FMX | Connect – www.fmxconnect.com - (Reported 11/01/2010)

Good Morning,

Halloween-induced heart palpitations will prove to have been ‘junior league’ as the ‘mother-of-all-market-weeks’ gets underway today. Precious metals continued to benefit from the US dollar’s overnight weakness (it basically orbited around either side of the 77 mark on the index) and opened the first session of November on a fairly firm footing, not looking as if corrections of any significant size were in the making.

Spot gold bullion started the week off with a 90-cent decline and was quoted at $1,358.90 the ounce. Clearly, a wait-and-see attitude in advance of the Fed, but one that is not willing to give up the recently built-up ‘premium’ which brought the yellow metal back from the $1,320s up to the mid $1,360s during the past week.

Silver showed a 15-cent gain on the open, quoted at $24.90 on the bid side of spot trading. The white metal managed to vault above the $25 level ahead of the NY opening and there is some shop-talk of a potential $26 achievement if and when ‘conditions’ (the dollar) create that opportunity. The Fed-related anticipation in the commodities complex was also manifest in the prices of noble metals this morning. Platinum added $15 to open at $1718.00 while palladium climbed $3 to one dollar shy of the $650.00 per ounce level.

Crude oil was ahead by 63 cents at last check, and was quoted at $82.06 per barrel. An equal amount of contradictory punditry is on display in the black gold market at the moment. While Goldman Sachs envisions triple-digit oil before the end of next year, its colleagues (Barclays, SocGen, JP Morgan) do not see the commodity being able to climb past $90 a barrel.

The world’s largest independent oil trading firm (Vitol) on the other hand, projects crude oil values to remain within a $70 to $85 range next year. Sounds all too familiar, (with ‘minor’ adjustments for price) from what one can see in the gold market as well. For the moment, what is notable is the slow rise in the number of gurus who are willing to allow for a post-Fed correction in gold on the back of potential disappointment with the size of the central banks pre-Christmas ‘package.’ One Marc Faber, among them.

Others, like veteran observer Ned Schmidt have warned that the change in the political landscape in the US (again, IF it comes) will make for a paradigm shift in precious metals’ trends. Well, that view was good only for an influx of less-than-kind e-mails directed at (otherwise long-term gold –bullish) Mr. Schmidt. Did he not know that it is not permitted to talk in Church? For every one of such cautious views, there are three that say: “Don’t Worry, Be Happy!” as corrections (IF they come) will be brief, shallow, and immaterial.

While financial column readers are (still) being regaled with visions of hyper-high gold price tags as a ‘more than certain’ outcome of all of this accommodation, some writers have gone out on a limb and are offering certain, more blunt, takes on the future of prices. By the way, this applies to certain other plays as well –the S&P 500 turned in quite the performance last month based on similar pre-Fed euphoria.

At any rate, Marketwatch’s Jim Lowell advises shorting gold after the election (wait, what happened to the Fed?). Even while allowing for the fact that gold has been “chief among the best in class [of assets] of Novembers past” Mr. Lowell explains that [for him] the yellow metal “is a speculative bet that I’m not willing to make: gold. I view gold as nothing more than a fear trade and even according to current confidence reports, the trade in fear has been very good.”

What the current market environment has turned into, hardly needed any further…clarification with this morning’s publication of a headline that blared (kid you not): “Street To Stump For QE2.” While such drumbeating draws closer and louder, the real question of the day and the week is likely to become: will the same “Street” “vote” with its feet (by either stomping in anger or stampeding on a run) if, in fact, the Federal Reserve turns out to be…reserved? 

Thus, the first trading week of November has turned out to be the most hotly contended (among pundits and market players who have many billions riding on the Fed easing bet) as well as hotly contested (among politicians who have at least $4 billion riding on their own bets for various positions) week of the current year. There is a lot more to consider as regards the aftermath of the Tuesday elections and the Wednesday Fed announcement however.

For example, the fact that within less than 36 hours after the Fed does whatever it plans to do, virtually all other major central banks are expected to be announcing something of their own. It will, in fact, be a period during which the largest ‘planetary alignment’ of central bank policy announcements since the stormy first week of October 2008 converges upon global markets. Consensus is, that the Fed –if it eases aggressively-will start the dreaded ‘race to the bottom’ as its counterparts around the world are forced to respond.

Much has been said and launched in the direction of the Fed in the hopes that it is listening. The US central bank cannot but be aware of the fact that its credibility is squarely on the line ahead of, as well as after it executes its maneuver. The risks being undertaken stem not only from the fact that this is experimentation on the grandest of scales (and, by definition, no one knows what could go ‘boom’ even if the intent is for jobs to do so mainly) but also because of the interrelatedness of global markets. This is one heckuva “PSAT” test (Policy Steps Aptitude Test) for the Fed. “Fail this not, must you” Master Yoda would warn.

While all of this hand-wringing was going on, guess who chimed in over the weekend in opposition to a much further weakening US dollar? No, it was not Tim Geithner. He tried that a couple of weeks ago and did not get very far with it. It was…China. The country’s Ministry of Commerce warned that the hitherto steep losses in the greenback’s value have already prompted currency market interventions by Japan, Thailand, and South Korea. It also warned that US policies and the “continued increases in commodity prices” that they have engendered are hurting China’s businesses. There, they said it; the “b” word in commodities.

Then again, China does have something to ‘protect’ indeed when it argues against further dollar weakness. Especially on the heels of reports that its manufacturing activity sector gained strength and that China’s Purchasing Managers’ Index rose to 54.7 last month. Such gains may well shrink if not totally dissipate if its chief market partner imports less in the post-Fed environment.

Back to the pre-Fed environment, for the moment. US consumer spending data showed a rise of 0.2% in September even as incomes fell 0.1% on the month. The savings rate in the US fell sharply and was recorded at its lowest level in 13 months. That ought to make the Fed ‘happy’ if in fact it is searching for evidence of life among consumers.

US inflation (what inflation?) remained flat (ex food and energy). The lack of inflation will likely turn into the micro-focus for the day, even as manufacturing data is slated to hit the wires later on. Of course, the main ‘number’ to be juggled around today and tomorrow will be 500 (as in: will the Fed bond purchase plan come in at, above, or under the $500 billion mark?).

Daiwa Securities’ chief economist, Mike Moran, offered the possibility that only $200 billion will be announced as of Wednesday. One can only imagine the fallout of such a ‘meager’ shopping plan based on the outrageous headline we quoted several paragraphs above. At the other end of the scale, figures such as $2 trillion (as per Goldman) and even $5 trillion have been floated as ‘necessary.’ No analysts were located who would dare say that the Fed will buy zip, nada, nothing. It is THAT much of a one-way street out there, folks. One-way streets are fine, so long as they do not end in a…cul-de-sac.

Drive carefully.

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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