King’s Speech – Tuesday Kitcommentary

The world turned up the heat on a recalcitrant Muammer Gaddafi over the past 24 hours and the results thereof were fairly obvious in various markets overnight as well as this morning.

The West deployed military assets around Libya, Russia and Turkey objected to any kind of intervention, the US and Austria joined the growing list of countries that have frozen Libyan and/or Gaddafi assets. More than $30 billion in such funds were placed "on ice" by US authorities yesterday.

Meanwhile, "The Colonel" himself was…still in a state of Charlie Sheen-like denial, saying that his "people love him, they really love him." Whether or not the man receives an Oscar or a well-placed cruise missile remains to be seen, at this point. Saudi stock markets fell 7% today as the threat of social unrest-related contagion loomed fairly large in the MENA area.

Global economic growth is not however seen as being materially affected by the jump in oil prices. Any such impact would be on the order of a roughly 0.3% "shave" in global GDP growth rates, and it would come only after a full year of oil prices remaining at or above current levels (not a very likely scenario, some say). In any case, this is way to start the month. Beware the Ides of March (two weeks to go).

Albeit some Libyan oil is clearly not flowing through pipelines, WTI crude oil remained well under $100 (@$97.77) per barrel, Brent black gold traded above $112 and gold vaulted towards $1,425.00 as the Libyan situation appeared to be taking a serious, but hopefully conclusive, turn. A subsequent rise above $98 in US crude made for somewhat difficult conditions for the Dow, which lost more than 40 point as a result.

Momentum players and technically-driven trades have once again made their presence quite obvious in gold, even more so in silver, and are pushing hard in their quest for an additional buck (or five) in the kitty. A quick glance at precious metals spot bids this morning showed gold ahead by $10 (near $1,421 the ounce) silver up by 39 cents (at $34.37) and platinum rising by a whopping $34 (to $1,827 per ounce). We could close the books on the first day of March at new records and then take aim at the figures mentioned in yesterday’s article, if ‘the Force’ stays with the longs.

Palladium advanced $13 to reach $809.00 per ounce, while rhodium remained unchanged at $2,380.00 per ounce. The noble metals’ complex was driven higher by the aforementioned type of profit-seekers who were seen attempting to reverse last week’s sharp declines in values, amid perceptions that GM‘s February auto sales — showing a hefty 45% (!) gain imply that the US automotive sales scene is rolling along quite nicely, and that such statistics will lead to increased demand for the Pt/Pd/Rh group of metals.

Reports that certain ones of these metals are now being stockpiled over in Switzerland (signaling oversupply) failed to make the news radar this morning. Toyota is expected to post a 28% sales gain, while Ford Moto Co. and Honda are each anticipated to report gains on the order of 10%, and Chrysler could show a 5% rise in the number of wheels being moved off of dealers’ lots last month.

Such profit-seeking (and not too much in the way of profit-taking, as yet) have made for a situation wherein metals, certain agricultural, and, of course, energy items,outperformed equities, bonds and the greenback for a third month (commodities returned 3.8% last month). Naturally, such a showing comes complete with fresh forecasts of…more of the same to come.

Not everyone’s crystal ball, however, shows the same rosy future in the pipeline. Australia today forecast commodity prices to "ease" as it sees the mining and farming sectors ratcheting all types of output higher. Meanwhile, the country Down Under stands to benefit to the tune of a quarter trillion dollars’ worth of annual export income derived from such commodities…

Bullishness in gold is nearing 80% and it remains at a lofty and nearly unanimous 90%+ in silver. Meanwhile, we continue to see gold ETF leakage of bar tonnage, as opposed to fresh, sizeable inflows amid current (rather conducive to growth) conditions. Precious metals giant Heraeus referred to the fifth consecutive monthly outflow of gold from the SPDR Gold Trust (GLD) in February, by wondering

"whether this is an appetiser for larger profit-taking to come is not clear, but the question is fairly important as this largest ETF, the SPDR Gold Trust, holds almost seven times more metal than the second largest one.”

In news from China this morning, there were at least two items of current and future importance. First, it was reported that Chinese manufacturing activity did slow down a bit last month –at least as attributed to the figures offered by the China Federation of Logistics and Purchasing (their version of ISM). The CFLP’s gauge number fell to 52.2 from January’s 52.9 but some analysts ascribed the decline to the hiatus in factory output that was brought about by the observance of Chinese Lunar New Year festivities, and remarked that the reading still implies expansion, not contraction. By contrast, over in the USA, manufacturing activity grew last month, and, it did so at the fastest rate since May of 2004, as underscored by the ISM’s reading of 61.4 (up from 60.8 in January).

The other bit of news from Beijing revealed that the US’ largest holder of debt increased its holdings of same to a new record of $1.16 trillion by the end of 2010. So much for allegations that China is somehow disgusted with the US, US debt, or that it is itching to unload its dollar holdings in favor of you-know-what (anything but dollars, the urban myths say).

Bloomberg, in fact, characterizes the recently augmented Chinese holdings of US debt by noting that

"China’s Treasury holdings underscore the government’s confidence in President Barack Obama’s stewardship of the U.S. economy. Overseas investors own about half of the record $8.96 trillion in U.S. publicly traded debt."

However, any day now, we are more likely to hear that yet another Chinese academician recommends loading up on gold as opposed to what his government has (obviously) been buying.

Finally today, we return to central banker talk. It was, after all, Fed Chairman testimony time in DC. Question: Well, what did Mr. Bernanke have to offer to the members of the Senate Banking Committee, in front of whom he was speaking this morning? Answer: A bit of "more of the same" as in previous Capitol Hill appearances. No scenarios of the Weimar Republic suddenly materializing on the shores of the Potomac. No disturbing visions of Harare-on-the-Hudson were tendered, either.

What was remarked by Mr. Bernanke this morning was the fact that "the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation."

In fact, the Fed boss later also said that "we will continue to monitor these [inflation-related] developments closely and are prepared to respond as necessary" while adding that "the Fed was unwaveringly committed to low and stable inflation."

In the above, read: "low" as somewhere between 2% and 2% and "stable" as…"stable." The US is currently tracking a…1.2% annualized rate of inflation. Evidently, those are not the types of expectations that some of the bettors in gold are exhibiting, at this juncture. If it is an increase in inflation that they, too, are anticipating, they must be thinking on the order of several multiples of that which Mr. Bernanke is projecting. Someone will be proven very, very wrong in due course. You decide who it shall be.

Mr. Bernanke’s British counterpart, Mr. King, on the other hand, noted this morning, in a similar to Mr. Bernanke’s appearance of his own, before the Parliament’s Treasury Committee that even though UK inflation figures have been running at 4% (as of January) he sees the raising of interest rates in order "just to make a signal, a gesture [that] is self-defeating." Mr. King’s nine-member team is sharply split on interest rate policy, with at least three policy makers (Messrs. Sentence, Dale, and Weale) arguing that rate hikes ranging from 1/4 to 1/2 a point are needed, and needed now.

What follows, are excerpts from Mr. King’s "letter of explanation" of inflation which had to be submitted on Valentine’s Day (!) to Chancellor of the Exchequer Osborne:

"Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months…that primarily reflects further pass-through from recent increases in world commodity and energy prices… The MPC’s-central judgement… remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead… no one should be in any doubt that when the balance of risks requires it, every member of the Committee is determined to act to adjust policy in order to bring the risks back into balance."

Same script-writer, different sound stage.

Faites Vos Jeux.

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