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Kitcommentary from Kitco Metals Inc. - "2013's Formula One: Strong Dollar = Jobs & Profits"

Category: Investment, Gold, Mining

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November 27, 2012 ( Mining stocks newswire) While news that the eurozone had reached a deal on the next installment of aid for Greece initially pressured the US dollar and lifted gold and the euro a tad, its impact wore off relatively quickly and markets opened with a different tenor this morning. The greenback advanced 0.29% and traded above 80.29 on the trade-weighted index while gold started Tuesday's session at $1,747 with a loss of $2 per ounce. Late Monday EW analysis indicates that the current resistance level to watch in gold is found at the $1,762-$1,772 area and that a breach of the key $1,796.30 level would negate the bearish case.

Conversely, breaking $1,735 and then $1,705 would indicate that a downward phase was underway in the yellow metal. Spot silver started the day with a loss of 13 cents per ounce at $34.05 while platinum moved $8 higher and traded at $1,615 the ounce. Palladium climbed $3 to reach $666 per ounce and rhodium was unchanged at $1,125 on the bid-side. Background markets showed crude oil advancing by 22 cents to $87.96 per barrel and copper up 0.36%. The euro was last seen trading at $1.296 against the US currency.

US stock index futures showed a market that was not very impressed with the news from Europe and players who are still preoccupied with year-end trading ledger maneuvers and the still-looming Fiscal You-Know-What. One Hong Kong dealer said that "many investors have chosen to sit on the sidelines as the month-end approaches, and some of them are closing the books for the year." Some bullion dealers are reporting buying more metal back from investors than they are selling, at this juncture.

The OECD this morning warned that taking a leap of a certain cliff come January might set off another recession. Market observers anticipate that, in the wake of Hurricane Sandy, several bits of US economic data (durables, consumer confidence, jobless claims, etc.) might be somewhat distorted when they are released this week. As regards US durable goods orders, they were reported as unchanged for October this morning. The news release lifted the greenback a tad further in early trading.

The majority of third quarter US GDP projections remain unchanged at 2.0% at this time, albeit there are some who envision a..revision to 2.9% for the period. Retail sales also appear to have fared well despite the initial impact of the storm. It was noted on Monday that 247 million Americans went on the traditional post-Thanksgiving shopping spree ritual this year.

The analytical team over at Standard Bank (SA) noted that Friday's rally in precious metals occurred against background of low volume and of (largely) absent trading participants. They estimate gold's current fair value at $1,740 and believe that –from a tactical angle-the metal is "overbought" but that it might manage to hold on to its recent gains better than platinum is likely to.

Meanwhile, albeit somewhat late, owing to the US holiday, it was reported by Reuters this morning that "Hedge funds and money managers slightly raised their bullish bets on gold and silver futures on some safe-haven bids in the week to Nov. 20, while they increased their net short position on copper futures, data from the U.S. futures regulator showed. Speculators increased their net longs in gold by 8,468 contracts to 148,630, a four-week high, the Commodity Futures Trading Commission's Commitments of Traders report showed."

In other industry news, Reuters also informs this morning that the "CME Group declared a force majeure at one of its New York precious metals depositories on Monday, due to operational limitations posed by Hurricane Sandy. CME said the depository run by Manfra, Tordella and Brooks (MTB), a major physical coin dealer, cannot move physical gold, platinum and palladium out of its New York facility."

Analysts at UBS AG noted this morning that the impact of the Greek news was offset by remarks made by Dallas Fed President Richard Fisher who cautioned the markets that the easy money policies of the US central bank cannot remain on offer for an indefinite period of time. As well, the UBS team reported that physical demand in India has once again become lackluster in the wake of the passing of that country's festival season. Annual demand for gold from India might sink by 15-18% or nearly 5.5 million ounces this year, as government efforts to curb it continue and as the poor monsoon season takes its toll on rural-based bullion buying.

As has historically been the case, the approach of the end of the year is engendering a plethora of bold forecasts about the future price of gold, as well as slew of "rational" explanations as to why the current price is not where it was predicted to be when the year began. Marketwatch's Mark Hulbert reminds us of the words of Harry Browne –laid to paper in that epic year (for gold) that was 1980. Mr. Browne warned discerning readers that "Almost nothing turns out as expected. Forecasts rarely come true, trading systems never produce the results advertised for them, investment advisers with records of phenomenal success fail to deliver when your money is on the line, [and] the best investment analysis is contradicted by reality. In short, the best-laid investment plans usually go wrong. Not sometimes, not occasionally - but usually."

The ritual of providing 2012 year-end summaries and 2013 forward-looking speculation makes for entertaining reading. In some cases the 2012 projections are "updated" verbatim, with only the insertion of the passage "by the end of 2013" as the variable. At the end of the day, however, the soothsaying deck remains stacked 90:10 with roaring bullishness (this, after eleven years of rising gold prices).

There are those who –while not predicting any major collapse- envision the coming year as a more moderate one for gold prices. Among them is CPM Group's Rohit Savant. Mr. Savant was the LBMA's most accurate platinum and palladium forecaster for 2011. He and his team expect gold prices to soften somewhat in the coming year (click on -title: "We Expect Gold Prices to Soften") –towards an annualized average of $1,666 per ounce. Mr. Savant notes that much of what gold investors expected in prior years is already "baked" into the current price of the metal. In fact, with regard to inflationary expectations, one could say that much more than reasonable expectations have been folded into this golden batter's current value.

