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Do As I Say? or Do As I Do?

By Jon Nadler       Printer Friendly Version Bookmark and Share
Mar 24 2009 8:59AM

"Due to Media travel schedule we will return with the daily commentaries tomorrow, Wednesday 25th March"

Good Morning,

Further easing in precious metals prices was noted overnight, as market participants took cues from yesterday's massive Dow rally and exhibited rising degrees of risk appetite. These two weeks are likely to come to be regarded as the time when the global financial crisis reached a waypoint at which a new heading was charted and adopted. Certainly, the amount of official noise and other signals coming from various quarters should not be classified as 'more of the same' any longer. Resolve to tackle this global quagmire has morphed into concrete actions.

To wit, a series of seemingly disparate events -when taken as a whole- should give some fodder to the fatalists calling for TEOTWAWKI out there. As Goldman's Abby Joseph Cohen put it this on CNBC morning, the 'green shoots of spring' are starting to become visible in the US economy. As that tree goes, the global cherry blossoms will, too. Treasury Secretary Geithner's toxic assets quarantine program (PPIP), AIG bonus recipients (mostly) returning their millions, Goldman's intent to return TARP funds, are all buds that have the potential to eventually yield some fruit. However, for the moment, the focus must remain on ensuring the blossoming of such buds.

Precious metals came under pressure before yesterday's afternoon close and exhibited their more 'normal' countercyclical reaction to rising optimism. Let's not forget that gold is one of (if not the) the best barometers of pessimism still out there. The selling pressure continued into this morning's action, as New York spot dealing opened with a $10.20 loss per ounce, quoted at $928.00 as players watched the dollar rising to near 84 on the index, oil falling to near $53 per barrel, and stock index futures that particular direction (other than a possible hiatus) following Monday's surge.

Silver lost 16 cents to start at $13.50 per ounce, and platinum gave back another $10 to slip to $1113 per ounce. Palladium fell $1 to $206 per ounce. A lot of work is still required on the automotive sector front in order for more robust speculative interest to return to the industrial metals niche. To be sure, palladium received a tiny (pun intended) but of good news today, as scientists announced that they have come up with nanoparticles of the metal that would virtually double autocatalyst efficiency and increase their longevity as well.

Speaking of official noises, some seriously contradictory ones came from China overnight. At once, statements that recommend China's switching away from its massive dollar reserves and other pronouncements that the country intends to keep buying US debt, landed in the lap of financial news writers. Now, go make sense of that. Why not just give your the gist of the two news items and let you draw your own conclusions? Warning: it's not as easy as one would first assume. First, this "bombshell" from the Business Insider:

"China continues to make somewhat disconcerting noises about the US Dollar. They're disconcerting in the sense that we need China to continue to like our money for the time being. Last week, it's premier made some (possibly overblown) comments about hoping the US would commit itself towards preserving the strength of its currency.

Now, FT reports, its central bank Governor Zhou Xiaochuan, has posted an essay calling for the establishment of some kind of global, IMF-based currency. Something that would represent a new reserve currency, but which wouldn't be linked to any particular national economic interest.

To replace the current system, Mr. Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between. SDRs and other currencies so they could be used in international trade and financial transactions.

Ultimately, this sounds more theoretical than anything else right now, and it shouldn't be taken as any definitive sign of China's attitude towards the Dollar. But if you assume that we're wholly dependant on China to continue to finance spending, and they keep making comments like this -- week after week -- you should definitely be a little nervous."

Feeling warm and fuzzy about Beijing running out to spend most of its greenbacks on SDRs? Gold? Soylent Green chips? Not so fast. Bloomberg finds that -as far as that radical departure goes- things connected to the Chinese reserves issue are not as they might appear (and change is nowhere near imminent either):

"China’s top foreign-exchange official said the nation will keep buying Treasuries and endorsed the dollar’s global role, supporting the U.S. as the Obama administration increases spending to revive growth. Treasuries form “an important element of China’s investment strategy for its foreign-currency reserves,? Hu Xiaolian, director of the State Administration of Foreign Exchange, said at a briefing in Beijing today. “We will continue this practice.?

Hu’s remarks came as Treasuries extended the worst start to a year since 1996 and less than two weeks after Premier Wen Jiabao said he was “worried? about the safety of the securities. U.S. President Barack Obama is relying on China to keep buying Treasuries as his administration sells record amounts of debt to fund a $787 billion stimulus package.

“China’s so heavily invested in U.S. Treasuries that to stop buying now would have a negative impact that would see China’s investments fall in value,? said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “It’s pretty important for the U.S. that the main buyers keep making purchases.?

The yield on the 10-year note rose two basis points to 2.66 percent as of 9:25 a.m. in London, according to BGCantor Market Data. The 2.75 percent security due in February 2019 fell 6/32, or $1.88 per $1,000 face amount, to 100 25/32. The Obama administration will announce details of a plan today to expand the $700 billion rescue of the financial system that will rely on enticing private investors to buy the troubled assets clogging banks’ balance sheets.

China, the biggest foreign holder of U.S. debt, increased its Treasury holdings by 46 percent in 2008 and holds about $740 billion of the securities, according to Treasury Department data. Wen called March 13 for the U.S. “to honor its promises and to guarantee the safety of China’s assets.? China was “worried? about its holdings of Treasuries, he said at a press conference after the annual meeting of the legislature, the National People’s Congress.

Yu Yongding, a former adviser to the central bank, said Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.? Today’s briefing in Beijing was ahead of the Group of 20 nations summit due to start April 2. Chinese officials emphasized the importance of combating protectionism and reforming international financial institutions. Vice Foreign Minister He Yafei called for a “clear timetable and road map? for changes to global bodies, including giving developing nations a larger voice.

The international community should focus on the supervision of the global monetary system rather than debating a replacement for the dollar as the reserve currency, regulator Hu said. That comment came as a Reuters report said a United Nations panel will next week recommend replacing the dollar and Chinese central bank Governor Zhou Xiaochuan said that the International Monetary Fund should aim in the long term to create a non- sovereign reserve currency. Reuters cited Avinash Persaud, a member of the U.N. panel. Zhou’s comments were in a speech posted on the central bank’s Web site.

Treasuries declined for a third day before a record sale of $98 billion of notes this week and as gains in stocks damped demand for government securities. The 10-year note gained earlier after Hu’s comments."

Don't know about you, but having grown up under Communist rule, the tendency is there to treat official statements as having some significant weight over those of academics. Well-intentioned as the latter may be.

SDRs. What a novel concept. George Soros suggested their use circa half a decade ago.

Off to a big day in the Big Apple. We may even be able to offer a bombshell or two of our own. Stay tuned.


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.