In The Lead ~ Inside Job

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Commentary ArchiveAbout Jon Nadler
In The Lead - Inside Jobs
Monday April 09, 2012 15:22

Friday’s US jobs data managed to yield a lift in precious metals values this morning but the advance was itself significantly below expectations and it most certainly did not come at the expense of a notable cratering in the US dollar. Forums and news comments were chock-full of predictions over the weekend about a $6--$80 rise in the price of gold as being in the cards for today, along with a capitulation statement by the Fed that it would buckle to such economic pressures and finally launch the good ship QE3. Gold market prognosticators, as we have noted over the past three weeks at least, have become totally Fed-dependent for their moonshot gold price projections; not necessarily a good thing.

The latest “Gold Thoughts” by veteran market observer Ned Schmidt remarks that “some investors seem disappointed with the Federal Reserve’s apparent failure to endorse another round of quantitative easing. While the fragility of the EU continues high, the ECB also seems to have no taste for another round of quantitative easing. All of this is causing great unhappiness. Reality seems to have clashed with the child-like expectations of so many investment strategists. That is understandable, for the whole house of cards and fantasies of much of the hedge fund industry are dependent on a continued flow of easy money. The rest of us should be somewhat more pleased that the Fed is not pursuing QE-Dysfunctional.”

Underscoring Mr. Schmidt’ observation about the ‘house of cards’ that the hedge funds built is the fact that the S&P’s Goldman Sachs Commodity Index had gained 80% (!) in the period extending from December 2008 to June of last year. Easy money = easy money made on commodities. The paradigm prompted SICA Wealth Management’s Jeffery Sica to declare that “the market is addicted to stimulus. This market has risen because of the liquidity push and the market will decline when it’s deprived of liquidity.”

As of the week that ended April 3rd the aforementioned investor “unhappiness” was reflected –according to CFTC data- in the reduction of commodity-bullish bets by hedge funds for a second reporting period in a row. In fact, bullish bets on crude oil reached a two-month low. The catalyst for such wagering was the release of the March 13 Fed meeting’s minutes in which a bit of a reluctance to extend stimulus was apparent. As well, the specs in ‘stuff’ appear to be quite concerned about the potential correction that would follow in the commodities’ space, were China to experience a ‘hard landing.’

Over the weekend, in the wake of China reporting stronger-than-expected inflation figures for March (3.6%) hopes for more stimulus to come from the PBOC were also placed on the back shelf by speculators for the time being. China’s trade data for March is due out tomorrow while first-quarter GDP statistics will be released Friday. Citigroup economists note that they expect China’s y-o-y G.D.P. growth to have sharply contracted (to about 8% from 8.9 percent in QIV of 2011).

Spot dealings in New York opened about $10 higher in gold which was bid at $1,641 per ounce, while silver struggled to maintain a better than one dime gain showing a bid quote at $31.94 the ounce. At least in part, the rise in gold can also be attributed to the news out of India that the country’s jewelers called off their three week-old protest strike after receiving government assurances that the to-be-imposed tax on unbranded baubles would be reconsidered.

India’s jewelers will be back at work until May 11th and they hope for positive developments on the tax issue to come their way. One would hate to see what gold sales during Akshaya Tritiya (April 24th) would look like if the industry was out on strike…As it is, the Times of India reported that “shoppers were back in T Nagar this weekend two days after jewelers called off a nationwide strike against an increase in import duty on gold, but traders say business lacks sparkle.” In its latest take on the gold market, Barclays Capital also notes “weak physical demand in China lately” when citing bearish gold market fundamentals.

As has been the case for quite some time now, arguments pro and con the bullish case continue to be manifest in the gold market. Such pronouncements generally swell in numbers immediately following a major decline-such as the one we witnessed last week, to three-month lows. Tomorrow’s NZHerald is featuring some of the most recent statements by gold market watchers. One observer, Cetin Ciner, Professor of Finance at UNC in Wilmington, said that although “It’s difficult to forecast, I think the gold bull market is over.”  Wells Capital Management’s Jim Paulsen noted that “Fear has been gold's best friend, and so to the extent that fear is dissipating, gold should fall. We might look back at these [Fed minutes] as

Prof. Ciner also remarked that, as regards gold decline last week, “the price of gold dropped on Wednesday despite news that Spain had to offer unexpectedly high interest rates to attract investors to buy new Government bonds. That suggested that the European debt troubles are far from over, normally a trigger for buying gold, not selling it. It's pretty obvious that gold's character has completely changed. If it was a real safe-haven asset, you would have expected investors to flock to gold."

