The opening gains in precious metals this morning brought the achievement of previously estimated price targets near $1,475.00 into the realm of reality. Spot gold dealings opened with a $13.60 per ounce gain in New York and a bid-side quote at $1,472.00 amid hectic activity. Silver added 63 cents to open at $40.27 the ounce. Massive gains in platinum (up $33 to $1,813.00) and palladium (rising $24 to $798.00) were also manifest and cited “economic optimism” as the principal driver of such value additions.
At least as far as the noble metals’ group is concerned, there was concrete cause for optimism; markets learned today that Japanese automakers plan to resume car production at all domestic factories on Monday – albeit at 50% of their former output levels. At least, there is some certainty as to that situation and the PGM niche directly benefited from the announcement.
However, there is also some uncertainty feeding itself into the platinum-group metals’ market; namely, stories of power supply disruptions courtesy of South Africa’s Eskom utility have surfaced once again and contributed to the metals being bid higher this morning as well. Curiously, little or no mention is being made of the potential impact of $111+ crude oil (or $124 in the case of Brent crude) on the very economies about which the commodities sector speculative crowd appears to be so “optimistic” about.
Also curiously, completely opposite excuses were on offer for the aforementioned gains in gold as one London-based trader noted that “US growth is also being watched, and any signs of weakness should help gold higher.” In so many words, any excuse is equally valid at this time. In fact, it is a time to just cast aside explanations and watch the momentum unfold.
One enigmatic morning market digest message from a New York trading desk we respect described gold’s price as now having perhaps “arrived” to a level that “includes most of the world’s ills.” One can read that finding in many different ways, including the “fully-priced” version of gold to be sure. Others were not so sure what (aside from the dollar) drove metals to this point, but left their explanations concentrated on the influence of the same players who presented the rest of us with crude oil at $111.50 (the Gaddafi “excuse” has outlived its “half-life” by a long shot now), corn at a 33-month high, cotton at more than $2.10 a pound (!), and silver above the $40 mark.
Said players were, in turn, said to be simply “availing” themselves of the opportunity to turn a buck based on the “ample liquidity” present in the system and were thus being afforded the luxury of pushing raw materials higher “irrespective of fundamentals.” Most explanatory fingers still appeared to be pointed at the US dollar. Transitory concerns brought about by yesterday’s tremor in Japan gave way to dollar-focused apprehensions as a government shutdown looms, even though the event is not essentially dollar-negative.
What does appear as dollar-negative for the moment however, is best explained by our good friend Matt Whitaker, over at the Wall Street Journal, when he wrote this morning that “despite the worries about the potential for problematic producer and consumer price increases, monetary policy around the globe remains relatively loose. This accommodative policy has been a boon to gold and silver prices because the low interest rates make it more attractive for participants to move money from other investments into the non-interest-bearing metals.” There’s your “ample liquidity” and there’s your “boon” – or is it: BOOM?
“The loose money policies, as governments have tried to boost their economies, have also sparked fears of inflation. A Federal Reserve official said Friday that now is not time to change the course on monetary policy. "The future permits a degree of patience as regards monetary policy," Federal Reserve Bank of Atlanta President Dennis Lockhart said. Flagging the "halting and fragile quality" of the economy as it recovers, the official said "the process of restoration of full economic strength with higher employment continues to require support."
The ECB rate hike also proved to play a passing role on traders’ minds even as a fresh Bloomberg survey of economists found that most expect the central bank to once again hike rates in July as well as in October, and bring them to 1.5% and eventually 1.75% this year, with the trend stretching into 2012, by the end of which we might see them at 2.75%.
This upcoming series of ECB actions has been labeled as a “hefty rate increase cycle” by market watchers. The onus is now on the Fed to try to keep up. Commodity market players are clearly grinning in Messrs. Trichet & Bernanke’s faces at the present time and continue to fan the very price spikes which Mr. Trichet’s first salvo was aimed at toppling.
Fears that the US government might be partially or fully shut down in coming hours sent the US dollar reeling towards fresh lows against the euro (which traded as high as $1.442 against it) and that drop fueled additional massive buying of commodities as the final trading session of the week got underway. A cessation of government activities might negatively impact US GDP by 0.02 percent, even if it turns out to be short-lived.
While few argue that the shutdown that might result from the discord among America’s political parties is a “positive” in terms of public perception or in terms of some of the services that might be impacted by it, the apprehensions at hand also appear to ignore the fact that the last time the US experienced such a phenomenon, the result was the production of a balanced budget.
While the posturing offered today by the Republican and Tea Party membership in the US has led to hard-money flavored talk about dangers of US defaults and some kind of imminent dollar collapse, the reality is that bringing the national deficit under control and into balance is generally best accomplished by stopping further additions to it.
It is now all down to bickering about $60 billion worth of cuts to be, or not to be made, but, truthfully, neither party has come up with reductions in spending that are as serious as had originally been proposed by them. Historically speaking, forcing the last shutdown in late 1995 proved to be a huge strategic error for the Gingrich-led faction and it basically guaranteed the reelection of then President Clinton. Everyone is now waiting to see how things might turn out this time around.
Keep the countdown clock handy.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America