likely not be revealed down to the blueprint level of detail.

That the gnomes are at work behind the Fed's marble hallways is no surprise. That advisors such as Paul Volcker and Larry Summers are in the wings offering aggressive solutions -if need be- is also no surprise. Perhaps the only surprise is how soon after last summer's incessant talk of melting skies the "replace & repair" talk has started, and how it defines the late stages of the crisis. Here is what is on Larry Summers' mind as reported on Bloomberg today:

"The Obama administration’s economic plan is showing early signs of success and the government intends to intervene in markets only temporarily, said Lawrence Summers, director of the White House National Economic Council.

“The president’s program at this point appears to be having many of its intended effects,? Summers said today at the Council on Foreign Relations in New York. “What is crucial and where our focus has been as we have intervened when necessary is on the intervention being temporary, based on market principles, and minimally intrusive.?

Summers cited slowing job losses, improving business and consumer sentiment, and “strong performance by most financial markets in recent months? as evidence that the U.S. economy is “in a different place? than it was several months ago. President Barack Obama’s chief economic adviser sought to ease concerns in Congress that the government’s role in the economy is broadening. Summers said the administration’s actions are used only out of “necessity? and are aimed at protecting the market from “its own excesses.?

He also said that the Obama administration will end its investment in auto companies “as quickly as is practical.? General Motors Corp., which received more than $50 billion in government aid and filed for Chapter 11 bankruptcy on June 1, is majority-owned by the federal government. Interventions in other major companies will be designed to be “as temporary as possible,? Summers said.

He cautioned that the system is still fragile. “There are always false dawns during financial crises,? he said. He said that while markets and the economy typically correct themselves, “vicious cycles? necessitating government action occur several times a century. “When faced with vicious cycles the government has no alternative? but to intervene, he said. “Any interventions in which we participate will go with rather than against the grain of the market system. Our objective is not to supplant or replace markets, rather it is to protect the market system from its own excesses.?

Republicans in Congress are stepping up pressure on the administration to ensure the government’s interventions aren’t permanent. “Restoring market discipline and getting the government out of the bailout business is critical to helping prevent another crisis,? Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said in a statement yesterday.

 "Okay, this is hollow propaganda" says the skeptic in you. But, ask yourself, could it be that there is more to the story? That Summers would not take to the microphone unless he saw real, palpable signs that something is shifting course? Here are some checks to add to the facts, courtesy of Carlos Torres -also of Bloomberg. They reinforce the 'fragile' part of Mr. Summers' observations, but also put dark meat on the bones of the on-again/off-again but now mostly on-again recovery being talked about in the 'green shoots' official sector locker rooms. Insofar as the article underscores the overblown fears of inflation, this will be your take-home assignment for the weekend. Show them to your favorite Zimbabwe-in-the-USA scenario writer and challenge him.

"The good news is the worst recession in half a century is almost done. The bad news is it will take years more for the U.S. to return to its potential growth rate, according to Morgan Stanley’s co-heads of global economics.

“There still are financial headwinds? and consumers and businesses still need to trim their borrowing, Richard Berner, a former senior economist at the Federal Reserve, said in an interview. “We’re going to see pretty slow growth in spending in the next few years.? The perils listed by Berner and colleague David Greenlaw dispirit even the most ardent optimist.

The rebound in gasoline prices will counter almost all of the stimulus plan’s tax breaks; banks, seeking to avoid risk and hampered by new regulations, will continue to restrict credit; rising unemployment will depress incomes; home vales are still falling; excess capacity will prompt companies to cut spending; state and local governments are retrenching; sluggish global growth will limit exports; and additional increases in interest rates may snuff out a recovery altogether.

A muted recovery would follow the weakest performance for U.S. gross domestic product, unadjusted for inflation, since the 1950s. The recession’s damage to the labor market has sent the share of Americans who are employed down to 59.7 percent, a level unseen since 1984, Labor Department data show.

Berner and Greenlaw, who are based in New York, forecast that the world’s largest economy will not start growing until the last three months of this year and that the gain in GDP in 2010, at 2.2 percent, will only be about two-thirds of the average growth rate over the last four decades. The slack signals that inflation will be limited even as fuel prices climb, meaning investors are overestimating the threat of inflation, Berner said.

“Markets may be surprised with just how tame the underlying inflation picture is in coming months,? Berner wrote in a June 8 research note. The Fed will likely begin to exit from its emergency lending measures by the end of the year, with the first rate increase not likely until mid-2010, he said. Longer-term Treasury yields have climbed since March as investors anticipated an end to the recession and reemergence of consumer-price pressures.

A measure of the projected inflation rate, derived from the spread in yield between 10-year government notes and 10-year inflation-linked Treasuries, soared above 2 percent this month for the first time since September. The lack of inflation is evident when sifting through the GDP figures. The price gauge tied to consumer spending increased just 0.8 percent in the first quarter from the same period in 2008, the smallest gain since 1961.

GDP before adjusting for inflation, known as the nominal rate of growth, dropped 0.4 percent in the 12 months ended in March, the worst performance since Dwight D. Eisenhower was in the White House in 1958. What inflation there is comes from the rebound in fuel costs that is also hurting consumers. Should retail gasoline prices peak at $2.75 a gallon, as Berner projects, the increase since the start of the year will deduct $50 billion at an annual rate from household cash flows. That would offset almost all the benefit of the recent tax cuts, he said. "

A brief but important Friday footnote. A lot of ill-informed noise has been generated by the Royal Canadian Mint's gold reconciliation story, seen in the Canadian press of late. Some 'market advisors' found an opportunity in this story, to try to instigate some kind of a "run" of the custodial accounts of that, and other mints around the world. How pathetic. We need very few words to emphatically tell you that Kitco reaffirms its 100% degree of confidence in the RCMs ability to keep the customers’ metals free of any material losses, no matter what the ultimate tally will turn out to be.

The RCM has issued a letter on the subject matter, and it has assured everyone that customer metal accounts are unaffected by the reconciliation problem. We expect a complete report on the findings of an on-going investigation and continue to remain at ease with the status of both our own as well as our customers' balances at the Mint. As well as those at any other mints around the world. Some over-zealous alarmists need to get a grip and learn how vaults, insurance policies, and such operate in the real world. Until then, we can only call them saboteurs. And anyone who listens to them, sadly misinformed.

Now, if you REALLY want to become informed on matters that really matter, and to everyone, you need look no further than the upcoming Freedom Fest 2009 in Las Vegas. Simply the best gathering of the best minds one can think of, this entire year, anywhere in the US conference circuit. Mark Skousen, the producer of the event is a most valuable fixture in the firmament of this industry. Mark's ability to put together the brainpower that a combination of (and only for example) Steve Forbes, Ron Paul, Bert Dohmen,  Larry Kudlow, Rick Rule, Frank Trotter, Michael Checkan, and others represent is a just a preview and guarantee of what caliber show one can expect this year. Do not miss this one, no matter what your summer plans may be. Alter your plans, for that matter.

You cannot go wrong on this one. That's a prediction.

Pleasant Weekend to All.

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.