Gold and silver falling as dollar rockets

In the Lead: “Sell Everything”

Johnson Matthey’s Platinum Today reports that South African PGM production experienced a surge in recent months. A 23.4% gain in the output of platinum-group metals was seen as leading that country’s overall mine production of metals, which recorded a 5.6% increase in the period ending in April. Analysts at Standard Bank (SA) remain of the opinion that their price targets for platinum ($1,900) and palladium ($950) can be achieved prior to the end of this year based on projected supply-demand fundamentals.

Speaking of impact factors, the one that appears to be shaping up to matter most over the coming months, is the emergent pattern of the flow of funds in Treasuries. As we near the end of QE2, the fact that the program has been fairly effective in diverting monies out of Treasury holdings and into commodities and equities has to be pondered with some caution to be sure. This, as the flow of funds into Treasuries has eroded quite noticeably since the initiation of QE2 in November.

One school of thought believes that the end of QE2 will spell a mad scramble for reallocating funds by individual and institutional investors. That same school feels that the first noticeable “post QE2 trade” will be focused on selling commodities and Treasurys and buying solid bonds and quality equities. Not that such was the case in the equities markets, at least as of this morning however. The Dow was headed for its longest (in trading week terms) decline since 2002, posting a 112-point drop that brought it down to very near the 12,000 mark.

Some of the Dow’s losses were attributed to the Fed digging in on its “No Mas Dinero” stance exhibited by Mr. Bernanke earlier this week. Others saw a rising level of disappointment with the US economic recovery’s strength. The downbeat mood was pervasive as all 30 components of the Dow lost ground in the sell-off this morning.

A day of “risk-off,” this is shaping up to be. Flocking to the shelter of the US dollar appeared logical (it gained 0.52 on the index mid-morning), but less logical was the decline in gold – which is supposed to normally offer safe harbour from a declining stock market. Oh well, the “buy everything” syndrome so heavily on display since the advent of QE1 and QE2 shows that it can also morph into “sell everything” on occasion.

Some of the apprehensions related to the US economy’s current trials and tribulations were reflected in one Fed dove’s speech this morning. Marketwatch reported that William Dudley, the president of the New York Fed, said on Friday that “recent disappointing data suggest that downside risks to the outlook have increased. The renewed drop in home prices could dampen consumer spending, prompting businesses to limit hiring. Aggressive government spending cuts could also slow growth in the short- and medium-term. I still believe that [these issues] remain risks rather than the most likely outcomes."

Mr. Dudley also told his audience in Brooklyn, NY that his forecast is for a “moderate recovery to continue [in the second half of 2011] but at a pace that is painfully slow for unemployed workers.” He concluded by saying that he expects “headline inflation to moderate, provided that commodity prices stop rising rapidly.” That proviso remains the $64K (with many zeroes added to it) question of this summer. When, and how (we already know why) might certain commodity prices stop rising rapidly, or perhaps at all?

We are now headed down to The Alamo; or, nearby, in any event, to…remember the busy goings-on at the 35th Annual International Precious Metals Institute Conference. Some 500 delegates from 22 countries will be making the trek to San Antonio to hear presentations on a wide range of topics of interest. Economic analysis, metals technology and processing, conflict gold, impending regulation in precious metals, market overviews, and a whole spectrum of other important issues will be discussed. Kitco News will cover the event and we hope to bring you fascinating video clips with delegates in attendance.

Until Monday,

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

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

About the Author
Jon Nadler

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

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