FMX | Connect – www.fmxconnect.com - (Reported 10/28/2010)

Good Morning,

More see-sawing was on display in overnight equities and commodities markets as pre-Fed calculations and sentiment extended the ebb and flow of the US dollar’s movements on the index, which, in turn, shaped corresponding gyrations in other assets.

Clearly, the closer we get to the middle of next week, the more the markets and a plethora of economists are reassessing the scale and scope of the Fed’s expected spending move. At the very least, there are now an almost equal number of critics telling the Fed to hold its asset-buying horses, as there are supporters who claim that this policy move is essential.

Whereas just one month ago the certainty levels about a stimulus package of no less than one trillion –and perhaps as much as 2 trillion-were the order of the day when estimates were solicited from Fed watchers. As of last night, even some figures well under $100 billion were being offered, at least as a possible hors d’oeuvre for what might come later –and do so in smallish tranches.

While the half a trillion (and probably more like a trillion) figure still appears to be fully baked into certain asset valuations at the moment, the markets and various dealers are focusing on what the reaction to the Fed’s outlined plan might be, come next week. To make matters more…interesting, the Fed itself has now asked (really) bond dealers and investors to tell it what their expectations might be about not only the initial size of the accommodation, but about its lifespan and eventual overall size.

Well, no need to go around asking Bill Gross (PIMCO) what he thinks about all of this. His pre-emptive statement, made on Wednesday, says pretty much where his heart is at: in a really uncomfortable place. Mr. Gross warned that the Fed plan is inflationary, and somewhat of a Ponzi scheme.

He also said that the coming move will spell the end of the now three decade-long bull market in bonds. Mr. Gross sees the next Fed move as the pivotal event that pushes the Fed into a liquidity trap that is as difficult to escape as the gravitational field of a collapsed star (a.k.a. a black hole).

People like the Fed’s Mr. – (wonder-if-he’ll-do-it-right) Dudley would argue that these are extraordinary times calling for extraordinary measures. And, thus, the market euphoria about the Fed’s program continues to now run into resistance from some of the very players it is supposed to make happy.

The dollar fell 0.38 on the index this morning (down to 77.69) giving gold an almost unilateral boost on the opening bell. Spot bullion prices gained $9.80 on account of the weaker greenback even as lingering physical selling took $1.40 off the value equation and left the yellow metal with a net opening gain of $8.40, at $1,333.40 per ounce.

Silver prices opened 24 cents higher and were quoted at $23.80 while showing no signs of melting up or down in the wake of the manipulation allegations and (now) lawsuits being leveled at JPMorgan and at HSBC.

Anyone who wants to get a clear understanding of where things stand on this issue at the moment would do very well to spend ten minutes watching this clip from Canada’s BNN. No further comment. No further need to speculate and have visions about things that are not there.

Platinum gained $8.00 this morning, rising to $1,683.00 the ounce, following a tumultuous day in the market yesterday. Palladium climbed $9.00 to start the session at $623.00 per ounce. Pointing to improving industrial offtake and continued robust investment demand, Barclays Capital said on Wednesday that palladium’s market deficit could gain in size.

Contributing to the rising shortfall in the noble metal will be continuing supply disruptions engendered by labour-linked output problems in S. Africa. As if on cue, news from S. Africa this morning tells a tale of an imminent strike at platinum producer Lonmin, on the heels of a collapse in wage negotiations.

This morning’s US weekly initial jobless claims report indicated a drop of 21,000 filing for the latest tally period. The total figure was 434,000 and it was the third consecutive such drop in filings as well as the lowest overall reported level since July. Polled economists had anticipated a rise in the figure to possibly 450,000 but the report failed to stem the dollar’s slippage and lifted gold further (along with, yes, stock index futures) in another example of counterintuitive moves.

Welcome to the ‘new’ normal, where good news is not necessarily for what it is. With a busy earnings reports day ahead, the Dow could get an optimism-related boost, but then again, so could gold, as their strange bedfellows relationship continues to unfold. Until it no longer does, that is (or, until we get more signs of you-know-what-is-at-or-near-a-top from developments such as this one). Mr. T. The Mr. T Index. The A-Team. Cash America. What can one possibly say? It is going to the moon, no doubt, but do sell it to “Gold Promise” and take advantage of all of this. Huh? That is what’s going on out there. Now,

Time now to look under the hood in the gold market. The World Gold Council released part of its Q3 statistical data with its “Gold Investment Digest” publication. No major surprises, as investment demand continued to define price (and defy fundamentals) once again, even as it fell 28% year-on-year during the reporting period.

That said, the WGC noted that net inflows into gold ETFs during Q3 were “just a fraction of the record levels experienced during Q2.” Nothing like a crisis (see Europe) to get things going for gold. Coin and bar demand was also lower on the quarter, contrary to what some newsletter and gold dealer ‘analyses’ would have us believe. Meanwhile, gold jewellery demand fell 5% in Q2 from last year’s levels, with Thailand, Indonesia, and South Korea leading the list of falling demand. Gold supplies gained 18 (!) percent in Q2 from levels recorded in 2009.

Mine output was up 3%, producer de-hedging “dwindled to insignificant levels” in Q2 and scrap supplies (surprise!) showed a 35% gain as record or near-record gold prices drew more bullion out of existing holders' hands (or could it be that Mr. T’s campaign is that powerful?). Factoids du jour: the world above-ground stocks of gold are valued at 6.53 trillion dollars, while cumulative ETF holdings are worth 87 billion bucks. Net long non-commercial positions in gold futures (as per CFTC) had a notional value of nearly $40 billion.

In closing, it is once again, picture time. A picture of year-to-date commodity performance (if that is what tickles the fancy) courtesy of the Bespoke Investment Group.

Until tomorrow, Fed-guessing, more of the same, only the same, and nothing but 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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