Five Finger Discount No More

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Good Morning,

Gold prices re-tested the $1100 support zone following yesterday afternoon's post market-closing surprise announcement by the US Fed that it would raise the discount rate to 0.75% in order to encourage banks to borrow more from the private market. The US dollar surged in the wake of the plethora of headlines that followed the Fed announcement. In the hours immediately following the Fed news, gold prices moved over 1 percent lower while the euro also dropped, reaching a fresh 9 month low. Spot gold touched lows at $1,099.50 an ounce, following which it recovered, but was still trading below the $1,108-1,110 an ounce resistance level.

Our friends at GoldEssential.com over in Belgium feel that: Going by the looks of it, this [move by the Fed] seems more of a clear signal that the Fed is ready to retract emergency liquidity measures than a [de facto] tightening measure based on inflationary threats. They also noted that: Technical charts for gold remain upbeat, as prices had thus far refrained from slipping back below a previous downtrend resistance line that was broken to the topside earlier this week, and which was currently located near $1,092.00 an ounce basis COMEX April Gold futures.

New York spot metals dealings opened the final session of the week in the mixed fashion this morning. Gold was lower by $0.20 per ounce, quoted at $1107.90 as against a somewhat milder than last night 0.10 advance in the US dollar on the trade-weighted index (last seen at 81.04 ) and a euro quoted at 1.352 (having dipped to under 1.35 overnight). Peculiar headline of the morning: World Gold Council Welcomes IMF Gold Sales. Book-squaring will keep things simmering along for the rest of the day. Silver started the session with a 15-cent gain, quoted at $16.00 per ounce.

Platinum and palladium were mixed, with the former shedding $7 to $1504.00 and the latter unchanged at $429. No change was noted in rhodium either, bid at $2350 the troy ounce. US CPI data came in below expectations, with core consumer prices falling for the first time since 1982. The Weimar Republic scenario has been put on indefinite hold (except in certain newsletters). This set of numbers was dollar-negative immediately after its release (low inflation = less need to hike fed funds rates just yet), and might help bullion on the day (at least before book-squaring rituals become manifest later), albeit April gold futures were still off by $9 at last check.

Another long-time friend, James Steel over at HSBC in New York had this to say about the hoopla regarding the Fed discount rate action: This development...is near-term gold-bearish, as it reduces liquidity. Highly accommodative monetary policies have been an important element in the gold rally. If this [however] implies [that] monetary policy will remain lax, then the sell-off may be brief. - Indeed, thus far, it has been just that. If anything, the IMF gold tonnage -now officially in the market's supply pipeline- still weighs more heavily in terms of potential real-world impact on gold prices.

Something else that might also play into gold prices going forward is the apparent slow but emergent drawing to a close of the mine de-hedging phenomenon that has also helped gold prices get to current levels. VM Group Fortis Bank notes that: At 8.0 million ounces, the level of de-hedging in 2009 (on a delta-adjusted basis) was the lowest since 2005, and that this slowdown is important to note in terms of the market impact of de-hedging.

VM Fortis also opines that: It seems clear that we will not have another year of large-scale de-hedging in 2010. On a delta-adjusted basis the global book is now 7.9 million ounces. So if de-hedging in 2010 were to repeat 2009's quantity, it would require the entire global book to be closed out during the year. Putting this altogether at present we expect full-year de-hedging in 2010 to be around 1.5-3.0 million ounces.

Dateline N.Y., Feb. 19, 2010: The Federal Reserve Board sent its most explicit signal yet that the emergency supply of liquidity to financial markets is done and the most aggressive monetary policy easing in its 96-year history will eventually reverse. - reads the introduction in a Fed-focused Bloomberg story this morning. Pretty dramatic words, no? No one should treat them in a dismissive manner.

However -and there is always the pressing need to revert to that overused little hybrid word- especially when pundits will now likely get carried away with what they believe to be one thing, when in fact it is quite another- the Fed move at this juncture represents...nothing more than a prelude, to an overture, to the first act, of the opera that will come to be known as the Great Unwind Saga.
The Fed was itself (St. Louis Fed President Bullard intimated that a fed fund rate hike may not even take place this year) seen as heavily stressing the fact that Thursday's move does not imply a change in current monetary policy, but that it represents more of a normalization of credit policy. For example, in the good old days before the crisis, the discount rate was a full 100bp above the Fed Funds rate, and, at the end of the day, the Fed's discount facility is hardly used by banks for funding anyway, and the hike only impacts $14 billion worth of borrowers. In plain English, this ain't the fed funds rate, folks.

Yes, one can say this much about the Fed's action: The rise in the discount rate suggests the risk is that the Fed's first rise in the target on the Fed's funds rate is earlier than September. The move by the Fed is U.S. dollar positive. - Richard Grace, chief currency strategist at Commonwealth Bank in Sydney. Mr. Grace's bank opines that the greenback will rise based on upcoming bets the Federal Reserve will accelerate the mopping-up job it has been warning about and that the euro might drop to $1.32 while the  Aussie dollar may fall toward 86.45 U.S. cents on said speculation.  
And thus, we come to the juncture where easy money is about to get a little less easy, and when the Great Unwind begins, and that is all that can be said about these developments with any degree of certainty.

While the timing of the Fed action was indeed a surprise, and it contradicts many who saw this act coming much later, the above finding is about as obvious as the discovery by Canadian scientists (following a 10-year study!) that people who are naturally happy appear to have a lower risk of developing heart disease or dying from heart attacks. So, go ahead, laugh a little, go have some fun. Or, a lot. It's good for you (as opposed to obsessing about the gold price every other minute and/or making ridiculous bets as to where it might be next month, or next week).

PS
Yesterday, my 82 year-old mother was diagnosed with an inoperable giant aneurism located in her head. Today, she plans to get her passport and visit 'the old country' for a month, soon. Following that, she plans to adopt a second cat, buy a big LCD screen (her vision is failing by the day), visit my two sons in far-flung corners of the US and Canada, redecorate her house, watch A Serious Man for the nth time, and hang out at Tony Roma's at least twice a week. She will not visit the Kitco website to check on the value of her meager gold holdings, she informs me.
Have a sunny weekend.

Jon Nadler
Senior Analyst
 Kitco Metals Inc.North America
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