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
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
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
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
, Brad looks at a quite interesting metric called the Silver
Leverage Indicator (
) 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
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
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
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
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
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
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
Until tomorrow, keep expecting the...unexpected.
Senior Metals Analyst
Kitco Metals Inc.
US & Canada Toll Free: 1 (877) 839-8036