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Final Exam: Are You Stressed Out?

By Jon Nadler       Printer Friendly Version Bookmark and Share
May 7 2009 4:35PM

Good Afternoon,

Gold prices held steady at near $920 per ounce early this morning, ahead of the release of US bank stress-test data (due at 5 PM NY time) and jobless claims figures due this morning. Then, after rising to a high of $926.60 basis spot offer, the rally dissipated as the day wore on, on the back of profit-taking. The spec funds' play was very much in evidence all over the commodity complex today. The CRB nearly touched and broke above the year's high. The 'reflation' play is in full swing here, even though visible signs of same are nowhere nearly visible, nor certain.

Et voila, by 3:30 PM in the afternoon, the yellow metal was showing a net loss of $1.40 per ounce, and was quoted at $909.60 per ounce -some $2 above the lows for the session. No intervention, no manipulation, no suppression. What then? Spec funds, were at it, once again, that's what. See oil, see commodities, see copper. See buying spree, followed by profit-taking spree. Again. Silver gained a dime, quoted at $13.83 per ounce, while platinum managed a $10 rise to $1145 an ounce. Palladium put in a strong performance, rising $9 to $236 per ounce, albeit background fundamental reasons for the blip were notably absent. Point. Finger. At funds. Again.

As we wrote this morning, the metals complex continues to exhibit a combination of attention from spec funds and inflationary anticipations. At the same time, seasonality factors and an increase in the 'good news' side of the balance sheet may draw not only some of the sidelined cash but also some of that already parked in gold to the increasingly attractive equities markets. Following a six-quarter string of negative results (something seen perhaps only twice since 1900) Dow & friends could be set for a further hefty gain, despite an already stunning percentage rise from their lows in March. Bear-market rally proponents could become the object of investor ire after having held them out thus far, and after continuing to advise staying out going forward.

Well, S.T. "D"-day arrived on the same morning when Rupert Murdoch declared that the world's worst economic crisis in decades (or ever) has seen its worst phase, and that the road ahead is upward. Newscorp's Chairman, commenting on the most severe worldwide economic downturn in decades, said that "it is increasingly clear that the worst is over." Speaking to analysts on a conference call, Murdoch said: "There are emerging signs in some of our businesses that the days of precipitous declines are done and that revenues are beginning to look healthier.

Today was also QE day -sort of- over in the Old World, where the ECB (a quarter percent late, and many a day too late) finally cut rates to 1%, hoping that such will be 'it' and that 'it' will be enough. Likely, not. The ECB's ostrich act has been more lamentable than any such kabuki ever to emerge from Japan. Meanwhile, the BoE boosted its bond-purchasing programme by $75 billion, in not-so-tacit acknowledgement that it was not ready to sign on to the 'worst is over' (at least as far as the UK is concerned) scenario just yet.

In today's news, GM lost $5.9 billion, which was less than had been expected. Wal-Mart same-store sales were up 5%, which was better than could be expected (see other chain-store sales for the period). Crude oil also took an initial leap upward, gaining $1.50 to $57.84 (don't look now, but black gold -for all the supposed trouble out there-has gained nearly $20 from its lows) but turned negative by the afternoon (@ $56.30). The Obama administration unveiled a $17 billion budget cut proposal, complete with the excision of some 121 spending programmes.

The US dollar was quoted at $83.93, a tad lower on the index this afternoon. Interest rates have been quietly trending higher, while credit risk shrank to the lowest level since last year's spectacular financial firm failures. The 'biggie' this morning, was the fall in initial jobless claims fell by 34,000 to 601,000. This was the lowest level in US unemployment claims in three months. The stunner of the day came from Down Under, where unemployment unexpectedly fell to 5.4% highlighting the fact that although the crisis is indeed global, there are pockets of activity which show a decidedly counter-trend characteristic.

While HuffPo's Arianna Huffington said this morning that the bank stress-tests fail the 'smell-test' and while former NY Gov. Eliot Spitzer (yes, that Mr. Spitzer) proselytized about the lack of ethics in the financial world (guess he sees more of it in the world of politics?) and the lamentability of the so-called taxpayer bailout of Wall Street, the bits and pieces building up to this afternoon's official release of the test results continued to show a mixed-but-mostly-positive bag of findings. Bloomberg found that:

"Federal Reserve stress tests on the 19 biggest lenders show Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. together require about $54 billion, said people familiar with the conclusions. At the same time, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of New York Mellon Corp. have enough capital to help prop up flows of credit to businesses and consumers grappling with the worst recession in five decades.

“There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward,? Geithner said yesterday in an interview with PBS television’s Charlie Rose program. “The results will be, on balance, reassuring.?

CNN Money reports (about an hour ahead of the 'big release') that:

"The Federal Reserve is directing at least six of the nation's 19 top banks to boost their capital levels by $65 billion. The official test results, to be released at 5 p.m. EDT, will show which banks appear able to weather the economic crisis without more help.

U.S. Federal Reserve Chairman Ben Bernanke, answering questions at the Chicago Fed, said that while he hopes stress tests add to market confidence, they aren't meant to be a test of the banks' solvency.

THE DETAILS: In the stress test results release, the Fed's analysts will report their estimates of losses and loss rates across select categories of loans, resources available to absorb those losses, and the resulting necessary additions to capital buffers. The estimates reported by the Federal Reserve represent values for a hypothetical "what-if" scenario and are not forecasts of expected losses or revenues for the firms, according to the Fed.

The following institutions were directed to raise capital:

* Bank of America Corp. (BAC)     $34 billion

* Wells Fargo & Co. (WFC)           $13 billion to 15 billion

* GMAC LLC                                 $11.5 billion

* Citigroup Inc. (C)                       $5 billion

* Morgan Stanley (MS)                $1.5 billion

* Regions Financial Corp. (RF)     Amount unknown


These institutions were deemed not to need new capital:

* JPMorgan Chase & Co. (JPM)

* American Express Co. (AXP)

* Goldman Sachs Group Inc. (GS)

* Bank of New York Mellon Corp. (BK)

* MetLife Inc. (MET)

* Capital One Financial Corp. (COF)

* State Street Corp. (STT)


Results for these institutions weren't known:

* Fifth Third Bancorp (FITB)

* KeyCorp (KEY)

* PNC Financial Services (PNC)

* SunTrust Banks Inc.(STI)

As for the other 8300 banks in the US, no test was needed. They are just fine, thank you.

So, are you sick and tired of paying 8 -10% (or more) for your one-ounce gold coins on some auction site? Tired of your friendly corner coin shop lamenting about not being able to obtain any coins due to some putative worldwide gold shortage? Well, be tired no more. If you feel the need to initiate or augment a gold holding, then your choices have just brightened.

Right now, right here, right on the Kitco store's page, you can buy 1-ounce, pure 24K gold, Olympic edition, Canadian Maple Leaf coins, for....drum roll.....5% (FIVE percent) above spot gold ask prices. You can also obtain Austrian Philharmonic coins for a 6.5% premium above gold. Shameless self-promo? You bet. It's just one way to combat ill-informed stories about shortages and the need to overpay. Look for more similar product and pricing surprises in coming days. As for the market, we can make no such promises. Keep an eye on the hedgies.

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.