FMX | Connect – www.fmxconnect.com - (Reported 10/27/2010)

Good Morning,

Additional gains recorded overnight brought the US dollar very near the 78 mark on the trade-weighted index and contributed to a fresh dip in gold prices down to the $1,326.00 level. Crude oil felt the rising dollar-induced selling heat as well, losing nearly $1 to fall to $81.72 per barrel.

Much of what was seen overnight was due to rising apprehensions related to next Tuesday’s Fed meeting. While most everyone still expects the US central bank to ‘give’ something in order to add some adrenaline to the economic recovery process, the short-dollar/long-commodities crowd is becoming just a tad less certain that the Fed will be all that generous.

Reports in the Wall Street Journal this morning suggest that there might not be another “shock and awe” –style accommodation coming from Mr. Bernanke and team. A few hundred billion here, another few hundred billion there, but that is about the extent of what markets are gauging as of this morning (and not enough to make for repeated runs to the topside in gold, and to the bottom in the greenback). Look on the bright side; there are only seven days and a few hours left to wait this one out. A case of “Waiting for Go-dough.” Or, less dough, as the case may turn out to be. The tension is palpable, and growing.

Way too much has been invested into the theory that another $1 to $2 trillion worth of stimulus money is in the pipeline, come next week. An aggressive campaign to sell the dollar has wiped some 5% off of its value on the trade-weighted index in September alone. As regards gold, at least one British trader opined that the metal might dip towards the $1,270.00 value zone when/if Fed-betting starts to abate and the US currency recovers some of its recently lost ground.

Such a scenario is obviously applicable to…stocks as well (of late) and they, too, showed a dip in index futures as the spec crowd started to show signs of uncertainty about the size of the Fed’s presumptive gift cheque. More close asset tangos on tap. Part of the apprehensions about the Fed easing issue is related to the school of thought that sees the world economic recovery as potentially being threatened. That is, if commodity prices gain in value much further following a Fed move to ease aggressively. In other words, easing some (or much) more might just bring with it the seeds that germinate into the monster that ate the expected boost in recovery and killed it, instead.

Spot gold trading opened with an $11.10 per ounce loss this morning, quoted at $1,329.20 as players raced to cover shorts on the USD index (last seen at 77.96). Silver fell on the open as well, losing 26 cents to start the midweek session at $23.60 an ounce. The noble metals fell in concert with the rest of the complex, and platinum shed $8 to the $1,693.00 mark while palladium gave back $10 of Tuesday’s hefty gains to open at $618.00 the ounce.

The largest increase in durable goods orders (once again boosted by 105% higher order bookings for civilian aircraft) since the very start of 2010 further depressed gold and oil prices as they had been rising on the hitherto anemic pace of US economic recovery (and the Fed policy moves that such might engender). The bad news? Orders for capital goods (not planes, but computers, machinery, and such) fell 0.6% indicating a possible slowdown in business investment. More hot & cold patches within the same news item. Par for the course, these days.

In other news, US mortgage applications showed a 3.2% gain in the latest reporting period, stimulated by ultra-low interest rates for home loans. Even so, the 2010 home loan tally for the year might only come in at under $500 billion, making this the lowest level of lending since 1993. The good news? Projections indicate that 2011’s lending might rise very near to $1 trillion. As they say: buy now, beat the rush.

If one needed any further proof of what has been happening of late, one need look no further than the latest take on all things macro by Jeremy Grantham; he, the CIO over at Boston-based firm GMO. In a “Night of The Living Fed” horror movie scenario, he notes that “global commodities, frightened by dollar weakness in response to QE2, have gone on a rampage, at least temporarily, with the entire CRB commodity index up 2.5% for the single day of Friday, October 8” [for example].

