400 - This is Not Sparta!

San Francisco Hard Assets Investment Conference 2011 Online Preview

The trade metrics released today by China revealed a notable deceleration in trade growth. The country's exports to Europe contracted sharply as fading demand for goods became manifest recently. It is worth noting that China's imports also declined even in the face of an appreciating yuan. It is thought that the general trend at work here is in part the result of concerted efforts on the part of China's leadership to avert the deleterious outcomes of popping various bubbles that have infested its economy and markets.

Now (as in: next week) comes the crucial indicator to parse: did loan growth also undergo a contraction, or is money still being handed out hand-over-you-know-what to anyone who can fog up a mirror? That, as well as China's inflation numbers for September, will be the focus for China watchers come next week. Despite an "at the ready" Fed indicator that was gleaned in the FOMC meeting minutes, the precious metals complex showed signs yesterday afternoon that the morning's lift turned a tad less energetic after it dawned on buyers that one Slovak vote does not make for the resolution of the European crisis or of the problems the region's banks continue to face.

Yesterday's EC outline of a comprehensive plan aimed at fixing Europe's banks was quickly shelved by those who showed optimism about it, when this morning's Credit Suisse-issued analysis revealed that no fewer than 66 of the region's financial institutions would not receive a passing grade in the event of a fresh stress test. Only eight out of 90 tested banks failed to make the grade in July, when the test involved a critical line of 5% core Tier 1 capital ratio. The latest computation uses a 9% core Tier 1 capital ratio. Among those needing the most capital in such an event would be Royal Bank of Scotland, BNP Paribas, Barclays Plc, and Soci'et'e G'en'erale.

As a result of the aforementioned China data and euro-zone turmoil, the overnight action in precious metals turned towards moderate selling despite some decent regional physical offtake coming from Asia. This morning's opening was really not much different; spot gold lost $7.10 to start the day off at the $1,667.00 bid level. In the background, the US dollar firmed a bit and remained well above the 77 level on the trade-weighted index. The greenback clawed back in the wake of the European banking-related news and speculators were once again showing that all might not be well in that system while also indicating that they are not quite as glum about the prospects for the American economy.

Crude oil slipped fairly hard, losing $1.50 and falling under the $84.10 mark per barrel. The Fed minutes also showed a US central bank that is less than sure that the US economy is fully on the mend. Meanwhile, the country's trade deficits remained steady at $45.6 billion in August, albeit the gap with China came in at a fresh record ($29 billion).

Speaking of the Fed, its members now appear to be closer to setting certain targets for how to react policy-wise based on the reading of certain "milepost" signals coming from the US economy. Instead of knee-jerk easing whenever one or another bad reading comes from a particular sector, (or when markets throw "gimme more" tantrums) the Fed will be parsing inflation, inflation expectations, and US employment levels and might well incorporate the Taylor Rule into its future decisions. Of course, some were quick to jump to the conclusion that such revamping in Fed policy-making processes invariably points to a sure-to-come QE3 as soon as Q1 of 2012.

This morning, commodities overall appeared less than pleased with reports that China has somehow amassed a large enough pile of copper to make for a potentially sizeable slide in the amounts of orange metal it might be demanding in the near-to-medium term. We are talking here about year-end 2010 (!) inventories, to boot. Nearly 2 million metric tonnes of the stuff were seen clogging various bonded warehouses at that time and nobody has offered estimates on what such stockpiles might have swollen to as we speak.

Black gold's traders were less than pleased with yesterday's IEA demand forecasts and Slovak EFSF vote. The US Labor Department reported that initial jobless claims dipped to the 404,000 mark in the latest tracked period. The dollar traded higher and stock futures declined in the wake of the barely-changed-from-last-week data and gold prices header somewhat lower still.

Silver gave back 57 cents on the open and traded at one penny above the $32 mark per ounce. Platinum and palladium both sold off as well, with the former shedding $11 to drop to the $1,534 bid-side level while the latter eased $7 to commence trading at $602 the ounce. No significant help to the noble metals' complex was offered by news that China's passenger-car sales activity surged for a fourth straight month in September, rising nearly 9%.

More than 1.3 million vehicles rolled out of Chinese showrooms and into eager buyers' garages last month. The sales increase percentage was the highest for the aforementioned period. Car fever continues to grip the Chinese consumer but we will have to watch the levels of economic activity (as reflected in the above-mentioned import/export data) and remain alert to potential trend changes, should they become manifest in this important niche.

Meanwhile, guess who's coming to Capitol Hill with tax hikes plans on the rich? No, it's not "Occupy [insert your favorite locale here]." It's...Warren Buffett. President Obama's newest BFF is bringing his fight to raise the numbers that the well-to-do are paying Uncle Sam to the recently-created deficit-reduction "Supercommittee." Uncle Warren - and he is not even remotely running for President (!) - offered to open up his personal tax return and challenged the well-heeled of America to do the same in an effort to get the tax dialogue and reforms underway.

The so-called "Buffett Rule" may be far from being a reality, but the publication (even anonymously) of the returns being filed by the 400 wealthiest Americans would be a "big step in informing legislators and the public in what needs to be done." Four hundred Americans have more wealth than half of all other US subjects combined, says activist documentary filmmaker Michael Moore. All of America household wealth amounts to $54.9 trillion. You do the math on the rich and the ratio. Suffice it to say, it will soon be demonstration placard material for the OWS throngs.

Until tomorrow,

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal. He will talk on both Sunday, Nov. 27, and Monday, Nov. 28, during the San Francisco Hard Assets Investment Conference.

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