Gold, Silver and other Metal Prices: Friday Commentary

Labor Day Before Labour Day

Good Afternoon,

Price ranges narrowed and action turned somewhat calmer in overseas precious metals markets overnight. The approach of the long weekend in the US and the imminent release of labour statistics made for a bit of an initially strange combination on Friday.

While some participants were seen jockeying for fresh positions -long or short- following the data signal, others were simply squaring the logbooks books (and some have already started that process yesterday while ‘gone fishing’ today) and were already looking forward to next week, and what it might bring.

That said, gold prices remained very near the 990 mark during the early hours, buoyed by a slightly softer dollar (off 0.10 on the index at 78.36) and marginally higher crude (up 0.45 at 68.40 pbbl) and some scattered follow-through buying following the two-day spike in the metal. Indian gold prices reached a record 30,000 rupees per tola overnight, and the local market was seen gearing up (we should say down) for a period that is not deemed as auspicious for buying the metal (between the 5th and the 19th of the month). It will be time to pay tribute to the elders.

The e-mails we got from gold retailers the Gulf region seem to corroborate that which was disclosed earlier this morning; that Abu Dhabi for example saw a 40% drop in  August gold sales. There is one bright spot to report as regards India this morning however; the country imported 3 tonnes more gold in July of this year than that seen in the same month of 2008. Buyers raised their buying radar following the early June slippage in gold prices that brought values closer to the $900 level by early July.

One other bright spot to also report today is that the buying spree we witnessed during the week did finally materialize in some additions to ETF balances. GoldEssential’s weekly ETF monitor findings reveal that: "Investor holdings in our ten monitored gold-backed exchange-traded funds were seen increasing 18.569 tonnes or 1.21 pct in the week from August 28th up to September 4th, in-house calculations based on official data showed on Friday. Five of the ten ETF’s announced an inflow and five ‘no change’. None of the monitored ETF’s reported a decline in holdings over the reported period."

The focus -as expected- this morning was on the unemployment data from the US. You could say that labour day came before…Labour Day. Expectations were that perhaps as many as 230,000 jobs were eliminated last month – smaller than July’s losses, and the smallest such decline since August one year ago. Nonetheless, the overall unemployment rate was anticipated to possibly bump up to 9.5%, and getting ever closer to the projected 10% lagging statistic that many economists and U.S. officials still believe could materialize.

The US numbers came just ahead of the G-20 meeting taking place over the weekend, and they underscored the fact that whether it is the US, or Europe, or other parts of the world, the recovery is still fraught with delicate issues and that yanking the stimuli packages too early might engender more pain. At the same time however, officials at the G-20 get-together are expected to present of roadmap of their eventual exit strategies, being fully cognizant that not doing so unnerves markets today, while crating actual problems (inflation for one) down the road.

Gold opened with a minor ($1.50) per ounce loss today, quoted at $990.20 while silver declined 12 cents to start the day at the round figure of $16.00 per ounce. Platinum rose $4 to $1255 but palladium fell $2 to $288 per troy ounce. Players were assessing the odds of a successful assault on the four-digit target, how far beyond that number the funds can reasonably push the envelope, and how long-lived the fourth attempt to overcome this price level Holy Grail might turn out to be.

And then, the numbers hit the wires. Unemployment actually rose to 9.7% -a 26-year high and more than was expected. However in August employers shed only 216,000 jobs- a number lower than forecast, albeit this still amount to the 20th consecutive month of such losses. Initial reaction was only clear in Dow futures, which turned lower following the data release. A flurry of trades hit the metals and currency market floors but it was –at that point- unclear which direction the day’s trend might take.

The situation was quite different on our side of the border, where employment actually rose by nearly 28,000 positions – the first such addition in four months. However, our jobless rate is but one percent under that of the USA and it rose by a tenth of a percent to its highest levels since 1998.

No doubt, this is -and will continue to be- a slow recovery defined by slow growth. Under such conditions and with examples such as US capacity utilization at a dismal –no, make that record low- of 68.5 there remain an output gap out there that does not make one bullish on commodities. Neither does the utter collapse of global trade in recent months (and to a degree worse than in 1929) give us much reason to cheer just yet, even if various and sundry corners have been apparently turned. No matter what keep reading in the published opinions of the usual suspects in the commodities camp. (So much for today’s op-ed)

Oil, for example, will likely trend back towards the $50s if the current weak situation persists. This is a scenario that we feel is strongly corroborated by technicals as well. Bloomberg cites Auerbach Grayson, a brokerage in New York, as saying that.

"Crude oil is on a "slippery slope" after failing to break through resistance and is set to test support at $60.43 a barrel, according to technical analysis. The failure of October oil futures to breach $75.27, the June 11 high, has made crude vulnerable to "significant decline," according to Richard Ross, a technical analyst at Auerbach Grayson. Futures dropped more than $7 since touching $75 a barrel on Aug. 25.

"We are right on a precipice here and are at a very important inflection point," Ross said in a telephone interview. Settling below $68 a barrel yesterday "opens the door to testing $65 and $60.43, which was the low on July 13." The failure of the 50-day and 200-day moving averages to cross is another indication that prices may fall, Ross said. The contract dropped below the 50-day moving average on Aug. 31. Oil fell below the 200-day exponential moving average on Sept. 1.

