In The Lead – Written In Cement?

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Markets turned quiet but somewhat apprehensive ahead of the release of the US jobs figures this morning, while European exchanges were seen closing out their trading week near six-month highs. Greece was still hard at work trying to secure its second round of bailout money as its bondholders were preparing to take as much as a 70% haircut on instruments gone sour.

Meanwhile, other metrics from Europe offered very little in the way of comfort and more in the way of apprehension as to where things might be headed in the near-term.

That "near-term" in Europe might be "darker" than many currently anticipate (as reflected in January’s asset-buying euphoria) if we take note of certain underlying trends. Note for example that M3 data coming from the eurozone points to the largest ever monthly drop in credit extension to the private sector; to the tune of more than 74 billion euros. The injection of liquidity has not resulted in an injection of loans into the region’s faltering economy. And, while the euro has managed to claw its way back to the $1.30 area, we are being warned that we ought not to fall for the idea that the eventual end to the debt crisis will boost the common currency to any significant degree; this, after all, is a credit and not a currency crisis. Read on.

The 74 billion euro credit collapse figure is twice as large as the credit contraction that took place in the crunch of 2008-2009. European banks are sitting on the money that the ECB has doled out to them. In part, the drop is attributable to a parallel collapse in credit demand. However, the corollary to all of this might just turn out to be that which Standard Bank analysts have termed a possible "deep and prolonged recession, not just some temporary turndown." Little wonder then, that, when considering the fact that 40% of its exports are aimed at the Old World, China’s Premier Wen is reportedly weighing the idea of "chipping in" to the EFSF and the ESM.

Not that China has its own near-term path all "sewn" up; certainly not if you ask Messrs. Gary Shilling and/or Gordon Chang. Mr. Shilling, who alerted us to the Great Recession that began in 2007, now projects that China will indeed undergo a "hard landing" and do so perhaps this very year. Mind you, "hard landing" implies growth at the otherwise more than enviable (if you are sitting in any other part of the world) rate of about 6%.

A quick round-up of recent Chinese economic metrics spells "worry" to say the least. Standard Bank dispatches relay the figures and the conditions as follows: "Falling freight volumes; rapidly decelerating cement production growth (slowing from 11% y/y in November to 7% y/y in December); and outright declines in metal-cutting machinery (-11% y/y in December) and excavator sales (-47% y/y in December), are just a few micro-level reference points painting a picture of an economy battling with falling exports and a challenged real estate sector."

Mr. Chang, for his part, sees signs that China’s economy is teetering and that ignoring its bubbles (real estate, bank lending, over investment in infrastructure, and government debt conditions) equates trouble. He rings the alarm bell loudest on China when it comes to that country’s recent-almost unprecedented-drop in foreign reserves (down nearly $93 billion); a sign that "hot money" (as well as domestic dough) is beating a fast trail out of the country.

Well, today is what EverBank’s Chuck Butler has coined as "Friday’s Jobs Jamboree" a long time ago. The US Labor Department numbers indicated US payroll gains on the order of 243,000 and a general unemployment rate at 8.3%. The upbeat data helped stock index futures immediately and they prompted a bit of a selling spree in precious metals at least initially. Surveyed economists had expected job gains on the order of 120,000 and the overall unemployment rate to come in at 8.5%. For the year just concluded, the US labor market added 1.82 million positions.

Some of what was reported by the Labor Dept. this morning did validate Fed Chairman Bernanke’s defence of his institution’s policies in remarks he made to US lawmakers yesterday. However, we must note that the Fed’s chief strongly rejected GOP Representative Paul Ryan’s suggestion that the task of job creation is taking precedence over his vigilance against the potentially higher inflation level that might arise out of the current easy money policies.

In Mr. Bernanke’s own words: "We are not seeking higher inflation, we do not want higher inflation and we’re not tolerating higher inflation."

However, even the interest rate policies in question are seen as little more than "largely guesswork" by at least one non-voting Fed official — Mr. Fisher of the Dallas Fed. He believes that the FOMC’s recent rate forecasts are "not binding commitments" nor are they anything remotely close to being written in cement, when one looks out over the longer term. He also noted that allowing inflation to rise in the short term by no means guarantees jobs growth. One of his colleagues, Mr. Plosser remarked the other day that the markets have misinterpreted the Fed’s rate projections as firm pledges and that rates might in fact need to be raised perhaps as early as this year, or the next one.

Meanwhile, PIMCO’s Bill Gross sees the advent of a new era of "austerity" and credit destruction (as opposed to the creation of same) in the wake of the Fed’s near-zero rate policies. In Mr. Gross’ view the assumption that cheap and "abundant central bank credit is always a positive dynamic" is as misplaced as can be. He goes one step further and alerts us to the idea that near-zero rates will not translate into investors buying more risk assets and that they might opt to sit on the cash instead.

Spot gold dealings opened flat, near the $1,759 bid level but it then fell by $25 to near the $1,735 area shortly after the release of the jobs statistics and then the ISM services index and factory orders numbers this morning. Recent advances (7.4% on the 30-day chart) in the value of the yellow metal had already prompted contrarian calls (based on the readings of gold newsletter sentiment data) for caution, and then some. So long as gold does not manage a close above the $1,803 area (according to EW analysis) the metal has the potential to turn lower after the current rally runs out of steam.

First level support in gold is thought to reside near $1,746 and then at $1,733 per ounce in gold. Both of those were touched this morning. Silver traded from 22 to 35 cents lower and was basically seen trying to maintain above the $34 per ounce mark, but not managing to do so very well (last quote indicated it at $33.50 down 5 cents). Platinum fell $15 while palladium slipped by $2; the quotes came in at $1,613 and at $704 respectively. Rhodium remained bid at $1,450 the ounce.

South African producer Impala Platinum (the second largest global platinum producer) fired 13,000 striking workers yesterday. The disruption is resulting in more than 3,000 ounces of lost platinum output per day at the firm. Such conditions and the improvements in US auto sales have narrowed gold’s (unusual) premium to platinum to $100-$125 recently and have been supporting the PGMs in general. In the background, the US dollar made some upside progress after the raft of positive US economic statistics; it was 0.20 higher at 79.21 on the trade-weighted index.

The Dow, unsurprisingly, added 145 points in the wake of the aforementioned numbers being released. What’s this we have here today? A day on which stocks advance, the dollar rises, and gold falls $22? You mean such correlations can still manifest themselves? What is this market world coming to? What happened to the ‘buy everything’ syndrome? Let’s just wait until Monday. There’s always hope.

Have a pleasant weekend. Only six more wintry ones left, according to the groundhog…

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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