Mind the Gap(s)

Tuesday morning trading in precious metals got underway while participants were still on active watch for any news from "Stalemate Central" in Washington, DC. The trading tilt was towards lower values at the start of the daily session but the complex did not give too much up as debt-related nervousness kept bids relatively robust.

Options expire today and added/related volatility will likely be on tap for the rest of the market day. Spot gold opened at $1,610.90 per ounce with a loss of $3.90 despite the notably softer US dollar (down 0.49 on the index at 73.65) and despite crude trading within 50 cents of the century mark per barrel.

Silver slipped by 4 pennies to start the session off at $40.32 per ounce on the bid-side. The white metal showed a remarkably narrow overnight trading range of a little more than half a dollar. Both gold and silver appear slightly tired of the off-again/off-again US debt soap opera but most of the traders we polled dismiss the possibility of the US defaulting next Tuesday. One New York-based market observer offered the take that, in the event of successful and deep cuts in US spending, the economy could contract sufficiently to make current silver prices history, so to speak...

Over in the noble metals' group platinum fell $3 to open at $1,783.00 while palladium climbed by the same amount to start at $808.00 per ounce. In the currency markets the euro hovered above the $1.445 mark even as Moody's offered the prospect of a "virtually 100% chance" of a Greek default and the Swiss franc continued to shine as warmly as gold has of late. Gold's near-vertical trajectory and performance has however been eclipsed by...you guessed it; golden-delicious, Apple stock. Charts show a wide gap developing between the two assets as Apple is doing the exact opposite of what Mr. Newton had experienced one fine day under a tree.

Carmaker Ford is expected to announce its ninth consecutive quarter of profitable operations, albeit the tally might reveal a 7% to 8% decline in earnings. No change was seen in rhodium which was still quoted at $1,900 on the bid-side. Dow futures showed a potential rebound in the making as traders awaited a string of earnings reports (3M, Ford Motor, UPS, etc.), the Case-Shiller new home sales tally, and the reading of the Conference Board's Consumer Confidence levels.

The US new home sales data showed a decline of 1% last month (to an annualized level of 312,000 units) however median sales prices gained ground by 5.8% and touched the $235,000 mark. The market shows a half-year supply of available homes at current sales levels, and there is some hope that the gap in supply/demand might narrow further down the road. US consumer confidence metrics also showed improvement for the current month and while the sentiment among those polled still indicates various persistent apprehensions about the future, more Americans expect job creation and incomes to pick up as we roll into 2012. But, for now, back to current reality (more like a...reality show, really).

Last evening's televised drama starring Messrs. Boehner and Obama put many an episode of "The Real Housewives of New Jersey" to shame in terms of both script as well as delivery. Even after having been presented with the "stealth" Reid version of his own proposals to cut the deficit, Mr. Boehner stood there and pontificated about why such a plan would not be acceptable - even as it excludes new revenues from higher taxes.

President Obama, on the other hand, had little left to say beyond asking Americans to contact their representatives and tell them what it is they might want them to do about the stalemate and the issues behind it. The gap between the two men is apparently growing larger than the huge divide between the US' revenues and spending at this juncture. Bridge-builders, apply within. Interestingly (perhaps to the Boehner faction only), in the majority of the most recent news polls a large swath (60%+) of Americans feel that the budget-balancing act must include higher taxes for the well-to-do.

Curiously, the very league of extraordinary gentlemen who profess to be horrified by the US government's spending sprees took an active part in getting the country right where it finds itself today. "Mr. Boehner, House Majority Leader Eric Cantor, House Budget Chairman Paul Ryan and Senate Minority Leader Mitch McConnell all voted for major drivers of the nation's debt during the past decade: Wars in Afghanistan and Iraq, the 2001 and 2003 Bush tax cuts and Medicare prescription drug benefits. They also voted for the Troubled Asset Relief Program, or TARP, that rescued financial institutions and the auto industry." Together, a Bloomberg News analysis shows, these initiatives added $3.4 trillion to the nation's accumulated debt and to its current annual budget deficit of $1.5 trillion.

Meanwhile, the amount of comments, urgings, warnings, and friendly nudges from various officials and academics on the topic of the US' debt ceiling continues to swell the closer we get to D-day next week. The IMF's Christine Lagarde remarked this morning that a US default would be a "very, very serious event" and that it could not come at a worse time (given the tremors in Europe on a largely similar front). Oft-quoted econo-pessimist Prof. Nouriel Roubini says that notwithstanding the flying gauntlets in DC, the USA will suffer a fiscal "drag" but not a default of the type that appears to be spooking so many investors these days. A gap between perception and reality is nothing new among investors.

A trillion here, a trillion there; it all adds up, as they say, to some serious money. Speaking of seriousness, we note the continuing resolve on the part of the Reserve Bank of India (RBI) to combat the inflation bogey. Whip inflation NOW. How? How about a 50 basis point hike (a stunner, say market watchers) in its repo rate. The RBI now lends money to banks at 8%. Whatever it takes to close the gap.

It might take quite some feats, on the other hand, to begin to address the yawning gap in wealth that is developing between American black and Hispanic individuals and the country's white population. As things stood in June, the chasm of wealth disparity between the aforementioned group in the USA, was at a record width. The period between 2005 and 2009 saw a 66% decline in median Hispanic household wealth and a 53% drop for black households.

This, while white family wealth took a hit of 16%; bad, but nowhere near the 50% mark. Also noted in the Pew Research Center's most recent findings was the fact that Asian household wealth in the States sank by more than 50% from its 2005 peak of $168,000 - a number that had placed that group of Americans at the top of the US wealth ladder. The dramatic contraction still points to the after-effects of the housing bubble's implosion.

Until tomorrow, do mind the gap(s)...

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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