In the background, the US dollar was actually 0.20% higher on the trade-weighted index this morning, where it was quoted at 80.01 at last check. United-ICAP analyst Walter Zimmerman said that “last week’s gains in the U.S. dollar could indicate a shift toward risk aversion, which would be negative for stock and commodity markets.” Mr. Zimmerman also said that “some commodity prices were already pointing to the weaker outlook; copper appeared poised for a sharp break lower, while crude oil was also flashing indications that its seasonal rally was beginning to weaken.  Meanwhile, said Mr. Zimmerman, “the U.S. dollar looks just fine. Everything else looks like it is about to deflate. This is the nightmare of central banks everywhere.”  

Crude oil fell fairly hard, losing nearly 2% to reach $101.50 per barrel. Evidently, for traders of black gold, the weak rate of March US job creation implies that they have some reservations about the pace of the recovery in the US economy. US stock index futures were reflecting a similar hint of pessimism among investors this morning and they were indicative of a broadly lower Dow to come today. Platinum and palladium showed the best gains of the morning with a 1.2% rise in the former (to $1,611.00) and a 0.80% climb in the latter (to $646.00). Rhodium remained bid at $1,350 per troy ounce after having lost $50 late last week.

Let us for a moment parse/dissect/look deep inside the US Labor Department’s so-called “disappointing” US jobs data. While it is true that analysts’ expectations for the figure were clearly north of the pivotal 200,000 level and that the report showed ‘only’ 120,000 jobs as having been created in the US in March, consider the chart below for a bit of perspective:



The Labor Department’s report did not show a breaking of the trend now in place since September of 2010, it did not show a number that comes close to the lowest rate of position creation during the period, and, if anything, it is more indicative of certain repetitive seasonal patterns. A game-changer, it is not. A paradigm-shifter, it is also not.

Also worth noting are the following counter-arguments and items of interest in the US jobs scene, as tendered by Marketwatch’s Rex Nutting in his latest “First Take” on the topic:

-The weather: Payrolls in December, January and February were boosted by unseasonably warm weather across much of the country. Fewer layoffs in January mean fewer people rehired in March.

- Most industries are hiring. Of 266 different industries, 60% were adding jobs in March. There were large losses in just a few industries: General merchandise store jobs fell by 32,000, building construction jobs fell 11,000, and temp-help jobs dropped by 7,000.

-Government hiring. After losing 265,000 jobs in 2011, layoffs in the public sector have slowed. In March, government employment fell by just 1,000 after a 7,000 gain in February.

-The trends are still positive. Over the past three months, payrolls are up an average of 212,000. Despite a drop in March, employment growth as measured by the separate household survey is even stronger, at 415,000 per month over the past three months. And despite the drop in March, the labor force has grown by an average of 273,000 per month over the past three months.

-The broadest measure of unemployment is down. The U6 unemployment rate, which includes all those who are actively looking for work as well as discouraged workers and those resigned to part-time jobs, fell to 14.5%, the lowest of Barack Obama’s presidency.

Mr. Nutting concluded that, while yes, the March L.D. report “stinks” and that it is, indeed, a ‘disappointment’ it should also be viewed in context. That context implies no triggering of QE3 but it also implies no departure from the near-zero interest rate policy for the time being. The Friday figures should actually have Chairman Bernanke smiling and reminding many that “I told you so” when it comes to the patterns of employment growth in the US. It would take a string of dismal April and May statistics of a similar type to alter the status-quo at the Fed. Meanwhile, be on the lookout for a string of Fed team member speeches to be delivered this week. On the list are Mr. Bernanke himself (today), Janet Yellen (April 11), and William Dudley (April12).

Until Wednesday,

By Jon Nadler
Senior Metals Analyst – Kitco Metals


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