If China does indeed slow from the stimulus-induced economic adrenaline rush, other commodities will also suffer. Gold will not, and cannot, be immune from those effects, recent developments notwithstanding. There is too much anticipatory behavior (of the incorrect interpretive kind, we might add) to the recent commodity feeding frenzy among spec funds. Tangible inflation is but a spec on the horizon, whilst tangible crises are fast turning into rearview mirror specs.

The ever-thinning ranks of leftover players in the afternoon half of the NY session saw gold turning up a bit from the lows it put in earlier, near $985.00 per ounce. The yellow metal was last seen sporting a 60-cent loss on the day, quoted at $991.10 basis spot bid.

Silver also reversed course and once again vaulted above the $16 mark. It was trading at $16.14 at last check, up 2 cents. Platinum and palladium showed only very small gains, rising $1 and losing the same amount, respectively. The latest offered quotes were seen at $1252 and $289 per ounce, respectively. We did not stick around for 17:15 hours to find out where the final tally ended.

Much of what takes place next week, depends -at this stage- on whether the gold-stocks correlation is still as valid as it showed itself to be in recent months, and on whether dollar traders take this Friday’s data set as a signal to take the currency to 78 or lower on the index. At last check, they managed to get pretty darn close- 78.11 to be exact. Post G-20 communiques will certainly play a role in where the US dollar heads next. However, for all intents and purposes, gold has already apparently made its play as if the labour statistics had come out on Wednesday.  

Part of what has already taken place (this week) can be attributed to investor funds being reallocated as jitters persist about the state of affairs in the global economy. Bloomberg reports that "Investors withdrew a net $4.95 billion from equity funds and added $5.06 billion to bond funds in the week to Sept. 2, amid concerns about the strength of a world recovery, EPFR Global said in a report.  "They struggled to make the connection between equity markets at 10 to 12 month highs and a global economy that has digested the bulk of the fiscal stimulus packages served up in recent months but continues to shed jobs," wrote the EPFR, which tracks funds with $10 trillion worldwide. "Going into September they steered the cash they once again pulled out of Money Market Funds into fixed income rather than equity funds."

In closing, we offer you a roundup of trader opinions on gold, and what might be next, courtesy of GoldEssential. In other words, the views of those who actually move this shiny stuff back and forth for their own firms and for clients thereof. Pick and choose – whatever suits your own angle – there is enough here to choose from:

• "Larger accounts are a bit cautious today", one London-based trader said, referring to the pending U.S. non-farm payrolls for August at 12.30GMT. He added that "everyone’s aware that gold has leaped over the last few days, and it feels a bit heavy on the back of a short-term overbought condition."
• A technical analyst at a major German bank said that "charts remain bullish, and that a test of the $1,000 mark is still on the cards, possibly later today, despite the overbought readings on the RSI.
•  Another London-based dealer said that "U.S. NFP’s today are likely to make or break an attempt to extend the rally on the short-term." He believed that "despite gold decoupling from the U.S. dollar in its latest up-move, I think it will need the support from a weaker dollar to mask apparent profit taking."
• "After Wednesday’s spectacular break, further upside had always been expected", one London-based dealer said, adding that "On Wednesday, inflows had been mainly from hedge funds and other speculators, but on today [Thursday] we have seen exchange traded funds jumping on the bandwagon as well."
• He added that the "market was very flow-driven, with the correlation to the U.S. currency dropping as the greenback remained fairly stable throughout the day". "It looks promising for higher levels", he said, adding that "it now has the clear opportunity to break the $1,000 convincingly. If it doesn’t succeed in doing that over the next weeks, disappointment could be very extensive."
• A NY COMEX trader confirmed that larger accounts were placing their bets for a test of the $1,000 mark, but added that so far, "the ride has been fairly easy given the cooperation of many stop-losses being triggered, aiding the momentum-based rally. "We’ll have some correction sooner rather than later" he added, and "climbing up from such dips won’t see such magnitudes of stop-losses being set off to aid the ascent, certainly if such correction would still happen before the $1,000 mark."
• His colleague added that "even a break of the psychological level itself doesn’t imply a guaranteed run higher, as so far "every single attempt to move above it has ended in a hit and run very quickly."
• Evelyne Winters at Goldessential noted that "despite [spot] gold having rallied as high as $1,030.80 an ounce in March 2008, and hitting $1,005.40 back in February, it has only recorded 4 days above the $1,000 mark ever, with even only one close above the mark being witnessed thus far."
• She believed that gold would "likely struggle ahead of $1,030.80, with a net speculative long positioning that was overly long certainly not boding well." Nevertheless, she acknowledged that a chart break-out above the previous record high ($1,030.80), combined with a journey of at least a week above the $1,000 mark might see prices extending their bullish phase a bit further.

Like we said, a world of opinions.

Now, here is ours: You deserve a long, peaceful weekend away from the madding crowds, markets, and the hustle and bustle. Go ahead and grab what’s left of summer and make it a tone of fun. The markets will all be there when you return on Tuesday.

As for us, we’re already ‘on board’ and "out" there…

Happy Fishing!

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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