NickelOdious – by Jon Nadler (Kitco Metals – June 13, 2011)

Jon Nadler is a Senior Metals Analyst – Kitco Metals

A further decline in crude oil prices conspired to drag most of the commodities’ complex to lower value ground as the new trading week commenced. Thus, precious metals lost chart altitude levels as well, despite the minor, 0.15 loss recorded in the US dollar index this morning.

Part of the early selling pressure was related to investors’ raising cash to cover margin calls incurred in the wake of the sixth consecutive losing session in the equity markets on Friday. However, at the end of the day (or, shall we say, the beginning thereof) reports that China’s economy is slowing (and perhaps more than just a tad) coupled with posturing by Saudi Arabia that it might ratchet supplies of black gold higher in coming weeks were the prime catalysts for the price dips we witnessed this morning.

As regards China, the prospects of a possible “hard landing” by that country’s economy were brought into discussion once again. NYU’s Dr. Nouriel Roubini said that he does not see the combination of China’s reliance on fixed investment (now running at about half of its GDP), its lurking “massive non-performing loan problem” plus its huge amount of overcapacity as resulting in any kind of a rosy outcome. For Dr. Roubini, the period after the year 2013 presents a “meaningful probability” for a Chinese economic “runway disaster” unless the aforementioned issues are tackled and resolved.

Roubini goes one step further however, and he also factors in the possibility of a global-in-scope “perfect storm” of economic woes, if the Chinese scenario unfolds along his line of thinking and it does so while coming in addition to the restructuring of debt in Europe and the continuing (and now possibly aggravating) stagnation seen in Japan. Mr. Roubini gives the “perfect storm” scenario 30% odds of becoming more than a probability during 2013 or shortly thereafter [provided the Mayan calendar allows us all to actually make it into 2013 intact, at all].

Addressing roughly the same issue of risks to economic growth, former Harvard professor and President Larry Summers urged the US administration to consider expanding tax cuts to US workers and also advised that it would be “premature” to take away the stimulus “punchbowl” by the time this year ends.

Mr. Summers raised the spectre of a possible US “double-dip” that might have been a reality by now, had the Obama administration not reached a compromise with GOP leadership on extending unemployment benefits and cutting taxes on wages in 2010.

Spot gold trading opened with a loss of $5.00 per ounce with the yellow metal being quoted at $1,527.00 in New York. Overnight lows came in at the $1,522.70 level and highs did not overtake the $1,530.00 mark. Gold failed to take out resistance overhead at the $1551.00 point and its chart path now opens questions as to the possible next level of lower-level of support being tested. For the time being, the slight uptick in equity futures (mainly on bubbling M&A activity visible out there) helped narrow losses and support metal above their overnight lows.

Silver fell by over 40 cents on the open this morning and it was quoted at $35.75 on the bid-side in New York. Overnight lows were noted at the $35.27 level and thus the $35.10 low seen one Friday ago once again came into trading focus as a potential pivot point which could usher in further declines in the white metal. The $39 mark needs to be convincingly overcome if silver is to try to take flight once again into the $40-$43 value zone.

Such odds currently appear a bit distant. Silver-based ETFs leaked another sizeable tonnage amount from balances in the latest reporting period. More than 580 metric tonnes of the white metal were off-loaded by silver ETF investors, brining remaining balances to the 14,267 level – a one-year low (so much for the putative “major silver rush” being depicted in various subscription-based publications; it is more like a rush to the exit doors). Net speculative positioning in the silver futures markets also fell according to the CFTC’s latest report on such matters. More than 110 tonnes’ worth of speculative long positions evaporated from the market and drew such aggregate levels to their lows for the current year.

Veteran market observer Ned Schmidt, in his latest “Gold Thoughts” opines that the “Great Silver Crash of 2011” may not yet have run its course. Mr. Schmidt points to the previously parabolic in character rise in silver on the charts and notes that based on previous annual lows, highs, and closing values recorded in the white metal, not only is the metal collapsing out of said parabola, but it is doing so in an “obvious and irrefutable” manner. His “to-watch-as-it must-not-be-broken” level is the $32.25 spot level, beneath which the possibility of free-falls to the teens in the white metal’s price is a distinct possibility.

One metal that has clearly plunged into a bear market paradigm is nickel. At this juncture, the industrial metal is witnessing its largest oversupply in four years. Albeit nickel has traded as high as nearly $52,000 per metric tonne four years ago when the signs of overhang emerged, there are analysts who currently project it to decline to $20,000 and then to a possible $15,000 per tonne.

The nickel market is buckling under a roughly 60,000 tonne surplus at the moment, and analysts feel that its only support – a strike at miner Vale- is now gone and tilting it firmly into bear territory. Nickel’s primary application is the production of stainless steel and its largest producer is China. However, nickel is not the only base metal in abundant supply out there. Estimates place the overhang in aluminium at 301,00 tonnes and the one on zinc at 11,000 tonnes. Copper’s supply, on the other hand, might fall some 380,000 tonnes short of demand in the current year.

For ther rest of this column, please go to Jon Nadler’s column archive at Kitco Metals: