Gold, Silver, Metal Prices: Commentary – 11/13/2009

Friday the 13th did not prove unlucky, at least as far as the “Old World” is concerned. The NY Times reported this morning that: “The 16-country euro zone has officially joined the United States and Japan out of recession, after figures showed its economy grew by 0.4 percent in the third quarter from the previous three-month period. However, the rise reported by the EU’s statistics office Eurostat was not as large as the 0.6 percent most economists had been predicting, as growth in major economies fell short of forecasts.”

The euro was lifted by the news and gained ground against the US dollar (rising to 1.492 from 1.486 earlier this morning) ahead of statistical news releases concerning the US economy. Whatever risk aversion was present in the markets early this morning, dissipated later on. A one-two punch coming from the widest trade gap in a decade and from once again swooning consumer sentiment set markets off in a different than expected direction by mid-morning. To wit, the Dow gained (?!)nearly 100 points after the poor data and metals rose. Carry on, so to speak…

Gold’s initial small gains turned into larger ones by noontime in NY. The carry trade resumed and quickly lifted oil (which had been down on ample inventories and fading demand) back towards $77 per barrel, copper and zinc, and of course precious metals. At last check gold was ahead by $13 per ounce, quoted at $1115.30 against a 0.50 drop on the dollar index (shown at 75.19).

Silver gained 16 cents per ounce, rising to $17.34 after a bit of a wobbly start this morning. According to Forbes, some analysts warn the fundamentals for silver remain a cause for continued concern. “Silver is really struggling to keep up with gold at the moment because this is a gold story, it is not a silver story,” RBS analyst Stephen Briggs said. “Silver is only a geared play on gold, its own fundamentals are not great. If it weren’t for the ETF buying the market is in surplus.”

Platinum roared ahead after an equally uncertain start, adding $30 at last check, to reach $1381.00 per ounce. Palladium was ahead by $6 during the midday hour, quoted at $353 per ounce. Perceptions that users of gold who feel the prices are just too lofty for their purposes are flirting with the idea of palladium substitution gave fresh energy to palladium. The palladium market remains in a surplus, but speculators will be…speculators.

On the other hand, news that Implats (the world’s second largest platinum producer) forecast that its output of the metal would fall by 100,000 ounces this financial year to 850,000 ounces sent the noble metal soaring this morning. South Africa produces four fifths of the world’s platinum and Implats alone supplies 25 percent of the precious metal, mainly from its South African operations and mines in Zimbabwe. We do not yet have a handle on what the implications might be for rhodium, but they cannot be very positive, production-wise.

Yesterday drop, the first in nine sessions, brought gold prices to very near the $1100 mark and took place in a within a fairly broad $22 range. GoldEssential.com analyst Matthias Detemmerie "added that prices are still encountering the gravitational forces of the some 12,000 call options at $1,100 an ounce that are rolling off in ten days time now. He believed prices were likely to trade between the $1,050 and $1,100 an ounce as expiration neared but added that gold could move more freely thereafter, as some weight will be lifted from the market’s shoulders.”

However, some analysts said this morning that the recent rally could be running out of steam, as investors turn reluctant to build up new long positions at these high prices. “No one really wants to get longer at these levels. There’s some profit taking in there and some people are calling an interim top and trying to short the market,” said Tom Kendall, precious metals strategist at Mitsubishi. Another case where fundamentals are playing the understudy role, while the carry-traders are basking in the limelight.

The party is in the wee hours of the morning, and despite the probable ‘last call’ at the open zero-cost dollar bar, the revelers continue the high-stakes poker game. Why not? Surveyed opinion (Bloomberg) is fairly unanimous: the Fed will likely only raise rates, come next September. Have another one, for the road, mate. Careful you do not spill…and drive carefully, too.

Bloomberg reports on the bubbliness in the world and reveals that more an more academic types are becoming aligned with the recent alarm bells being rung by NYU’s Nouriel Roubini. You have been warned:

“Asian central banks should tighten policy before their U.S. and European counterparts to counter "dangerous asset bubbles," said Barry Eichengreen, professor of economics at the University of California, Berkeley. "Asia’s bubbles now pose a serious risk to financial stability," said Eichengreen in an article published today on Eurointelligence.com, an economic commentary Web site. This is "a task for emerging market central banks, not for the Fed or the European Central Bank."

The comments add to the debate about how policy makers should react to surging stock and property markets in Asia after central banks around the world cut interest rates to record lows to fight the financial crisis. Hong Kong’s Chief Executive Donald Tsang said today the Fed’s policy of keeping rates near zero has him "scared," while World Bank President Robert Zoellick yesterday said it’s up to Asian officials to act.

