Gold, Silver, Metal Prices Commentary – October 7, 2010

Good Morning,

For a change,…fresh records were inked into many a book of records, and fresh profits were booked on long gold positions in many a fund book overnight.

The 1,365.70 spot offer figure that gold reached is now within about $20 of the ultimate target that some wave-based analysts have previously targeted for the yellow metal in this phase. A phase, that has now morphed into one where the explanations being provided for the no-longer ‘near’ but ‘fully’ vertical ascent in prices have ranged from the logical to the preposterous.

While no one really knows the precise point at which the tensile strength of the surface of a fast-expanding spherical object gives way, most will agree that deflating such an object can normally not be done in an orderly fashion following a pin-prick. Fresh warnings were issued as regards potential price corrections here by Dennis Gartman, Swedish bank SEB, US Trust, and Barclays Wealth Management.

Noted Harvard economist Kenneth Rogoff…noted that gold prices are "probably more than double their long-run inflation-adjusted levels. A rapid adjustment back to trend could be a very painful ride for investors merely looking for safety."

Nevertheless, gold opened with an $8.10 per ounce gain at $1,357.20 basis spot bid this morning, after having touched the aforementioned pinnacle overnight, and before it turned sharply lower during the 10 o’clock hour on…(the most plausible of to-be-tendered explanations) profit-taking. Silver shone just as brightly, adding 18 cents out of the starting gate, with a quote at $23.37 the ounce (also before it took a turn lower later in the session). Today’s (overconfident?) sign-o-the-times: Anglo Gold Ahhanti eliminated its hedge book. Like, totally, man.

Platinum gained $4 to reach the $1,715.00 mark (do we hear $1,750.00? going once…) while palladium added $10.00 to come to within $3 of the next round figure of $600.00 the ounce. Rhodium was strady at $2,210.00 after having shed $30 earlier. In the background, the US dollar was off by 0.36 on the index (at 77.04) and crude oil rose $0.44 to the $83.67 per barrel mark. Aussie and Canadian dollars were basically at parity with the greenback while the yen was hovering near the line-in-the-sand mark at 82 against it.

The apparently emergent ‘currency wars’ were the principal topic featured in several overnight statements made by various nations’ officials. Suddenly, currencies and where they might be headed are on everyone’s mind. The only thing that remains to yet be ascertained is whether the trends have been set into motion by outside forces (speculative funds) or by internally-designed policies. Give that one a year or two to be fully sorted out.

At any rate, US Treasury Secretary Geithner attempted to smooth rising tensions over with a warning about the "damaging dynamic" of the race to the bottom in currency values," while at the same time offering the prospect that the rising problem would be "much easier to solver if countries come together." Well, at least some of those countries will come together as the IMF’s meeting in Washington begins in a matter of hours.

It remains to be seen however, if they can walk away from the various round and/or square tables with some pledges to not totally upset the global currency apple cart. The greenback reached a decade-and-a-half low against the yen on Wednesday. As for China’s yuan, the so-fervently-wished-for appreciation by everyone else was quickly smothered once again by Premier Wen Jiabao last night.

The Chinese leader not-s-politely rebuked the EU and instructed that "it shouldn’t join the choir" (read: Mr. Geithner’s a capella) demanding a stronger Chinese currency. Then, he went one step further and, taking a page from any generic doomsday newsletter, he warned that:

"If the yuan isn’t stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil." Translation: "Scream all you want; we will go at this alone, according to our own plans and not yours."

For his part, Japanese Finance Vice-Minister Igarashi told reporters that "it is not our intention to engage in a currency devaluation race for the sake of the national interest." Mr. Igarashi’s remarks have prompted some currency analysts to opine that perhaps a shift in the strategies regarding ‘proper’ currency valuations and/or ’emergency’ interventions will be the subject of discussion in DC tomorrow. Why the putting on of the brakes at the precipice of ‘currency wars?’

Currency guru Axel Merk warns that the act of "devaluing a currency may lead to escalating international political strains, global criticism and intensification of protectionist pressures" When one currency is artificially weak, other countries may be put at a disadvantage, as other countries’ goods and services may be less competitive in the global market. Trade wars are good for no one: they create inefficiencies and slow down global growth. In a period of lackluster global growth, this is the last thing we need."

Mr. Merk adds that "recent references of a "race to the bottom" and worldwide "currency wars" should not be taken lightly — given that the global economic recovery remains on unsteady ground, the implications of another slowdown in growth could be disastrous."

Such fears may have contributed to the sense of urgency in calling for cooperation rather than going-at-it-alone contained in Mr. Geithner’s ( and Mr. Igarashi’s) remarks. For a change, the G-7 might underscore that they are about to back-track to the Plaza Accord environment — even as market perceptions point in the opposite direction.

More dissection of the current state of hot-and-bothered affairs in the gold market came from Seeking Alpha contributor Jason Schwarz. Mr. Schwarz first questioned a market in which a super-side spectrum of confused, contradictory, and illogical explanations are being offered to account for the recent (sixty day) gains in the yellow metal. Then, Mr. Schwarz elaborates further and correctly identifies the four groups responsible for what he (among others) labels as a golden bubble. Note the three-out-of-four dominance of the ‘usual suspects’ as follows:

• Group 1 (November 2007- April 2009): Hedge funds who were worried that the global financial system would crumble as a result of the mark-to-market banking regulatory requirements.
• Group 2 (October 2009-April 2010): Hedge funds who were worried that unprecedented stimulus would result in hyperinflation as global economies recovered.
• Group 3 (May 2010-July 2010): Hedge funds who were worried that the euro zone would collapse thereby causing currency chaos.
• Group 4 (August 2010- ???): Individual investors who are now buying gold for the first time because they want in on the action.

Mr. Schwarz concludes with the observation that "gold at $1400 is eerily similar to oil at $140. Remember all the credible firms extrapolating the speculative action into $200 oil forecasts? Those same bubble builders are now calling for $2000 gold." and that inside of twelve months his reversion to the mean scenario (involving $60 GLD) will materialize.

September retail sales better than expected, German industrial production rises more than anticipated, the Dow flirts with 11K (!), Bank of England puts additional stimulus ‘on hold’ while jobless claims drop 11,000 on the latest reporting week. Should these metrics matter? Not if the arm-wrestling manifest over previous days (the media has actually backed off of or forgot to call any more ‘records’) reignites after a brief dip. Place your bets.

PS — Here is one little bet that might pay off over the next year: currency wars do not ignite. Premise: who needs/wants a fresh crisis?

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler

Original article link: The Winds Of [FX] War Or Just Hot Air?