What We've Got Here Is Failure to...Instill Confidence

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Tuesday's New York session finished with a 1.5% gain in gold prices following a mid-morning turnaround precipitated by a surge in oil prices and a decline in the dollar. An amalgam of market-moving news dented the greenback's hitherto runaway gains and sparked some fresh buys in energy and precious metals. The news that engendered the favorable buying conditions ranges from the possibility that Lehman might have to toss another $4 billion in credit losses out the window, and that US housing starts were scraping bottom at a 17-year low. Also aiding the slide in the dollar were June wholesale prices which rose faster than consensus expectations. The Dow lost 132 points as shares of AIG, Lehman, Target, and Home Depot dropped amid credit woes and slowing consumer spending.

Spot gold was trading at $812.10 at last check, up $13.40 on the day and looking likely to chalk up its third gain for the month-to-date. Silver was more moderate in its advance, gaining only 10 cents to $13.13 but platinum and palladium continued to lose ground, with the former dropping $45 to $1332 and the latter falling $2 to $281 per ounce. Opinion remains divided as to the noble metals' next steps, but CPM Group NY was quoted as optimistic on the prospects for price recovery in the group (see below). Optimism on the gold and oil front my be inferred from today's price action, but the underlying shrinkage in open interest in both still presents signs of worry. Our take is that the worries (as seen in the recent exodus of fund money from the complex) reflect possible regulatory intervention into the commodity markets, should the roulette wheels show signs of wild and woolly betting action once again.

On the Fedspeak front, today was Mr. Fisher's turn to reiterate his platform of dissent on interest rates and stagnation versus inflation. " The Federal Reserve must be ready to take action if slowing economic growth fails to curb inflation stemming from higher food and energy prices" said he today." Until we have a clear sense of what will prevail, monetary policy makers must remain poised to act if slowing growth fails to contain inflationary pressures," he also said. In addition, Mr. Fisher remarked that he was not surprised by the dollar's recent rise as too many had sold America short -evidently prematurely. Finally, he also expects the US economy to basically grind to a halt in the second half of this year.

Speaking of expectations, much ado about a certain Prof. Rogoff (former chief economist at the IMF) sounding his own alarm from the relatively safe and faraway Singapore today, about the probability of a large US institutional failure in coming months. We have earmarked just such a collapse as one of the two reasons why we believe that gold -notwithstanding its latest turn in fortunes- could yet experience a short-term spike before year-end. The other, was an as yet unknown geopolitical 'big bang.' Nevertheless, it is worth looking under the hood of Prof. Rogoff's dire prediction and learn what it says about...predictions (more than about the banks). We will grant you that 200-300 banks will see an FDIC seal on their doors over the next 36 months. Compare that to the near 1,200 banks that expired in the S&L debacle of not that long ago. The crowning jewel of that saga was Continental Illinois.

So, what does Prof. Rogoff's cautionary tale mean today? Marketwatch's David Weidner warns us about...the warning:

" Ken Rogoff, the former International Monetary Fund economist who has predicted a major U.S. bank failure in the coming months, isn't talking about what specifically could cause such a failure. Maybe that's because his panic attack is a big part of it.

Rogoff is correct when he says U.S. banks are at risk, as he did in a recent talk in Singapore.

Many U.S. banks are at risk. Market strategist Barry Ritholtz pointed out Monday that Washington Mutual Inc. HSBC Holdings PLC's U.S. holdings, National City Corp., Sovereign Bancorp and Huntington Bancorp are considered among the weakest banks, with more than $25 billion in assets, according to a report from Weiss Research Inc. On the brokerage side, Weiss noted that the brokerage arms of Morgan Stanley, Goldman Sachs Group Inc. and Citigroup have the lower capital multiples, making then less capable of withstanding losses.

The truth is, the collapse of Bear Stearns Cos. wasn't about capital, it was about liquidity and, more importantly, confidence.

When Rogoff claims that the banking system is "not just going to see midsized banks go under in the next few months; we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," how much confidence has he pumped into the market?

The reality in the U.S. banking market is, as Ladenburg Thalmann analyst Dick Bove noted Tuesday, that "equity is up, deposits are up; margins are up; loans are up; non-interest income problems are being resolved; and non- interest expenses are coming under control."