Another respected veteran analyst, Cranberry Capital's Paul van Eeden, goes one step further (click on -title: "I think US has dealt with Financial Crisis") and opines that gold is priced at twice its reasonable (theoretical) value at the moment. Mr. van Eeden, as Mr. Savant cites the absence of manifest inflation (let alone the hyperinflation that we are being warned about elsewhere in the financial newsletter world) and the outlook for the US dollar and the US economy as being among the factors that temper his outlook for gold's future price performance or his assessment of its current value. Mr. van Eeden notes that he is a "gold bug" but not a perennial "gold bull."

UBS Wealth Management's head of commodity research, Mr. Dominic Schnider, believes that gold prices might "flatten" over the next twelve months and that they could orbit near $1,875 the ounce after a brief year-end spike to $1,950 per ounce. Mr. Schinder cites a factor that we recently mentioned in these columns: the dire need for continued, sizeable investment demand in the gold market in order to clear the market's current surplus. Says Mr. Schinder: "Securing investment demand in the short run is an easy task, but it is a different story over the long run. To ensure that the gold market is undersupplied, investment demand into gold needs to rise constantly." That might be a challenge if expectations of interest rate increases start to become a topic in 2014."

Another potential topic to begin making the rounds–and well before 2014 rolls around- could be the US dollar and its possibly new-found vigor. In a recent Wall Street Journal opinion piece, former hedge fund manager Andy Kessler has some suggestions for recently re-elected President Barack Obama on how to get foreign capital to return to the US and how to get domestic investment (and, in turn, jobs and profits) going again. Hint: pull a "Rubin" on the US dollar. Yes, that certain Mr. Rubin. President Clinton's former and "greatest secretary of the Treasury since Alexander Hamilton."

Here's how Mr. Kessler advises Mr. Obama to proceed (after, of course, he replaces Mr. Geithner with a person as yet unknown –but similar to Mr. Rubin in strategy): "Mr. Obama doesn't need Congress to kick-start investment in the U.S. It takes a strong dollar and a new Treasury secretary with credibility as a start. That person will need to persuade Federal Reserve Chairman Ben Bernanke or his eventual replacement to end what has come to be called "QE Infinity"-investors' belief that the Fed will just keep printing dollars and debasing their value by quantitative easing."

Another person who might like to presently be advising Mr. Obama –and has indirectly done so via an extensive Op-Ed in the New York Times on Sunday- is mega-rich investor (and, to some, anti-gold spokesman) Warren Buffett. Berkshire Hathaway's Chairman and CEO lambasted the "Grover Norquist School of Tax Thought" in a brilliant and incisive article that speaks volumes about some of the things that need to happen if Americans are going to quit complaining about their recent economic predicament.

Leaving aside the "minor" matter of the fact that one might have been able to buy a share of Mr. Buffett's [BRK.A] at about $5,900 in late 1990 and that they would currently be sitting on a $132,410 share of said company's stock, -which means he must have been doing something right- let us focus on Mr. Buffett's "credentials." In fact, only one of them is required: HE is rich; very, very rich. So, what does an extremely rich person have to say about the very class he belongs to and its rates of taxation (the BIG bogey in this latest Fiscal You-Know-What media storm)? Let's use his words:

"The wealthiest individuals in America hit a new group record for wealth this year: $1.7 trillion. That's more than five times the $300 billion total in 1992. In recent years, my gang has been leaving the middle class in the dust. A huge tail wind from tax cuts has pushed us along. In 1992, the tax paid by the 400 highest incomes in the United States averaged 26.4 percent of adjusted gross income. In 2009, the most recent year reported, the rate was 19.9 percent."

Mr. Buffett also noted that "The group's average income in 2009 was $202 million - which works out to a "wage" of $97,000 per hour, based on a 40-hour workweek. (I'm assuming they're paid during lunch hours.) Yet more than a quarter of these ultra-wealthy paid less than 15 percent of their take in combined federal income and payroll taxes. Half of this crew paid less than 20 percent. And - brace yourself - a few actually paid nothing. "

While he prefers a cutoff point for the elimination of the Bush-era tax cuts for the $500K and above class, Mr. Buffett has the following set of pivotal suggestions for President Obama, Congress, and anyone interested in truly addressing the US deficit situation:

  • We need Congress, right now, to enact a minimum tax on high incomes.
  • I would suggest 30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that.
  • Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these [lobbyist] warriors for the wealthy.
  • Above all, we should not postpone these changes in the name of "reforming" the tax code.
  • We need to get rid of arrangements like "carried interest" that enable income from labor to be magically converted into capital gains.
  • It's sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.
  • Our government's goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. - levels that have been attained over extended periods in the past and can clearly be reached again.

Apparently, Mr. Buffett's "radical" ideas are catching on in the USA. A couple of weeks ago, former Mitt Romney economics aide Glenn Hubbard (Dean of the Columbia Business School) "broke ranks" with the Grover Norquist School and is now advocating higher taxes for the rich in America.

Yesterday, Republican Senator Saxby Chambliss apparently also broke ranks with Mr. Norquist's pledge and expressed his concern for his country as being above on his priority list than the "no new tax" promise etched into the Norquist "Bible." None other than SC Senator Lindsey Graham also apparently softened his former stance in a major way, when, on November 19 he told one publication that he stands ready to break the aforementioned pledge for the sake of resolving the Fiscal Cliff issue and the US' deficit conundrum.

Until next time,

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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