Gold speculators get back on the horse

The broader trading range remains unaltered, and extends from $1,400 to $1,450 per ounce. The US dollar saw only marginal declines as speculators appeared to have already factored in the potential outcome of the Thursday meeting of the ECB; i.e. that central bank’s first interest rate hike since the wild days of 2008. “Buy the rumor – sell the fact” may not yet have materialized in the euro and much still depends on the Fed’s posturing following what is widely anticipated as being a fait-accompli as regards the ECB’s hike.

Platinum and palladium appeared to totally shrug off the Japanese automobile supply disruption and roared ahead on the back of equally lavish speculative attention being paid to them as was being manifested in black and yellow gold this morning. The former gained $24 to start the day’s New York session at $1,787.00 per ounce, while the latter rose $12 to open at $785.00 the ounce. No change was reported in rhodium – its bid-side quote remained static at $2,330.00 per troy ounce. We offered the most recent analysis of the noble metals’ group markets in last week’s closing commentary, courtesy of Standard Bank (SA).

The TIPS market shows that inflationary expectations have indeed risen from their recent (August) low of 1.5%. The yields currently manifest in the ten-year instrument of that type are reflecting an average expected inflation rate of 2.53% for its duration. Meanwhile, the smoke signals coming from the Fed are not containing any images of a possible QE2.5 or QE3. Moreover, there is still distinct possibility that the current QE2 program might come in some $100 billion short of its original $600 billion initial scope. Recent data from the US Labor Department has tallied a decline in US joblessness from the 10.1% peak of 2009 to the current 8.8% (recorded last week).

The investment crowd in the Treasury market is evidently being swayed by the recent string of hawkish Fed Presidents’ comments on the prospects for US interest rates. Following nine consecutive days of losses, the US Treasurys market appeared to convincingly reflect the feeling among US government bondholders that QE is all but finished and that the Fed will indeed make for the “EXIT” door, as it has to. The only lingering questions regarding such a policy shift are related as to whether it will be gradual or swift in nature and in execution. Many in the commodities’ niche are watching with bated breath.

As everyone who reads these columns obviously knows by now, the record low level of interest rates that the Fed created in the wake of the opening of its liquidity spigots has drawn massive amounts of investment dollars into commodities, into and risk assets in general. An unwinding in the Fed’s monetary policy of the past circa two years could bring about a similar event in hitherto (literally) “over-inflated” assets. Societe Generale’s Asia equity strategist, Todd Martin, said today that “once the Fed ends or reverses its policy bias, then the inflation trade — where investors actively invest in commodities and underlying stocks amid expectations that high global liquidity levels will boost demand and prices — faces the risk of potential unwinding.”

Fed communications are now slated to come our way more frequently and more detail-laden than ever before. The US central bank has signed up for press conferences (the first one will be held late this month) via which it will release inflation, unemployment, and GDP projections without the customary three week delay we have been used to. This type of approach and transparency stands in stark contrast to those who have viewed the Fed as utterly “opaque.” In part, that kind of perception may have been the result of the Fed’s own “strategy.” Certain of its members believed that announcements of policy that took markets by surprise were the most effective ones, as opposed to a priori signals that result in the markets “seeing” the Fed coming with policy x or y and moving ahead of it.

Until tomorrow, keeping one step ahead,

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

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

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