The midweek trading session in precious metals had something to offer to everyone, but most of all to the many platinum fans out there. Spot gold prices spent most of the morning oscillating between gains and losses and played second fiddle to a string of hot and/or cold news from the world or geopolitics, economics, and commodities. Topping the news scroll this morning was the ADP report on the US private sector’s addition of 201.000 jobs this month. Good, but not quite good enough, apparently. Analysts expected 217.000 positions to have been added to payrolls. The ‘missed’ number was later used as an excuse to explain why gold prices gained, as if the Fed was automatically going to extend QE2.5 based on the reading. More on why that might not be the case at all, way below.
Overall, however, the yellow metal appeared on course to chalk up its first gain in five days as the on-going military action in Libya and credit ratings downgrades for Greece and for Portugal trumped sliding crude oil prices and more hawkish talk coming from the Fed. This even as the head of one of Portugal’s banks said last night that he was not convinced that his country should accept an EU/IMF bailout. Black gold prices on the other hand, fell more than half a percent on news of rising US stockpiles (likely to their highest level since December). The US dollar marked time at and around the 76 mark on the index today.
Bullion traded in a fairly broad channel that extended from $1,411 on the lower end of the price scale to $1,425.00 on the upper reaches of same. Larger support/resistance remains in place from $1,400.00 to $1,450.00 and no decisive break is expected on either end of that value spectrum as more impactful news (than currently being supplied by the news flows) would be needed in order to set heavier trading action into motion.
Regardless of certain views by traders that perhaps a quintuple top attempt has been made and that it failed last week, and despite the apparent drying up of fresh inflows of speculative funds into the market, the gold bull market could be facing a problem of a different nature at this juncture. Thus, while additional pushes towards higher ground (the $1480-$1530 zone keeps being mentioned, as is the more remote possibility of a $1600 ‘print’ before year-end) may materialize, the gold bull market may be facing a temporary but more prolonged (on the order of a couple of years perhaps) period of weakness.
“Even within that secular increase in investment demand, you can have a cyclical pause, where investors pull away from the market for a time. And our view right now about gold is that we may be approaching a cyclical peak in a secular bull market.” Were the terms with which our good friend Jeffery Christian described the potential turn that might develop in the market perhaps as early as the latter part of this year. Mr. Christian was speaking at the launch of the CPM Group’s Annual Gold Yearbook 2011, an all-encompassing publication that dissects the ins and outs (literally) of the gold market’s tonnage flows. You can secure a copy of that most valuable book for yourself, for about 10% of the cost of an ounce of gold. Consider it money well-spent.
Also on the gold market front, we have heard from the other statistical research house in the business – GFMS of London. Their analyst and Managing Director, Paul Burton, spoke at a conference in Perth, West Australia today and indicated that not only did gold production reach a new all-time high in 2010 (at 2,652 tonnes) but that it is expected to do more of the same in 2011. Mr. Burton acknowledged that China has retained the crown among the globe’s gold producers, that Australian gold output rose by 16% last year, and that sustaining current gold prices (or trying to go for $1,600 as a possible target) is very much in the hands of the investment community at this juncture (in fact, almost entirely in the hands of said community).
Silver prices picked up in value on Wednesday and were last seen trading near $37.48 per ounce (up 35 cents) on the back of more speculative interest on the part of hedge funds. A Bloomberg webinar in which this author participated this morning had panelists in unanimity agree that the speculation in silver is red-hot and that potential outsized pullbacks could manifest themselves when least expected. Silver retains the crown in the volatility and/or riskiness race when compared to gold, other precious metals, and a host of other assets of the conventional type (think paper).
Platinum and palladium gained nicely on Wednesday despite the recent fall in the share price of its miners – a decline precipitated by the ultimatum that was issued by the government of Zimbabwe late last week, giving mining firms 45 days in which they need to come up with a plan on how to transfer a majority ownership stake to local black investors. The ownership transfer issue could be regarded as a positive for platinum prices if in fact the process suffers from glitches, results in work stoppages, or is perceived in any way to impede the output of the underlying (and still vital to the world) metal.
