Hungary Hungover


By Jon Nadler

Jun 4 2010 9:09AM


Good Morning,

Anticipation that Friday morning’s May jobs report from the US Labour Department would reveal a ‘staggering’ rate of job creation (the largest in 27 years) briefly brought bullion prices to under the $1200 during the overnight and early morning hours. The metal sank as risk appetite for equities rose and as safe-haven quests abated for the time being, and despite a fresh decline in the euro that depressed it closer to the 1.205 level. Bargain hunters in gold did become visible in the mid $1190s however, and bullion regained some composure.

There was some good news in the yellow metal’s fall to under the round figure however. Namely, Indian bullion purchases (as mentioned in yesterday’s post) picked up a tad, as patient would-be buyers were finally rewarded with numbers that appeared as a long-shot odd earlier in the week. And, thus, buy they did, following several days of lackluster activity in the bazaars.

Imports of the yellow metal into the country-still the world’s largest consumer of it- dropped to only about 17 tonnes last month; a far cry from 2009’s near 29-tonne import figure. Reports indicate that more buyers are lined up under $1190 per ounce –we just do not know if they will have a chance to fill such orders during the coming weekend or not.

While New York spot dealings opened with narrowing losses across the precious metals complex, the trade was still focusing on but one item this morning; the pivotal jobs report from the US. Spot gold fell $3.60 per ounce to start at $1204.20 while spot silver declined 14 cents to open at the $17.81 per ounce mark.
Gold could still be poised to try to test support around the $1181.00 level at this point, and RSIs have deteriorated in the wake of the latest correction. If however, sufficient numbers of bargain hunters turn out in short order, bullion might well retake and maintain above the round figure, albeit resistance is still manifest at the $1120-$1130 zone.

Platinum dropped $18.00 to $1525.00 while palladium lost $10 to reach the $439.00 figure. Rhodium was quoted at $2600.00 and we noted a welcome (for investors) narrowing of the metal’s spread to $200.00 at last check. Meanwhile, the US dollar was once again racing upward, by about 0.5 and getting closer to the 87.75 level on the index, while crude oil fell about a half a buck (to $74.10 per barrel).

Kudos to the team at Standard Bank (SA) this morning, for providing a quick and not-so-dirty analysis of conditions in the PGM group metals niche. Without further ado, their take on the sector, as follows:

“Platinum and palladium are finding better support after their recent sell-off. We see $1,500 for platinum and $420 for palladium as their fundamental price floor. We estimate that platinum at $1,500, palladium at $420 and rhodium at $2,700 could provide an average PGM basket price of $1,244 for South African platinum mines. Using these parameters, almost 100% of PGM production in South Africa is profitable on a “cash-operating cost” basis, with a ZAR/USD exchange rate of $7.50. Cash-operating cost is the minimum condition to be satisfied for mines to remain in business.

We believe that the marginal producer remains important (due to demand-side developments) and, as a result, the PGM basket price cannot cut too deeply into the cost curve for long. Very importantly, ETFs are increasingly removing some of their large amounts of above-ground stock from the market. In this regard, we have seen platinum and palladium ETF holdings at an aggregate level very sticky despite the recent sharp downturn in metal prices (similar to what we’ve witnessed in gold ETF holdings). The latest figures put platinum ETF holdings at 1.03m oz and palladium ETF holdings at 1.77m oz.

It is worth noting that there may be some cross-subsidization between profitable mines and loss-making mines within a mining company. This may see production carry on for longer than would otherwise be the case. But ultimately, loss-making mines would have to close, thereby crimping total PGM supply. It is also worth noting that cash operating cost excludes other costs of sales such as smelting and refining costs. We estimate that with PGM prices at the levels mentioned above, only around 80% of mines are cash positive when smelting and refining costs are included. These costs still exclude any exploration and capital expansion costs.

Because the ZAR exchange rate plays such an important role in the cost curve of platinum producers, we set target prices for PGM in ZAR terms. They are for platinum at ZAR 13,500 (currently at ZAR11,800), for palladium at ZAR4,875 (currently at ZAR3,400) and rhodium at ZAR30,000 (currently at ZAR20,000).”

The euro once again generated headlines as it dropped to under 1.21 (a fresh, four-year low) at last check. Thus, as it turns out, at least on certain occasions, it does not always follow that a falling euro (and dollar at this point) implies automatic gains in bullion. Not when the general market situation is taking on the asset-liquidation flavor of two years ago… (See the recent cave-in in commodities).

At any rate, some of this morning’s euro-swoon came on the heels of Hungarian PM Viktor Orban suddenly declaring that his nation’s economy is in a “grave situation.” Grave, or in the grave, it is not known. Mr. Orban assigned blame for the problem to the previous government (sounds like a replay of the Greek blame-game) which ‘manipulated’ figures and ‘lied’ about the country’s economic conditions. The PIIGlets turning into default goulash? Let’s just say that many of them are claiming a case of severe hangover from the previous regimes’ drunken spending sprees. Why, this kind of news could overshadow today’s “jobs jamboree” (moniker courtesy of Everbank’s Chuck Butler). Easily.

Stock index futures also turned lower ahead of payroll numbers as players tried to read under-the-hood conditions and ascertain whether or not census-related employment masked on-going weakness and spotty patterns in the US recovery, or if this is ‘the real thing’ and the economy is now back to firing on most cylinders on its own, no jumper cables required. Recall that last month’s jobs data was largely cast aside as the eurozone value demolition derby was in full-swing.

If in fact the employment creation pattern start to show signs of being a consistent one, then the calls for Fed interest rate hikes will only grow louder and more insistent. Already, the Fed’s poster man for such exit strategies needing to take place sooner rather than later – Thomas Hoenig- is calling for a full-point rate increase “by the end of the summer.” From zero to 1 in 100 days? And from there to 4.5% in an equally speedy manner? Hey, the Aussies have been doing it for some time now. Brave Bruces that they are.

Well, Mr. Hoenig appears to be somewhat at odds with his Chicago Fed counterpart. Charles Evans recently stated that the eurozone crisis could ‘delay the raising of interest rates.’ Avoiding unpleasant rates of inflation while ensuring that economic stability is maintained has always been the challenge for central banks when such pivot points in policy arise.

For now, the bets are squarely lined up against Mr. Hoenig’s drumbeat. But, as “Bob” pointed out in yesterday’s Ten Investment Commandments, when all experts (and speculators to boot) agree on something going strictly “one-way” (their way) well, look out…the other way.

And, they….off! The jobs figure came in at 431,000 – lower than expectations. Payrolls (ex-census jobs that totaled 411,000) rose by 20,000 while private sector ones gained 41,000 positions. All is well, but not quite well enough. Columnists pulled out version “B” of their articles on the post-game analysis for jobs.

Gold briefly reacted to the upside before sinking again, the US dollar hung on to (most of its morning) gains, and the euro remained in a dazed/confused stupor. Industrial metals headed south as demand apprehensions took over for the day. No stupor among speculators who will take these numbers and run into various directions that suit their book best with them. Get ready for Freaky Friday volatility. Keep an eye on that pot of Hungarian Fishermen’s Stew. It does not smell very good.

We, on the other hand, are all off to Vancouver, and the BIG June Cambridge House Conference. And what’s this? Nadler in a DEBATE (the answer is: yes, when it involves civilized counterparties)? Why, what’s this world coming to?!! Why, to the Kitco booth, of course!

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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