Metals update for June 8

Good Morning,

The specter of lost/altered “A” letters in the credit ratings Scrabble game and the urgings for sharper budget scalpels made an unwelcome appearance in Britain overnight. Newly-installed Prime Minister Cameron was told—in no uncertain terms—that the Albion faces “formidable’ fiscal challenges on its debt unless faster deficit reduction measures are applied—and soon.

Calling the AAA to keep its AAA rating might be a moot thing for the UK: market guru Dennis Gartman sees one of the three letters changing, no matter what. The World Cup of Debt is in fact, this summer’s biggest game in town. Many a town.

The slim bounce in the euro we witnessed on Monday lost momentum as the common currency hit a new all-time low against the Swiss franc and as it traded back under 1.195 vis a vis the US dollar. Switzerland’s currency (along with the greenback-now at a 14-month high on the index, and of course gold) is benefiting from safe-haven inflows during this week of accelerating news of the alarming type that stretch from Budapest to London (with a brief detour to Madrid where civil servants lay in the street to protest the cuts coming in their salaries).

Well, at least Hungary is pedaling fast and trying to undo the damage its PM’s words caused last Friday. The forint is poised to gain as much as 6% if recently introduced bank taxes and spending cuts convince players that all is…better, if not yet well.

Not surprisingly, despite 98% bullishness levels, the fact that for the first time since 1987 equities are cheap relative to bullion and fueled by technical talk of targets ranging from $1346 to $1374, gold prices advanced to a fresh record overnight as the Europe-centric worry levels hit new pinnacles of their own. A $1252.10 spot bid print was added to the record books. At this point, there are two perceived ‘bears’ left in Gold Town. The other one is Robert Prechter.

The man who called the 1982 stock market rally and bailed out of same prior to the 1987 crash, noted at the Reuters Investment Summit in NYC that bullion could fall “at least” 40% from its peak (which peak, was not specified) as deflation and the metals “over-ownership” become principal market forces. Mr. Prechter did not have kind words for equity markets either, advising spectators to remain out of stock “completely.” On at least that part of the Prectherian view, the gold bulls would wholeheartedly agree.

New York bullion trading opened with a reduced gain in gold as some of the buying seen in earlier hours abated a tad. Spot gold rose $3.50 to start at $1243.80 the ounce. A small 12 cent gain was noted in silver, which opened at $18.27 per ounce this morning, following yesterday’s attempt at repairing its technical breakdown suffered late last week. So far there has been progress, but no dice.

Over on the Indian physical side of gold, whatever buying was planned for today remained but a plan. Buyers stayed home while the monsoon finally approached and watched their favourite metal touch 19,000 rupees per ten grams. The premium on gold bars slid region-wide in Asia overnight. No reports yet on the scrap metal faucets having been turned on again, but they cannot be far behind at these prices.

Platinum and palladium got off to a rather dull start in New York, the former gaining $1 and the latter losing an equal amount. Quotes on the bid side were $1514 and $430 respectively. Rhodium remained lower, quoted at $2450 following yesterday’s loss of $50 per ounce.

No significant action was manifest in crude oil (gaining 36 cents to $71.81), the US dollar (off 0.15 at 88.34) or the euro (stalled at 1.194) as the morning markets got underway. Stock index futures did point higher, but the pothole that the market hit on Monday is still being felt among traders.

That session’s unfolding looked very much like a bet on a near-certain double-dip occurring on at least one side of the Atlantic, if not both. Fed Chairman Bernanke said that a “W” economic event is unlikely, however we will have to wait until he and his team meet later this month before such odds are specified.

One thing that Mr. Bernanke did declare as likely was the prospect of an increase in the US interest rate environment. While the bets on same are clustered well into the first months of 2011, Mr. Bernanke noted that the US central bank’s “extended period” of a practically zero rates is predicated upon still high unemployment, low inflation and stable price expectations.

He then added that: “We have right now a very accommodative, very easy monetary policy. We can’t wait until unemployment is where we’d like it to be or inflation gets ‘out of control’ to tighten credit.”

In plain English, the read-between-the-lines Bernanke signal contained therein is that that the Fed may need to raise rates even with “unacceptable levels of unemployment.” Such a call has now repeatedly been made by K.C. Fed President Hoenig, and it argues for an increase in the Federal Funds rate target to 1 percent sooner than the spec traders see it (and carry-traders loathe to fathom), like within a few months.

Meanwhile, and perhaps too quietly (for the euro), the biggest part of a 750 billion euro safety net (Le Tarp?) was deployed under Europe. The continent’s finance ministers sealed a deal to bring a 440 billion euro fund to the markets. Such a facility would sell bonds and use proceeds to make loans to troubled PIIGS and/or PIIGlets.

In addition, Bloomberg reports, “the ministers authorized the creation, when any loans are made, of a ‘cash reserve to provide an additional cushion or cash buffer for the operation of the EFSF,’ according to the statement, which held out the prospect of more measures to improve creditworthiness.” Go tell Fitch’s and/or S&P and/or Moody’s. Better yet, tell the crowd that has pounced on debt instruments the even remotely contained issuers deemed as ‘radioactive.’

The Wall Street Journal reports that the global default rate among junk-rated debt issuers the past year continued to slide in May and remained below last year's levels, according to Moody's Investors Service. The figures have continued to fall as defaults, which peaked in early 2009, fall out of the 12-month figures, and defaults since then have occurred at a slower pace.

And so it goes in trading land. All kinds of bets on one side of the room, while the other side quietly sells or buys ahead of what turns into a stampede. What else is possibly new?

Happy Spectating. In this case, from above the clouds, on yet another airliner. Pass the peanuts, please.

Jon Nadler is a Senior Analyst at Kitco Metals Inc, North America.

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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