Meanwhile, in Japan, the production of more than 230 automobile parts is said to be unable to resume for up to one full month, while Honda has cancelled all dealer orders for May delivery for the autos it builds in Japan. No details were available as to the parts rationing by Toyota, Subaru, and others and whether or not they include platinum-group metals-containing catalytic converters or not.
Well, one could almost see this one coming. Following several days of hawkish Fed talkers taking to the microphones, we have now also heard from the almost-extinct doves who work for the central bank. Could there be only two such birds left? Here goes today’s (ample) harvest of Fed-talk:
Boston Fed President Rosengren and his Chicago counterpart Mr. Evans both affirmed that QE2 ought to remain in place and that perhaps it should not be truncated in size or in terms of expiration date. Such talk was quickly counteracted by Kansas City Fed President Thomas Hoenig (a non-voting FOMC member) who urged that the Fed should being the exit procedures from its current monetary policy, like…yesterday. Mr. Hoenig would like to see the Fed shrink its balance sheet and lift the fed funds rate to 1% -and soon.
Mr. Hoenig went one step further and made a direct linkage between what we see on various commodity price boards at this very moment and the Fed’s monetary policy (up to this point). He argued that “the longer policy remains as it is, the greater the likelihood these [inflationary] pressures will build and ultimately undermine world growth. He also alluded to resources (read: easy money) being misallocated (read: used to play in various markets) and creating problems (read: bubbles).
For his part, Atlanta Fed President Dennis Lockhart said today that rising commodity prices –while eliciting “understandable” fears- are not here to stay, and that he (for one) would be ready to hit the “tighten” button if overall price stability were at risk of falling over. While the statement does lift a page from his boss’ Mr. Bernanke’s oft-used script, it is a de facto new one for Mr. Lockhart, and it reinforces the perception that almost everyone out there on a mission from the Fed is preparing the markets for the inevitable.
Various schools of (not very deep) thought have blamed the Fed for intentionally undermining the US dollar while at the same time chanting the praises of the price miracles that such a putative purposeful sabotage job gifted to gold and silver. Well, Bank of America, for one, begs to differ. The firm points to the weak link between import prices and the US dollar as direct, prima facie, evidence that the Fed had no incentive to nuke the greenback.
The weak linkage implies that the Fed will not actively seek a drop in the US dollar to boost inflation or to make its debts easier to repay, or to make US goods more appealing for export. The dollar fell about 5.8% over the past year but import prices (ex. autos) showed little or no change. Such exculpation for the Fed and its policies may result in muted criticism of the US central bank at the upcoming G-20 meeting. With the echoes of the Japanese quake and the EU situation still reverberating, the group will likely have much bigger items to fry at the summit table.
Something else that has been floated out there by the aforementioned schools of doomsday thought is the possibility of an abandonment of the US dollar by the Chinese central bank. Even while promoting the merits of a reform of the international monetary system, the latest proposal from a Chinese academician (Mr. Xu Hongcai) admits that the world is basically in a “dollar trap” from which it is all but impossible to escape without losing a foot or something else more vital.
Any attempt (by the PBOC or some other central bank – okay, Iran aside) would lead to dollar weakness, which, in turn, would do untold damage to the value of the remaining reserves of said country (more damage than the possible benefit of diversification out of the greenback might bring, actually). China’s catch-22 (or catch 2.85 trillion to be precise) is more problematic than any other country’s predicament, Two-thirds of the near $3 trillion China reserve kitty is in US dollars. Try to divest, say, half a trillion (a QE2-sized chunk). Watch your $1.38 trillion lose…how much exactly? Don’t even go there.
Until tomorrow, hold on to those dollars (along, of course, with some gold).
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America