Gold and Silver Report - A Brush With Death

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Last night's momentous events proved once again that world developments come about when they are least expected and that their effects on financial markets can be anything but predictable. Last night also proved that at least as far as silver is concerned, the spills it that it occasionally experiences can be as gut-wrenching and pocketbook-draining as the euphoric thrills it provides now and then. Thus, this morning there is a lot of searching for answers and for future-telling among global investors. Good as the commodity party  has been since September, there are certain aspects of it that have been built on less than solid foundations. Sunday night's tremor revealed some cracks that bear watching as we go forward.

The news that former wealthy Saudi businessman-turned-Public-Enemy-No.1, Osama bin Laden had been permanently "neutralized" by US forces would actually have had an easy time fueling precious metals and oil higher as the Taliban's current leadership wasted no time in warning about upcoming retaliations against American interests. However, as it turns out, the intersection of uncertainty and overheated markets makes for a strange, unpredictable locale in terms of both politics as well as money.

What at first appeared as a misprint or computer malfunction in the market's price tickers turned out to be a very real and clearly frightening (especially to latecomers to the silver-plated punchbowl), 12% meltdown in the price of silver last night. The white metal lost that huge amount of value in a sensationally swift manner (in just 11 minutes) and did so amid conditions that could only be described as "out-of-control trading." After having touched a high of $48.22 the precious metal was also seen changing hands in Asia at $42.17 per ounce.


Monday's trading action in New York opened under continuing selling pressure for all of the metals in the complex. Gold fell $13.40 per ounce to start at $1,552.30 on the bid-side. Friday's price action was labeled as a "throw-over" in Elliott Wave parlance and was not confirmed by the patterns in silver. A solid close taking place beneath the $1,542.00 level could be thought to indicate that a
significant top (based on wave patterns) might have been put into place in the yellow metal.

For the time being, there was only a momentary, overnight dip on gold, to the $1,539.50 level, but the developments in gold for this week, and indeed, for this quarter -according to our good friend Brad Zigler, the managing editor of HardAssetInvestor.com, bear watching very closely (and even more so for silver). In his in-depth Marketwatch analysis , Brad looks at a quite interesting metric called the Silver Leverage Indicator ( SLI ) which was devised by Roland Watson (AKA "The Silver Analyst"). Within the context of that measurement, it is thought that precious metals market tops are thought to occur or be predictable when silver's four-year return exceeds gold's return by 80% or more. That percentage was as high as 1.53% just recently.

Silver opened with a $2.94 per ounce loss this morning, and it was quoted at $45.00 in fairly hectic early action in New York. The white metal's daily volumes of trading in the SLV vehicle exceeded those of the ETF that tracks the S&P 500 (!) in three out of five sessions last week. Trader talk from New York is that what we saw last week was the effort of an institutional desk to speculate in the market via the "convenient" silver ETF.

Last night's "flash-crash" -style routing of the bulls came on the heels of a doubling in silver prices in the past six months. Current downside targets on offer from various technically-oriented observers range from around $30 to perhaps $35 per ounce. The CME has, unsurprisingly, raised the price of "admission" to the silver market speculation spectacle for various players, yet again.

Platinum, palladium, and rhodium all eased lower as well this morning as sympathetic selling and lower oil prices kept most of the commodity space on the defensive after last night's geopolitical news storm. Platinum fell by $15 to the $1,858.00 level, while palladium dropped $10 to start at the $779.00 mark per ounce. Rhodium lost $10 to achieve a $2,200.00 per troy ounce bid-side quote.

The US dollar was apparently stalled at the 73.00 level in the trade-weighted index while crude oil shed $1.50+ per barrel but remained still above the $112.00 level while players awaited developments on the economic front and the fallout from the Osama event to make their presence felt in the markets in a more meaningful manner. The immediate reaction in oil markets to the Osama killing news was one of jubilation, but traders remain wary about future developments in the niche as the Taliban and/or Al Qaeda are signaling avenging the death of the figurehead. As of this writing, black gold had narrowed its losses to only about half a dollar.

