In The Lead – Stall Warning

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Precious metals dealings once again opened mixed in New York, with gold and silver still free from the effects of any profit-taking gravitational pull and with the noble metals exhibiting the opposite condition.

Spot gold traded at $1,666.60 per ounce (a gain of $6.50) following an overnight vault to nearly $1,675.00 the ounce overseas. Casting aside the non-default of the US, and the maintenance of the AAA rating of the US by both Fitch’s and Moody’s, gold specs set out to do that which would have logically been the case in the event the worst had come to pass as a result of Washington’s debt wrangling circus.

A summary glance at the latest GMFS/Brady/Soc Gen Global Hedge Book Analysis reveals that the first quarter of 2011 was in fact the second quarter of net hedging by global mines. This followed an uninterrupted four-year period of net de-hedging; a process and a time that many a market observer recognizes as having added substantial dollar amounts to the current price tag attached to an ounce of gold. Less than 5 million ounces of the yellow metal remain on the total global hedge book as of the end of March. Food for intense thought and a critical market topic we have not held back from keeping you informed about.

The Financial Times Lex blog opines that — at this juncture-gold may go swiftly in either direction as the epic clash of opposing armies run towards each other on the market’s battlefield. However, the FT remarks, that the problem remains that of pinpointing a top correctly. If one indicator — that of the rise in so-called "dumb money" gold holdings — is close to being as accurate as professionals say it is, then we might have a problem on hand. Recent accumulation patterns in the iShares Gold Trust, for example, reveal a large surge in the number of accounts that own under 100 ounces of bullion. Such accounts have trebled in the past 12 months while fund-flavored large ones have "barely budged."

Silver opened with an 11-cent gain at $40.96 on the bid-side and of course no one used the excuse that the metal climbed on account of expectations related to expanding economic conditions. It was not long however, before the white metal succumbed to the same pressure that brought about a 2.7% drop in palladium, and a 1.15% decline in copper this morning. It’s called economic gloominess coupled with a still decent opportunity to book hefty profits.

Platinum fell $17 to the $1,778.00 mark and palladium shed $21 to ease to the $804 level per ounce. US July vehicle sales reflected some growth but remained below expectations and first quarter sales levels as well. The difficulties for car makers were partially attributed to the lingering effects of the Japanese quake back in March. Honda and Toyota sales dipped by more than 20% on the month while GM and Ford reported single-digit bump-ups in the amount of iron that moved off of US dealer lots.

In the background, the Dow appeared set to try to repair some of the sizeable damage that has been inflicted in recent sessions, the US dollar sank to the 74 mark on the trade-weighted index, and the Swiss Franc… halted its ascent and went into a tailspin in the wake of the Swiss National Bank’s de facto ‘intervention’ in the market by a cut in the three-month LIBOR (to effectively zero).

The US as well as the global economy appears set to stall if the latest readings from various parts of the planet continue to be part of a trend. Gauges of various economic conditions in the US, Europe, and China are lurching towards contraction precisely at the time when various governments have had to adopt stern austerity and spending cut measures in order to avert debt downgrades and/or defaults.

The next two trading sessions in the US will see the release of initial jobless claims data, and unemployment statistics from the Labor Department. ISM non-manufacturing and US factory orders are on tap as well and they will surely be dissected by a very nervous Wall Street. Thus far this morning, the ADP report on private sector job conditions indicated a gain of 114,000 jobs in July; better than the expected 85,000 gain, but still lower than June’s 145,000.

Previously released sets of data has been pointing towards conditions that may best be described as fitting the "R" scenario if the US economic momentum remains aimed in the same direction. Things do not appear to be much better in the eurozone at the moment, either. The service sector there expanded at the slowest rate in almost two years. Italy’s indicators are flashing red while Spain’s are already indicating a stall underway. Signore Berlusconi might have to resort to some of the crooning he used to be known for, eons ago, in smoky Italian lounges, when he appears on TV tonight to explain the "situazione."

China’s services sector moderated further in July as the five successive interest rate hikes by the PBOC appeared to have engendered their desired effect. With these three major regional economies hovering very near the 50-mark as regards their PMI indicators, the feeling of having hit an air pocket of some significant size is making most global investors quite queasy. The report that the UK managed to post more than a modicum of growth in its economy basically went by "under the radar" this morning. The obsession of the day has quickly turned from "debt" to "dip."

Meanwhile, in the US of A, the reverberations of the "deal" that averted the default continue to bounce around the marble halls of various Washington buildings. One of them, in particular, the Pentagon. While defense spending mushroomed under former President Reagan and then exploded into a supernova under Mr. Bush, no one wanted to ‘go there’ as the expenditures were classified under the "sacred cow" category.

Now, after the realization has sunk in that the cheques being written for defense by the US government really are the proverbial straw in terms of size and weight (the US spends more on defense than the rest of the world combined), a possible era of (deep?) cuts is in the making. At this point, no one knows precisely how much and what parts of the Pentagon’s budget will be affected, or those of the State Department or the DHS. The up-and-coming bipartisan committee (by the end of November) will hopefully be able to shed some light on those uncertainties.

Also as yet uncertain, but certain to make it to the aforementioned committee’s discussion table is the issue of… higher taxes. Despite Mr. Boehner’s grin and gloating that he got "98% of what I wanted" from the Tuesday "deal" that was signed by the President, the idea of seeking new "revenue streams" remains very much alive.

The upcoming expiration of the Bush tax cuts (at the end of 2012) might be the opportunity to bring about changes to the revenue side (read: taxes) of the US’ budget in the same fashion that the spending cuts were ‘integrated’ into what should have strictly been a debt-ceiling raising issue. Treasury Secretary Geithner says that the "Republican leadership is still open to considering new revenue streams." One must wonder which "leader" in the GOP he polled…

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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