Gold, Silver, Metal Prices Commentary – 3/17/2010

Chinafornia

Good Day,

In a familiar replay of the past fourteen months’ worth of meetings, the Fed concluded on Tuesday that doing nothing as regards the fed funds rate at least, was still the most reasonable course of action. The US central bank thereby acknowledged that the U.S. economic turnaround is still not sufficiently vigorous to spark inflationary processes.

Since the Fed saw little justification for hiking the cost of borrowing at this time, it simply reiterated its well-worn "extended period" mantra and thus gave audiences reason to watch the same movie once again. You know; the one where carry traders borrow those ultra-cheap dollars and pump up the prices of everything you saw rising yesterday afternoon, as if the economic recovery was going on right here, right now, at full bore.

Meanwhile the Bank of Japan, doing its part to try to revive the economy, doubled a lending program aimed at stoking credit growth to $222 billion. The Fed’s decision not to decide to hike was not exactly unanimous. Kansas City Fed President Hoenig once again broke ranks and said "that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability." Overruled, Mr. Hoenig.

Gold had its best day in a week on the Fed news yesterday, but oil was not absent from the party either. Stocks enjoyed a better session, and the euro showed it still had vital signs. The dollar, well, as is normally the case following such a Fed-gifted reprieve to the trade, it fell to a one-and-quarter month low on the index. It was still at 79.63 at last check this morning.

Safe-haven bids for the greenback have taken a few more hits following the announcement by Standard & Poors that it will be removing Greece from its ‘credit watch: negative" file. Bets that the euro may aim back towards the 1.40 level appeared to have gained traction in the hours following the Fed and S&P signal. Meanwhile, US Treasury chief Geithner asserted that there is simply ‘no way’ that his country will lose its Aaa credit rating.

The mid-week trading sessions in precious metals opened with some additional –albeit much smaller– gains this morning as the dollar slowed its decline and oil tempered its gains. Spot gold bullion showed a $1.70 gain out of the starting gate, quoted at $1127.60 bid per ounce. Silver added 2 cents to open at $17.49 the troy ounce, while platinum rose $2 to $1637.00 the ounce. Platinum, which is already trading at an eight-week high, may "soon reach" $1,662 an ounce, if technical analysts at Commerzbank AG are right.

The yellow metal subsequently ran into some resistance as specs appeared reluctant to buy it further, following this morning’s deflationary-tinged wholesale price numbers -which were slumping at their fastest rate since last July. Inflation? What inflation? PPI was unchanged at 1%…so, it still seems like (over) hedging for the imminent advent of the Weimar Republic and/or Zimbabwe-on-the-Hudson might not be the best course of action. Fortunately, there are other to-be-hedged-against worry items still floating out there…

Current resistance in gold is seen up ahead at about the $1145 area and the January high is still a target to have to overcome. Support should emerge at near $1120 should the market turn lower. Russian gold production continues to increase, presenting one of the other (aside from China and Australia) bright spots in global output for the metal.

The country recorded an 11.25% gain in gold production for 2009 with a 205.2 tonne tally from its mines. Meanwhile, India’s gold demand turned lackluster as global prices jumped and local dealers’ clients told them that with upcoming weddings on the calendar, it would be nice to be able to pick some bullion up under $1100.00 an ounce…

Palladium was also higher by $2, quoted at $473 and rhodium remained at $2390.00 per ounce, unchanged from Tuesday’s last quote. Automotive world recalls are all the rage these days, with carmaker Honda the latest victim of bad press regarding the ‘feel’ of some of its cars’ brake pedals. Other nameplates are looking towards the future with optimism however; BMW aims to sell more than 1.3 million vehicles globally this year. The Ultimate Sales Machine.

Many of those Bimmers might land on Chinese roads, where the species of "Yuppius Affluentissimus" is evidently still thriving, thank you. Chinese economic growth is forecast at 9.5% for this year, although cautionary signs are about as abundant as the ‘dangerous curves ahead’ ones at the Nurburgring racetrack where some of those fast cars are tested. In fact, "China faces twin risks of a property bubble and strained local government finances, bolstering the case for tighter monetary policy and currency appreciation," the World Bank said Wednesday in its quarterly report on the Chinese economy. Sounds for all the world, like California. A place that will soon either ‘turn Brown’ or be ‘up for auction’…

The WB is not alone in raising the chequered flag on the country with the red flag. In fact, "China is in the midst of "the greatest bubble in history," said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP. So, forget tulips, it looks like plum blossoms are all the rage. The characterizations get worse:

"The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan," said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

"As I see it, it is the greatest bubble in history with the most massive misallocation of wealth," Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China "is a bubble waiting to burst."

Bloomberg reports that Mr. Rickards "joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy." Of course, not everyone agrees on what they see in China: "People making comments about bubbles possibly don’t have all the facts," HSBC Holdings Plc Chief Executive Officer Michael Geoghegan said in Shanghai today. "Regulators are in control of the banking industry, and have the ability to curb lending as needed," he said.

On another topic of great interest recently- that of Greece- we have Harvard University’s Professor Martin Feldstein, (who warned almost two decades ago that the euro would prove an "economic liability,") who now says that Greece’s austerity plan will fail and the country may quit the single currency to fix its fiscal crisis.

Bloomberg reports that Mr. Feldstein opines that: "The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy. The alternatives are to default in some way or to leave, or both."

His diagnosis clashes with that of European Central Bank President Jean-Claude Trichet, who calls Greece’s strategy "convincing" and rejects as "absurd" any speculation it might leave the euro zone. Investors nevertheless aren’t ruling out Feldstein’s analysis. Billionaire George Soros said last month that the euro "may not survive," and credit default swaps indicate a 22 percent chance

Greece will default within five years, up from 16 percent a year ago. Mr. Feldstein stands by his analysis that it’s not "unthinkable" some countries may choose life outside the euro area. Leaving is "certainly possible, and in part it can happen even if all the economic advice to a government is, ‘You shouldn’t do this,’" he said. "Politicians don’t always listen to their economists."

Nothing could be truer. In fact, therein lie the seeds of what makes markets tick and yield entertainment for speculators. What fun would there be if everyone was on the same page? The kind one might have at a paint desiccation-watching festival. Uncertainty has its rewards. Keep the word ‘might’ in heavy rotation, please.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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