Weekend news also indicated that China's economy is in fact losing a few degrees of its hitherto torrid temperature levels. The efforts of the PBOC to cool inflation via the hiking of reserve requirements and interest rates has "paid off" at least a reflected in the dip that the country's Purchasing Managers' Index has taken in March. The metric fell to 52.9 from 53.4 but inflationary pressures have only partly been alleviated at this point. Many expect a further interest rate hike courtesy of the PBOC, perhaps as early as today.

However, despite the fact that China's policy research chief at the FRI, Mr. Chen Daofu, welcomes the end of the Fed's QE2 bond-buying campaign due at the end of June as a "positive message as the global economy is already faced with excess liquidity" he also opines that the cessation of the program will likely not be a signal that we can expect China's inflationary pressures to come to a sudden, concurrent halt as well. Mr. Chen believes that the Fed may not begin to raise US interest rates until very late in the current year.

More interest rate decisions are on tap in the region this week. India is widely seen as one of the countries whose central bank will indeed hike rates as it continues its anti-inflation campaign. In addition, the decisions on rates from the Philippines, Australia, and Malaysia are also in the pipeline this week. Meanwhile, due to the Labour Day holiday, many a regional market is out of the loop today and Japan's markets will be "off-line" for most of this week.

What will certainly not be on hiatus this week, will be the wrangling  between the politicians in the US about the imminent reaching of the country's debt limit. Financial market writers have detected a number of US GOP lawmakers who are dismissing the warnings regarding the failure to raise said ceiling and who are attempting to derail President Obama's efforts to have the May 16 debt-ceiling limit event not turn into a US default "event" by around July 8. Democratic leaders on the US' House Budget Committee have warned that if the debt ceiling is not raised it would send a signal to the markets that "the United States is a deadbeat."

Speaking of...death and of the US' fiscal and monetary woes, the school of thought that still wishes to abolish the Fed is very much alive and visible. Over the weekend, a detailed New York Times epxose by Roger Lowenstein delved into the matter and posed the very question that folks such as Ron Paul have been asking for some time now: "Can we do without the Fed?" Mr. Lowenstein finds that the argument of a Fed-less US is not without actual historical precedent.

Efforts to keep an embryonic an Alexander Hamilton-conceived US central bank in place were undone by President Madison in 1811. A second effort at having a US central bank was seen as a "curse" by then President Jackson and he de-certified that institution in 1836. In a nutshell, Mr. Paul suggests that the Fed be done away with, and that the gold standard could take care of the US' "problems."

The problem with that tack is that such proposals ignore the fact that -according to Mr. Lowenstein's article " The gold standard...led to ruinous deflations. When gold reserves contracted, so did the money supply. David Moss, a Harvard Business School professor, asserts that the United States experienced more banking panics in the years without a central bank than any other industrial nation, often when people feared for the quality of paper; specifically, it experienced them in 1837, 1839, 1857, 1873 and 1907. " Clearly, this is a case of the "good old days" that never were - even if in its early days, the Fed maintained the gold standard, and that such a policy forced it to maintain tight money even in dire times of 1931, smack in the middle of the Great Depression.

Most modern economists today regard that approach as a major policy mistake on the part of the Fed. Noted Fed historian Allan H. Meltzer remarks that -based on historical evidence- the gold standard "does not work for one country alone; the bad paper money corrupts the good." Thus, unless Mr. Paul can convince the other 194 countries of the world to sign up for his "golden" visions, we might not have a workable idea at hand.

Mr. Lowenstein concludes that "Banking purists would like, if not to abolish the institution, to return it to the job envisaged on Jekyll Island. They are, in a sense, the financial equivalent to strict constitutionalists. Nostalgia has its place, but so does pragmatism. Mr. Bernanke and his colleagues may be flawed, but democracy trusts in the power to elect, appoint and, if need be, remove. It is fine to lament their alleged excesses - for instance, the Fed's swollen balance sheet in the name of stimulation, or "quantitative easing." It is another to imagine that regulating the money could be as simple as it was in 1913, or that a formula, or a [JM Keynesian] barbarous relic, could do the job. "

Until tomorrow, keep expecting the...unexpected.

Jon Nadler Senior Metals Analyst  
Kitco Metals Inc. North America
US & Canada Toll Free: 1 (877) 839-8036
Websites: www.kitco.com  and www.kitco.cn                      Blog: http://www.kitco.com/ind/index.html#nadler



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

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