Following Friday’s joblessness number-induced melt-up, the precious metals complex took a small breather early this morning. The rebound in the U.S. dollar (up 0.70 on the index, and back to 79.90) that came despite some “accommodative” remarks made over the weekend by Fed boss Bernanke (see below) was the main catalyst for keeping prices (all but silver, that is) from making further gains in the first hour of Monday trading.
The dollar’s advance, once again, came at the expense of the euro, which, albeit trading a $1.32 – but still down 1.1% against the US currency – is seen as quite vulnerable going into 2011, given the possibility that Spain and/or Italy might get into a sufficient amount of fiscal trouble to give the short-sellers of the common currency a fresh lease on life for the duration of next year, at least. EU finance ministers (and the IMF) will meet today to discuss the “why & how” of boosting the €750 billion safety net facility available to such countries in the event of need, and how such a larger fund might avert the spread of contagion in the eurozone.
Gold spot prices opened at $1,414.30 per ounce in New York, showing a 20-cent loss on the bid-side as some $12 worth of physical buying was mitigated by a corresponding decline in value on account of the rising U.S. dollar (see the Kitco Gold Index). Spot silver on the other hand, surged 37 cents to open at $29.75 as more fund money was in sight, banking on it to outperform; this, after the metal came up four cents short of the round $30 figure overnight.
Platinum fell $4 on the open, showing a quote at $1,721.00 per ounce, while palladium eased as well, dropping $7 to the $760.00 level after quite a run last week. Rhodium remained steady at $2,280.00 per troy ounce. Crude oil rose marginally, adding 62 cents to climb to the $79.77 per barrel level. The Dow opened with minor losses (off 25 points) at the 11,357 level.
Base metals traded a tad lower, caught between the prospects of any potential further Fed easing and the possibility of China hiking interest rates prior to the end of this year. For now, these markets are more likely to draw energy from the implications of last Friday’s jobs situation and the perceived Fed response to same. However, one cannot discount the possible boost the greenback might still enjoy if the news out of Europe reveals further difficulties for the euro.
Although Friday’s increase in the general unemployment level was a probability that had been hinted at repeatedly by U.S. officials since around August, the shock value (markets-wise) it manifested was sufficiently serious to mobilize the Fed’s (and the White House’s) PR machine and take to the public airwaves.
Perhaps this is a consequence of the recent promises that the Fed will commence a more frequent and more detailed public communications campaign on its policies, or maybe just an attempt to put Friday’s numbers into context. Whatever the case, in an appearance (taped three days prior to Friday’s Labor Department release) on CBS Corp.’s “60 Minutes” on Sunday, Fed Chairman Bernanke had some pretty concrete things to say about the U.S. economic situation. Mr. Bernanke painted a picture of an economy that is but one tick away from not being “self-sustaining” and thus not creating the number of jobs that are needed for a gradual reduction in the unemployment level towards the goal of “normal” unemployment levels nearer to six percent.
President Obama will speak in North Carolina later today and is expected to tender a compromise by which the Bush-era tax cuts will be temporarily extended for all income brackets but only if benefits for unemployment are also given an extension. The President is also likely to call for fresh investment in education and innovation, as a catalyst for further jobs creation.
On Saturday, Mr. Obama expressed his confidence that a recently concluded free-trade deal with South Korea will support “at least 70,000 American jobs.” Whatever it takes, just get jobs going – that seems to be the message coming from certain important buildings in DC. For example, the Fed Chairman (in his “60 Minutes” discussion) did not exclude the possibility that the U.S. central bank might have to either resort to bond purchases beyond the recently announced $600 billion or to using “other measures” available to it in an effort to get jobs creation on a reliable growth track.
That said, Mr. Bernanke vehemently defended his team’s recent policies by alluding to the dire scenario that would have resulted, had no stimulus measures been undertaken. He also threw a bucket of cold water in the direction of the Sarah Palin-flavored allegations that money is being “created out of thin air” and that the consequences of all of this accommodation imply inevitable hyperinflation.
“We’ve been very, very clear that we will not allow inflation to rise above 2 percent. We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. That time is not now.”
Mr. Bernanke also tried to convey to the “helicopter Ben” crowd that the Fed’s purchases of Treasury securities shouldn’t be equated with “naked” printing of endless supplies of dollars. “The amount of currency in circulation is not changing,” he said. “The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.”
The same aversion to inflation getting out of hand (or just beyond targeted levels) is also evident in China’s central bank communications of late. The new language adopted by Beijing authorities last week has now given speculators less to…speculate about, at least on certain fronts. See today’s Hang Seng Index, which fell on just such apprehensions, dragged down by developers and banks.
Chinese interest rate hikes are now not a matter of “if” but of “when” and “how much” and price controls on certain key commodities have already made an appearance. MarketWatch’s Craig Stephen warns that, this time, China means (anti-inflation) “business.” With that, come certain risks that the [sped] “trade” ought to ponder:
“For economies and assets that have benefited from China’s growth and liquidity, Beijing’s next move will need to be watched closely to see if some form of “soft landing” can be managed for what is now the world’s second-largest economy. CLSA notes, for example, that China’s inflation issue presents a tactical risk to the Aussie commodity trade. The Australian mining sector and dollar have been big beneficiaries of China’s growth.
They are not alone as a whole host of commodities from steel, iron ore to basic food stuffs have risen on Chinese demand. It also appears that even gold should be included in this list. Last week China disclosed for the first time its gold imports grew five-fold this year to more than 209 tonnes in the first 10 months of this year. Perhaps the trade for next year is to find assets that China has not yet been buying and will not be selling.”
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America