Taxing Matters

Metals prices with the exception of silver attempted to recover some of Monday's heavy losses in early trading action in New York this morning. The yellow metal fell $34 yesterday and touched lows near the $1,768 level. The currently apparent fatigue being exhibited by the precious metal has not changed the fact that the blogosphere remains laden with unequivocal pronouncements that gold "has to go up" and/or that it "cannot go down." Not everyone agrees, however:

Late Monday Elliott Wave updates offer the opinion that if gold were to convincingly break under the $1,702 mark then we could expect a series of sell-offs to commence to push it much lower on the charts (initially towards the $1,669 level). In the absence of that decline at this time, there remains a possibility that the current vacillation within a possible "bullish triangle" in bullion might conclude with yet another push to the upside and the previous peak, or possibly even higher, before the major decline commences.

Gold spot opened with a gain of $8.40 per ounce at the $1,787 level as the US dollar traded 0.36 lower, at the 77 mark on the trade-weighted index. Gold's initial gains narrowed considerably within the first hour of trading and the precious metal briefly dipped back into the red price column to trade at $1,778 after the coffee-break hour. Then, as the mid-morning passed, bullion vaulted higher and recaptured the $1,800 mark with relative ease albeit there was no substantive market-moving news to be found by speculators.

Chalk it all up to the by now customary "new normal" in gold. Thank you, hedge funds. Still, MF Global analysts are leaning towards "selling the rallies" in the yellow metal and are projecting a price band for gold of from $1,700 to $1,750 within a matter of a few weeks. Just as the dollar did not make any sizeable moves, the euro did not stray very far from the $1.37 area for the time being, either, as it apparently shrugged off another (by now) "routine" S&P debt verdict. The Dow, on the other hand, got a 120+ point boost this morning (and so did oil) on the hopes that there is light at the end of the Greek tunnel and that the Fed will not let markets down. The Dow gained despite the lackluster US housing-starts data.

It could also be that euro-sellers stepped back from selling the currency after they witnessed the ECB stepping in to buy Italian government bonds in the wake of the S&P downgrade. Silver opened weaker and showed a loss of 29 cents at the $39.36 bid quote. The white metal is still trying to tread water above the $38.70 level-one that, if broken, could draw it down towards the low $32s area. Until such a breach of the aforementioned pivot point happens, the potential for a quick and aggressive push to a level as high as $45+ remains on the radar.

The noble metals notched small gains only, with platinum adding $1 at $1,773 and palladium climbing $2 to $715 the ounce. Rhodium traded at $1,825 per ounce as of the latest price-check in New York. Investors in the platinum-group metals space who feared that the advent of electric vehicles might negatively impact the demand for such metals might be less nervous of late.

Despite the dazzling displays of plug-in cars by BMW and Renault at the Frankfurt motor show, it turns out that issues such as charging times and driving range are keeping consumers from readily embracing the future of the automobile just yet. Nissan expected to sell as many as 25.000 electric Leaf vehicles in the US in its first year out. It sold fewer than 6.200 of them through the month of August.

Most major market' price movements appeared lackluster this morning, despite S&P's overnight downgrade of Italian sovereign debt. Greece lived to see another default-free day despite a 100% level of betting positioning that expects it and the entire European Union (and currency) to go belly-up. Fitch's Ratings cautioned the bond and euro vigilantes that, odds-wise, they might just be plain wrong. Overall, the trade appeared to have taken the customary wait-and-see attitude that prevails in and around Fed meeting time.

Thus, we might get a somewhat less fuzzy picture (despite intra-day possible rallies here) of where these markets might be headed next after tomorrow's closing bell. In the interim, there is a modicum of optimism manifest in equities, based on the hopes that Greek debt talks and a possible stimulus of some type courtesy of the Fed could bring some much-needed stability to the markets and allow some better economic growth to take place.

Speaking of such growth, we can count the IMF out for the moment as signing on to such a (better than up to now) scenario. Newly-installed managing director Christine Lagarde said today that (albeit) "Overall, global growth is continuing" it is "slowing down." Her institution now expects world economic output to rise by 4% this year as well as next.

While that is not a shabby number by any means, it is still substantially below the previously achieved 5.1% level the world experienced in 2010. As for the USA, the IMF now expects growth for the current year to come in a full percentage below the previously estimated 2.5% level. The IMF also praised President Obama's recently-tendered jobs program and took quite a dovish stance on policies of tightening by central banks, given current economic realities. "Over to you, Mr. Bernake, then over to you, Mr. Obama." The ball is in play, and being passed.

Mr. Obama did unveil his $3.6 trillion "go big" contribution to growth and deficit reduction yesterday by calling for a "grand bargain." In a Rose Garden speech somewhat reminiscent of the ones once delivered by F.D.R., Mr. Obama said that under his program the national debt could fall to 73% of GDP in the coming year. He also said that the country cannot just cut its way "out of this [deficit] hole" and that taxes will have to rise in order to accomplish the balancing act properly. It turns out that "Trickle Down" has done anything but trickle in that direction and that the napkin-based "Laffer Curve" is actually...laffable.

GOP "commandos" were quick to jump on the proposals and label them as "class warfare." We mentioned a few developments that have led to the current situation in the US in yesterday's post. Chief among them was the steady decline in wages that the American working class has experienced since the 1970s began. Expanding on that theme and delving further into the rich-poor gap that is widening in the US of A, we find today the column by Ron Klain over at Bloomberg News.

Speaking of taxes and the American tax structure, former Reagan-era Treasury head George Schultz said that the time has come to clean "house" once again, in the manner that the 1986 Tax Reform Act once did. At the present time, the byzantine tax code in force the US and the labyrinth of loopholes and exemptions makes for a very comfy situation - if you are GE or Chevron. For the average Joe, the situation is...a tad different, however. Mr. Schultz also said that the Fed made a mistake in the first ten years of this century by keeping interest rates artificially low and that such policies might lead to stagflation, as they once did.

In the interim, put that 1960 Chubby Checker hiton your iTunes favorites to good use and repeat after us (and, perhaps, the Fed):

"Do you remember when things were really hummin'
Yea, let's twist again, twistin' time is here."

Until tomorrow,

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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