Bove and Rogoff agree that consolidation will be a part of the industry's recovery. The difference it seems is how banks will be sold. Rogoff seems to think failed banks' assets will be sold off. Bove envisions something more orderly.

Recent evidence is on Bove's side. UnionBank Corp. agreed Monday to sell itself at a 21% premium to Mitsubishi UFJ , despite concerns about the bank's balance sheet, which is heavy with California mortgages.

The UBC deal is evidence that dire predictions about the banking industry just might be the industry's biggest problem."

Some of the first recognitions of value type of analyses have started to make their way into the daylight. Following a 44% drop from its all-time highs, the price of platinum is now being regarded as quite a bargain. Mineweb's Tessa Kruger reports that Researchers CPM Group New York has taken the magnifying glass to this unique metal and has the following conclusions to offer to investors:

" Platinum is still a relatively attractive investment in the market as the price is set to increase to $2,200 in the first half of next year and to remain at high levels of around $2000- $1,900/ounce through the end of 2009 and 2010, says the CPM Group's commodities expert Jeffrey Christian.

Christian told Mineweb in an interview that the downward movement in the platinum price over the last few weeks was technically driven as new resources funds and hedge funds were simply selling because the platinum price had started to decline.

He said there were no macro economic reasons for the technical sellers' actions, nor were they acting on price fundamentals. The sellers of platinum were following a "gut feeling" and price charts that prompted them to sell when the price declined and to buy when the price increased.

Vehicle manufacturers also played a role in recent platinum price movements as they bought PGMs to add to metal inventories in the first quarter when the South African power crisis erupted, but either sold or lived off their inventories in the second quarter as they fought for survival.

However, Christian said he has seen new buying in the market over the last two weeks by investors driven by platinum's long-term fundamentals. He believes the platinum market is currently tighter compared to nine months ago as the South African power crisis in the fist quarter of the year saw producers and refineries selling off inventories.

Lower prices also dampen selling in the physical market, while the auto industry's use of platinum has probably decreased by 2% and not by 10% as commonly believed. And while South African producers are pushing as much concentrate as possible through their smelters to make up for losses, this would only cause a short-term surge in supply.

As a result, Christian expects the platinum price that has fallen 39% off highs to below $1400/ounce, to reach new highs again over the next three quarters, rising through the first half of next year, before coming off to still high levels in the second half.

Christian believes the price will also remain high in the longer term as power problems in South Africa, that will take years to solve, will stunt growth in platinum production.

"Platinum is looking attractive compared to other investments such as equities, bonds and cash," he said.

"Institutional investors are invested in cash right now, while their other investments are low. Many of them have been in platinum since the price soared from $700/ounce and are still holding. The issue is that if they take profits in platinum, they have to reinvest the money elsewhere and there are few attractive investments at the moment."

The fact that the world economy is awash in cash could bode well for platinum companies as there is a constant search for good investment commodities. Mining companies offer the additional attraction of often paying dividends to shareholders and if the price is sustained company profits should surge.

However, a factor that has gained importance over the past few years in determining the platinum price was the future price expectations of investment holders that lead them to either sell, add to or hold the metal. This comes as there has been a steady increase in resource funds, institutional investors and individuals holding platinum since 2004."

A drop of corresponding magnitude in gold would bring the yellow metal to the $580 area but silver would only have to give up another dollar and a half to reach such a depth in correction. Palladium, on the other hand fulfilled that target when it reached $305 and is now at $275 per ounce.

The quest for liquidity will keep the lid on prices for the moment, and the $775 mark reached last week still presents a compelling short-term target for sellers of gold. The upside target to keep an eye on is in the $820-$825 zone as it was the last holdout before prices headed to under $800 last week. Watch the macro-scene but remain focused on the dollar, as it still carries the conductor's baton.

Happy Trading.

PS - One of the more jaw-dropping articles in recent memory surfaced yesterday, and it propagated a myth that sinister forces are behind...well, everything in this metals markets. As "evidence" the piece (hate to call it that) presented gold lease rates that had ostensibly gone to near 3% NEGATIVE (!) quite recently. Such a situation never took place. Call any number of bullion banks, visit any number of websites. While our own data feeds were coming in containing the error, and we are pursuing explanations from sources, you can rest assured that the science-fiction of negative gold leasing interest rates remain simply that. Perhaps the conspiracy forums can start a new thread now. This one is in full cardiac arrest.