The midweek trading sessions in New York opened with rising commodity prices. Oil gained nearly 3.5% following a dismal month-to-date performance (see below). Copper added 1.2%. In the precious metals' complex, gold opened with a $21 per ounce gain at $1,765.00 while silver climbed 71 cents to the $38.42 per ounce mark. Volatile conditions will remain the order of the day and outsized moves, the norm. Do not expect market moves to make sense given market-impacting news of a specific type. Oh, and just wait until the day after Labor Day...
There has now (as would be expected after a $300 bungee jump in five weeks) been a virtual epidemic of $2K and $2.5K gold predictions; complete with shrinking timeframes for those achievements to occur. As in: perhaps this very year. Formerly vilified "evil manipulator" entities (JP Morgan) are now being given exalted, near-saintly status as their latest crystal-ball gazing happen to coincide with the crowd that desperately seeks and exhibits positive confirmation biases. Others still, match the $2K gold calls with their own; the 20K Dow calls. Read all about it. Extra, extra!
Platinum advanced $9 to $1,759.00-still under the yellow metal's valuation- and palladium rose by $10 to the $745.00 level. The US dollar, which had breached the 74 level on the trade-weighted index overnight, was recovering lost ground with a gain of 0.29% as trading got underway. Dow futures indicated a potentially bleak day ahead.
There is one potential contributing factor to the market storms still underway at the moment. However, the topic is still taboo as few dare mention a possible correlation due to the fear of prophecies becoming self-fulfilling. London. A new and ominous dimension has been added to the fear factor that is gripping the world tightly this long hot summer; social chaos. Nihilism appears to have taken over in one of the world's formerly most stable democracies.
London (and now parts of NW England) is ablaze with the fires of rage; the same London that exhibited nothing but the warm/fuzzies at a recent royal family wedding. Armchair psychologists opine that youth feels most alive when it is rioting. Others point to desperation about a bleak future as the cause. Whatever the paradigm, markets shudder when the streets are on fire. This is one of those times, and we are reminded that there by the Grace...goes France (2007) and Canada (NHL finals) and the USA (when). Dissent is also defined as rebellion in most dictionaries.
Dissent of a different stripe (some call it mutiny) was on the snack menu at yesterday's Fed meeting. Taking a page from the recent clash we all witnessed in the US legislature, the FOMC's members displayed active disagreement over what to do about the apparently once again sagging US economy. In just two months' time the Fed's perception as to how the American economy is faring has shifted dramatically. The outcome of the gathering-though many have already interpreted this as a full-on promise- was that the Fed has indicated that current conditions are "likely to warrant low levels for the federal funds rate at least through mid-2013."
CNBC, for one, was not all that happy with the Fed's "pledge" about rates. The financial channel tendered the opinion that the "Bernanke put" is off the bargaining table and that Mr. Bernanke might have in effect signaled to the markets that they might as well "drop dead." In other words, the Fed is indicating that the trough of virtually free money remains open for a while longer but that it is now (finally) focusing on the US economy instead of trying to prop up asset values as some have suggested.
Nothing was said by the Fed about the recent caving of the equity markets, about any QEx.0, about some fresh TARP, or about the flattening of the yield curve. To be sure, the time-stamping specificity that the Fed has attached to the "extended period" language has many scratching their heads. For one, the Fed has never done such a thing; nor should it, according to economists. However, the fact that that is all that the Fed did, and nothing more, essentially implies that the markets and the US economy must stand on their own; financial conditions be damned. Nearly $8 trillion in global equity market capitalization has been vaporized since July 26. Could an actual US default have resulted in much worse? Good question.
Something that was singled out for mention in the Fed statement was the topic of inflation. The relevant passage indicates that "the Committee also anticipates that Inflation will settle, over coming quarters, at levels at or below both consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations."
Most markets exhibited varying degrees of confused reaction to yesterday's Fed statement. Assets that had rallied prior to it being issued fell, and then rallied again. Others (the Dow at the end of the day) simply rallied. In most cases, the rule was to overreact. Take crude oil, for example. The Fed failed to assuage black gold speculators about the prospects for the US economy and they pushed the commodity to just above the $79 mark; a 2.5% loss. That loss comes on top of the 17% that crude has already lost this month. Bank of America/Merrill Lynch fears that the advent of a mild recession could send oil toward the half-century mark.
Taking a page from the Fed's (and BofA's) expectations of moderating inflation and commodity values Roubini Global Economics' Director of resources and commodities, Shelly Goldberg, opined that [given weak economic conditions]: "needless to say there will be less consumption throughout the world than we had seen in 2010. You're going to see a hiatus in surging commodities prices overall."
Amid the chaos and the noise, someone (George Soros) is quietly buying "stuff" you can actually use and which has value way beyond currencies or metals; yep, farmland. Welcome to the next bubble; only this one, well, it might have quite some time left to inflate.
Bloomberg reports that, "hedge-fund manager Stephen Diggle calls farming the ultimate safe haven. Diggle began buying farms with his own money in 2008 Lehman Bros. filed for bankruptcy in September of that year and the S&P 500 plunged 43 percent in the next six months. He purchased 8,000 acres in Uruguay, three smaller plots in southern Illinois and an 80-acre New Zealand kiwi-and-avocado orchard.
"We really thought all the investment banks would go under," says Diggle, who as a hedge-fund manager uses options and warrants to bet on price swings in the market. "Everyone said, 'Buy gold.' But at the end of the day, you can't eat it. If everything else goes and I just have these farms, it makes me moderately wealthy."
Back to the ranch.
Jon Nadler Senior Metals Analyst
Kitco Metals Inc. North America