Casino Royale

On the eve on which the US is supposed to default on its debt, all appears to be well; at least as regards the odds of not doing so. Ah, but appearances, you know, can be deceiving. Some see the resolution of the bloody, weeks-long fight that just took place on Capitol Hill as nothing more than a President who has caved to the demands of a gang of Tea Party thugs. Gang members extorted a deal under the threat of blowing the whole US house of cards to smithereens if they did not get their way.

Anyway, the "deal" (a simple guide to which may be found here, at BBC News) that is about to be inked tonight leaves certain questions about the structure of the US budget wide open, to say the least; like, say where in the world additional revenues (read: taxes) might possibly come from. It also leaves a plethora of worries about US economic growth in place, specifically at a time when the country needs it fairly badly. The headliner worry is the one related to jobs, of course.

New York's Black Star News concludes that "at the end of the acrimonious grandstanding - the Republicans demanded that the wealthy preserve their riches while the working class and poor pay for the damage created by the George W. Bush deficit and unpaid wars - a destructive "deal" was concluded. Many sober economists predict that with the scaling back and reduction of government spending - rather than investing trillions into economic activity that will create jobs - unemployment is likely to remain high or even worsen."

The second day of trading action for August opened in somewhat of an...inverse fashion as the one on Monday had; namely, gold and silver notched hefty gains while platinum and palladium did not. New York spot dealings started off with a $13.80 per ounce rise in gold (at $1,634.10 on the bid) and with a 57-cent climb in silver (at $39.81). Platinum and palladium on the other hand soon stalled out at what appears to be near-term resistance around the $1,800 and the $830 mark respectively.

An apparent deal has been reached to end the strike among gold miners in South Africa but talks continue in order to avert similar labor action at Anglo American Platinum and Impala Platinum. None of the above has lessened the amount of shop-talk related to upcoming majority ownership talks and/or nationalization talks in that country's mining industry. Separately, auto giant Toyota Motor reported barely breaking even on the second quarter but boosted its forward outlook nevertheless.

Gold continues to show nearly the same level of bullish consensus as it did on the last day of trading in April (94% versus 97%) and it is doing so on the background of the third largest net long position in place in the market since October of 2009. Silver does not offer as clear a picture and it might well push higher if in fact the $41-$41.50 overhead resistance points are taken out. Lacking that, or subject to the emergence of a bout of heavy selling, the white metal could still be poised to aim for the low $32 area it last visited in early May.

As good as the price action has been in the physical metal since 2011 began (with certain small exceptions), the same cannot be said about bullion-related equities - not by a long shot. The putative leverage that gold mining equities are supposed to offer vis a vis the actual stuff these firms dig up, is...completely absent. Or worse. A quick glance at the YTD returns on a slew of precious metals equity funds reveals that the pep talk oft-heard at hard money investment conferences is...just talk. The Globe Investor's analysis of 14 such funds shows none as being "in the black" for the period that ended July 28. Their negative returns range from minus 1.8% to a minus 9.4%.

Crude oil did not make too much progress this morning; it appeared stalled near the $95 per barrel level as doubts about the global economy's ability to sustain growth remain manifest in the wake of one feeble economic statistic after another. Standard Bank (SA) notes that "the health of the global economy remains the overarching factor in dictating the directions for the oil market. Behind all the sovereign debt concerns in the eurozone and the US, there are plenty of signs of a slowdown in economic activity in many major economies. It is likely that the oil market again might have to lean on hopes of further stimulus from monetary policies, which leaves the oil market much more vulnerable for a big fall."

Speaking of potentially big falls( and, hopefully, not in your wallet), Marketwatch's perma-pessimist, Paul B. Farrell, minces no words when he warns that the "commodities casino" is not a place for the faint of heart and/or the weak of wallet. Mr. Farrell sees China as being headed for trouble and cites the source we recently cited as well in these columns; Gary Shilling.

The case is made by Mr. Farrell that one might as well dismiss the Chin-dia 'insatiable' commodity demand myth, recognize a bubble for what it is, and - most importantly - that, for "na"ive amateurs with portfolios under $100K betting their retirement money" on commodities, the game is "a total crapshoot" - one in which the 'house' always wins. Always. Something to take into account the next time you get a thrill and the urge to invest after reading "to da moon!" predictions for commodity X.

The US dollar advanced a tad, remaining above 74.30 on the trade-weighted index. However, the greenback lost sufficient ground to the Japanese yen to once again give rise to overt talk of intervention by the Bank of Japan. The euro was trading near 1.417 - not quite benefiting from the shine it enjoyed last week, to be sure.

At fault, say traders, were the record yields that Spanish and Italian bonds hit amid regional investors' worries about the EU's economy. Similar apprehensions sent the Dow tumbling (90 points at last count) once again this morning as investors digested bad consumer spending news in the US and the still-present specter of a credit rating downgrade of US debt by one or another vigilant(e) agency (which was not vigilant when one wished they had been).

And now, all that's left on the green felt tables are a stack of professional chips and the roll of the dice that the Friday jobs report and the Fed meeting one week from today will turn out to be. Let the guessing game being anew. In this casino, the last bets have already been made about August 2nd. Seems everyone lost; even the winners.

Roll'em...

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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