"It’s not when to exit, but who," Eichengreen wrote in the article. "Dangerous asset bubbles are developing in emerging Asia and in China in particular. Property prices are booming, especially in the big cities. All this is alarmingly reminiscent of the U.S. in 2006." China’s benchmark stock index has risen 75 percent this year and the World Bank said last week that its policy makers must avert stock and property-market bubbles after lending swelled to a record $1.27 trillion this year.

The International Monetary Fund argued in a report to the Group of 20 last week that record-low U.S. rates are fueling global "carry trades," allowing investors to borrow cheaply in dollars before plowing the money into riskier assets. Tsang said today he’s concerned about a wave of speculative capital that may cause the next global crisis.

"I’m scared and leaders should look out," he said. "We have a U.S. dollar carry trade at the moment." Eichengreen argues that Asian central banks have more scope to tighten policy because their economies are growing faster than those in the U.S. and Europe. "Nothing prevents emerging Asian central banks from acting," Eichengreen said. "Their economies are growing robustly. They are the ones with bubble trouble. They can and should tighten now."

For the moment, the speculative focus remains dollar-centric (what else) and is tracking the fallout from this morning’s economic stats (Europe’s as well as those from the US) but attention is slowly shifting towards pre-weekend book-squaring and speeches to be delivered by various Fed officials over coming days. The most anticipated one, of course, an address by Mr. Bernanke on Monday. Equally important on the dollar-spec radar will be the kick-off of the “Asia Tour” by President Obama. The US leader is expected to reaffirm the leadership role of his country in the Asia-Pacific region.

Some observers have pointed out that China has visibly tried to exert increasing influence in the region, taking advantage of the lack of attention by the US during the past year of transition from one administration to the other, and by the fact that US authorities were totally sidetracked by the financial crisis. “China is "stealing" jobs from developing countries and hindering a global recovery by keeping the yuan low, Nobel laureate Paul Krugman says. "China’s bad behavior is posing a growing threat to the rest of the world economy," Krugman, the Princeton University professor who won the Nobel prize for economics last year, wrote in an Oct. 22 New York Times article.

Harvard University Professor Martin Feldstein, the Reagan administration adviser who won the 1977 John Bates Clark medal for top economist under 40, said "China’s policy of expanding domestic spending while depressing the renminbi will lead to its economy overheating," in a Financial Times article last month.” No doubt, the meetings will not ignore coverage of the US dollar “situation” (one that is making life miserable for Asian exporters, and is creating asset bubbles in the region) and how to try to tackle it. Central bank efforts by some have thus far failed to stem the tide carry trade tide.

Meanwhile, billionaire South African Johann Rupert advises the well-to-do of the world to heavily stock up on some of the stuff his empire of luxury goods provides, in the event they are worried about a Weimar-comes-to-Washington scenario. Buy ultra-luxury baubles as a hedge against hyperinflation. His firm, Richemont, is the second-largest luxury goods maker in the world, trailing only LVMH Moet Hennessy Louis Vuitton SA. But, not so fast, says he -at the same time sending up a warning flare:

Back in May, – according to Bloomberg- “Mr. Rupert predicted the crisis would lead to inflation as governments print money to reduce debt burdens. Today, he said the Federal Reserve may surprise investors by raising interest rates, boosting the dollar, while the U.S. economic system’s resilience may surprise European observers. "The Fed is not going to put an orange light between the green light and the red light," Rupert said.

"If one day they do something, that dollar could go the other way, and serious disruption could take place with all of these carry trades. "The United States will be back quicker than most people think. I will never bet against the United States of America. A lot of people have gone bust that way. Whilst things are perhaps in turmoil while they’re cleaning up their economy, it’s a very industrious, vibrant country that can adjust."

A bit of a different take on the US, the Fed, the dollar, and the carry trade, that. Certainly, the snapping up of Cartier jewels and Montblanc pens and Panerai watches could meet a bad end if professors Eichengreen, Roubini, Feldstein, and Krugman prove to be correct.

However, the Rupert remark is certainly, a bit more ‘elegant’ in tone than the recent (June) quip (on the state of the US economy) by Marc Faber spoken with a haughty Swiss attitude: “The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. “I’ve been doing my part,” he added, [a little curiously since Mr. Faber spends most of his time in Asia.] – wonder what Bill Gates or Warren Buffett might have to say about that…

Spoken like a guru? Afraid not.

Have a pleasant weekend. Consider wine before champagne.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Check out other site market resources at Bullion Prices, Silver Coins Values and the US Inflation Calculator which easily finds how the buying power of the dollar has changed from 1913-2009.