Epiphany, Of Another Kind
The first full trading day of the new year started off with a pattern reminiscent of the year that just passed; namely, dollar selling/ commodities buying. News that China’s manufacturing activity grew at the highest rate in over five years stimulated the by-now-familiar trade among players. Thus, the US dollar gave up sitting on the 78 perch on the trade-weighted index and promptly fell 0.36 this morning, to 77.56 and lost more than 1% against the loonie. Oil prices climbed substantially, gaining $1.50 to $80.87 per barrel, aided by not only the China news, but by a blast of frigid weather in parts of the US.
Gold prices may have started off Monday with a bit of a wobble in overseas action, but by early morning in New York they were up as much as 1.9% per ounce. Volatility will likely not be in short supply today, or as the new week unfolds, as more participants return to the table and attempt to chart a speculative course of action –at least for the month ahead. Various fund players poured more than $60 billion into commodities last year and have made for quite a crowded trade as we open the curtain on 2010.
New York spot metals trading started the Monday session off with gains across the board. Gold opened $20 higher, quoted at $1117 per ounce, and silver climbed 32 cents to $17.19 an ounce. A hefty $28 was added to platinum, which reached $1495, and an equally healthy $13 rise was recorded in palladium, which saw a bid of $419 per troy ounce. Rhodium was trading $30 higher, at $2390 per ounce.
The combination of the China news, dollar weakness on the heels of same, and heightened geopolitical jitters (see the recent events in the air, in Afghanistan, and now Yemen) contributed to this morning’s market tenor. Anticipation is already building up for Friday’s employment numbers. A growing number of pundits are forecasting…gasp! job gains in the US for the month of December – and not just of the mall Santa variety.
The defining agent of this year’s action will -once again- be the path that the US dollar eventually takes. If in fact it turns out to be the case that the US central bank will allow the currency to provide fuel for carry-traders for yet another year, by “staying the course” as regards ultra-low interest rates and keeping the world awash in liquidity, then we may yet witness a replay of 2009 – at least until mid year.
If, on the other hand, the Fed not only verbally signals that the era of cheap money is about to draw to a close, but actually does something about it –say, before mid-year, then another type of market play will become manifest rather quickly; one that diverts money back into the greenback and away from risky assets. We lean towards the latter. Here is, in part, why:
“Having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs. However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach.”
The above were the words of Fed Chief Bernanke, as relayed by the New York Times, just yesterday. Quite a symbolic message with which to start the new year, no? One can call this bombshell the “Bernanke epiphany.” Only the epiphany is not his, but that which could hit his speculative-minded listeners. Mr. Bernanke briefly flashed a knife that the Fed has been as yet unwilling to wield, but one that every carry-trader fears greatly.
Michael Aronstein, the Oscar Gruss & Son Inc. strategist who predicted the 2008 mid-summer collapse in commodities, is now looking elsewhere for bang for his buck(s). His firm, the $320 million Marketfield Fund had allocated as much as 45 percent of its assets to commodities and related equities last year but then went ahead and liquidated all those holdings by November, and is now allocating more to U.S. equities.
Mr. Aronstein told Bloomberg that: “We began to feel the dollar is poised to get stronger and we just felt like the overall commodities trade was gathering more risks than we’re willing to undertake,” Aronstein said from New York. “The big unknown here is to what extent investors will remain enthusiastic.” Meanwhile, a certain Mr. Barton Biggs, (he, of Traxis Partners LP), said he’s buying things such as shares in household-product manufacturers, drug maker firms, and computer-related companies. His hedge fund gained three times the industry average in 2009, but is currently shorting raw materials.
Watch for support and bargain hunting between $1090 and $1100 and also for possible additional buy-stops being triggered above $1120 per ounce in gold. The metal is still some $50 below the point where one could expect a renewed assault on previous high ground. The first quarter historically brings price weakness on seasonality factors and one should not rule out the low to mid $900s as a possible trough during the next 100 days.
For the six months ahead, we envisage (not predict) a (still wide) range in prices, of from $880 to $1280 with the inside channel of $970 to $1070 likely. For the time being, the average price is likely to stick fairly close to the 2009 number near $970 per ounce. With a view to the three-year average gold price still near $845, and with the aforementioned rising possibilities of Fed behavior changes, the expectations that the final 2010 tally will see even better than last year’s 25% year-on-year gains in gold, may be…great expectations. But, let’s revisit these numbers again, come July.
Kitco Bullion Dealers Montreal
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