Mr. Grantham also notes (while acknowledging that, yes, he too, owns some) that: “Everyone asks about gold. This is the irony: just as Jim Grant tells us (correctly) that we all have faith-based paper currencies backed by nothing, it is equally fair to say that gold is a faith-based metal. It pays no dividend, cannot be eaten, and is mostly used for nothing more useful than jewelry. I would say that anything of which 75% sits idly and expensively in bank vaults is, as a measure of value, only one step up from the Polynesian islands that attached value to certain well-known large rocks that were traded. But only one step up.” Mr. Grantham feels that the Fed’s asset bubble-blowing ways “and artificially stimulated asset prices encourages risk-taking investment behavior that can lead to asset bubbles that invariably end badly, as was the case with Internet stocks and housing.”

Mr. Grantham then sends one out of the ballpark with the observation that “Capitalism has been manipulated far more, and more dangerously, by the last two Republican-appointed Fed bosses than everything else added together,” Grantham added. “It is naive, if fashionable, to blame the rather current lame Administration for all of our problems. They inherited a cake already baked, or better, ‘half-baked,’ and the master bakers were the current and former Fed bosses.”

Not to be left out of the chorus of criticisms, The Guardian, over in the UK, offered this stunning map of global corruption levels. Go there, if you dare. Then, pack your bags for Finland (or Sweden, or Denmark).

Silver market ‘manipulation’ footnotes:"Bankers say that Comex data offer an incomplete view of the market whose centre is in London. Banks often use short futures positions to hedge their long physical positions. Two previous CFTC inquiries found no evidence of wrongdoing in silver markets. The CFTC declined to comment on the status of the latest investigation.

“Edel Tully, precious metals strategist at UBS in London, said: "Based on the breadcrumbs that Bart Chilton has given us today, it's hard to see what impact it could have on the market -- unless the CFTC says the manipulation is ongoing, which we don't see evidence of." - This from the FT last night. The CFTC’s Bart Chilton said nothing to suggest any information or knowledge, or prompt any gloating on the part of conspiracy theory adherents. He did say things that could be taken as inappropriate and grounds for problems for him, later. Saying he “believes something,” in his position, is not necessarily a positive thing.

Under current US law, successfully prosecuting cases of market manipulation hinges on a four-pronged “test” that starts with first having to prove that prices were “artificial” at any given time, or that they were “outside the bounds” of normal supply and demand-based valuations. Then the government must then prove that the party being accused had the ability to cause an artificial price, and that it took any actions to cause it, and, more so, that it intended it.

“I don’t believe there is any long-term conspiracy to control prices,” said Leonard Kaplan [a man in the market since Day One] the President of Prospector Asset Management in Evanston, Illinois. “Manipulation can occur in small doses for very short periods of time. Adding regulation may not do the trick of correcting the problems simply because the players are smarter than the regulators and they’ll find another way to game the system.”

Or, if you do subscribe to a ‘rigged’ silver market theory, perhaps steering clear of it (knowing that the chances of overcoming the ‘other’ players are about the same as going up against Caesar’s Palace in a high-stakes poker game) and waiting might be a less frustrating alternative. No one stopped to think what happens if the putative ‘manipulation’ has actually been carried out in an ‘effort’ to lift silver prices from $5 to $25. No one questions why Warren Buffett might have made a 130 million ounce play and entered a market that was allegedly suppressed. The only questions being asked are why silver is not $200 an ounce. Gee, don’t know. Let’s go ask its users how they might like such price tags and how much of it they might consume then.

Until tomorrow, Fed-guessing and more of the same.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal

Jon Nadler’s 33-year career has focused exclusively on the precious metals market. Mr. Nadler has extensive ties in the industry and has consulted to The Perth Mint, GoldMoney.com as well as to The World Gold Council. Mr. Nadler's commentaries are quoted daily by financial media. Marketwatch, BNN, CNBC, Forbes.com, TheStreet.com, Dow Jones, Forbes.com, Bloomberg, and Reuters have all featured his gold market comments. He currently serves as Senior Analyst at Kitco Metals Inc. of Montreal.

Since 1977, Kitco Metals Inc. of Montreal has earned the reputation of being the world’s premier online retailer of precious metals. Kitco offers a complete line of high-quality pure gold, silver, platinum and palladium bullion coins, bars, and precious metals buying as well as a range of highly secure storage programs to individual investors and corporate partners worldwide.

 

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