Gold improves on not 'so bad' news

DAILY KITCOMMENTARY FROM KITCO METALS INC. FOR August 27, 2010

Most market remained at a virtual standstill overnight as participants showed no interest in taking on large bets ahead of what promised to be an eventful session today. Revised U.S. GDP data and speeches by Ben Bernanke and Jean-Claude Trichet remained at the centre of global investor focus during the wee hours as well as at the start of this morning’s action in New York.

Everyone wants some clues about the state of the U.S. economy and everyone wants to hear what central bankers might have to say about the global one’s condition as well. The last month of the third trimester dawns on Tuesday and throngs of participants will begin returning to their posts over the next 10 days or so, hoping to outguess and outperform in the few remaining months of 2010.

After an overnight period during which the trading range was confined to less than $7, gold prices opened steady-to-higher in New York. Gold’s initial $1.80 gain had the yellow metal trading at $1,238.10 on the bid side, while silver drew 10¢ closer to the label of ‘not-so-poor-man’s-gold’ with fresh advance to just above the $19 per ounce mark.

Platinum and palladium opened essentially flat this morning, with a one-dollar advance in palladium (to $497) and no gain or drop in platinum; quoted at $1,529 the ounce. Rhodium’s last price check indicated a $10 rise from yesterday’s $2,070 bid quote. All quiet on the automotive front (save for fresh Toyota recalls) as regards noble metals, but not so quiet on the South Africa labor front where National Union of Mineworkers members stopped working at Richards Bay Minerals today. To be continued.

Well, U.S. Q2 GDP was indeed revised lower. A lot lower. To but 1.6% on the economic speedometer, from the 3.7% annualized rate that was recorded in Q1. Not quite as low as some polled economists had expected (figures from 0.9 to 1.3% had been mentioned), but low, nevertheless. Much of the downward revision was attributed to a staggering surge in U.S. imports (up 32.4%, the largest such gain in a quarter-century).

There were however some bright spots in the Commerce Department’s report as well. Final sales rose by 4.3% while business fixed investment gained $17.6% on the quarter. Some observers have concluded that the strong import figures underscore a still present species on the economic scene; the American consumer.

Gold prices initially dropped following the release of the U.S. GDP data and the U.S. dollar gained in the wake of the figures. However, some twenty minutes after the news was made public, the precious metals complex resumed its ascent as funds once again threw money at it –albeit with a bit of caution, to be sure. Gold touched the $1,242.00 price mark, silver doubled its initial gains, and palladium was ahead by $4 the ounce.

The initial hesitation and divergent behavior in the U.S. currency, oil, base metals and gold revealed some uncertainties in how to interpret the data among players. Later on, the emerging consensus among investors appeared to be that the US GDP data was a case of ‘less worser’ in the making. At least that was what the Dow clawing back to above the 10K mark was trying to intimate…maybe.

In essence, the likelihood of surpassing of the putative resistance level at around $1, 247.00 was all but baked into the golden cake this morning – at least according to some in the trade who saw the GDP figure as the obvious catalyst for at least such an advance, and probably more.

We did not get our cake, thus far today, and the jury is out as to whether this implies a parallel bout of profit-taking by other spec players, a pre-weekend book-squaring jamboree, or the ‘I-will-still-wait-and-see-what the Fed Chief has to say’ attitude taking over.

Pre-Fed Chief-like words were already flowing in the pipeline but went largely unnoticed in the markets. St. Louis Fed President Bullard opined that while the US economy is clearly not rolling on a firm patch at the moment, he does not see a fall-off into a double-dip as very likely either. “Reasonable” growth is what Mr. Bullard anticipates for the American economy in the year’s second half.

Of course, don’t tell that to PIMCO’s CEO, Mr. El-Erian. He sees ‘alarming’ signs of momentum loss in the world’s largest economy. The $14.5 trillion U.S. economic powerhouse is losing power-and fast-according to Mr. El-Erian. Solutions to this problem? Well, they are not to be found in more stimulus effort, opines the PIMCO executive. How about “tax reform, housing-finance reform, infrastructure investment, support for education, job retraining, removal of barriers to interstate competition and stronger social safety nets” proposes he, apparently lifting an entire passage from Mr. Obama’s campaign playbook of not so long ago.

Let’s see to what degree Mr. Bernanke or Mr. Trichet come off as ‘alarmed’ in their upcoming speeches today. It could well be that the brothers-in-arms that the two men have become following their combat against the worst worldwide slump since the ‘other’ global combat ended in 1945, might be parting ways. At least as regards their take on what’s next and how to navigate the narrows we are all in. At the end of the day, the two men are still fighting the D–day (make that the “D” word) battle and are trying to avoid a Japanese-style ‘capitulation.’

Previous of possible coming attractions were offered early this month, when the former indicated that the Fed will offer a sugar-free version of QE with a Treasury purchase plan and a new/improved $2.05 trillion balance sheet, while the latter feels that heading for the ‘exit’ door is up on the turntable, cued and ready to play. Perhaps in Q1 of 2011 if all goes well (and, apparently, it is going well if EU economic indicators are any indication). Guess we will have to wait what they really have to say

Not much GDP-type of guessing to be done over in the UK this morning; the actual figure is now out. The British economic engine also appeared to be idling along, firing on as many cylinders as allowed for a growth rate of 1.2% (starting to sound familiar). The number however – in Britain’s case-was actually better than had been expected. In fact, that pace of economic advance is the best quarter-on-quarter gain for the country’s GDP since 2001. Jolly good.

Guessing when rather than if, on the other hand, remains the name of the game in Japan. The ‘game’ is of course related to figuring out precisely when words such as the latest ones from PM Kan –who indicated that he is ready to take ‘decisive’ action on the yen in currency markets- turn into…decisive action. For the past week now, we have only heard jawboning from Japanese officials. Hint: it is not doing the trick, gentlemen. Try something over the weekend, shall we?

We shall try something else over the weekend; ‘intervention’ (probably not successful) in the fishing grounds of the waters off Victoria BC.

Jon Nadler

Senior Analyst, Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

Blog: http://www.kitco.com/ind/index.html#nadler

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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