Gold, Silver, Metal Prices: Friday Commentary (9/25)

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Gold’s largest weekly drop in more than two months was slightly mitigated by a small decline in the dollar during the overnight hours. The sell-off in the metal began on the heels of the Fed meeting on Wednesday, albeit one last push to the $1020 marker was still attempted by the hugely long speculative fund crowd. At the end of the day, our perception that the convergence of the FOMC, G20, and gold-IMF calendar and related issues was a possible pivot point for the dollar (not we said the dollar, not gold) was well-founded.

UBS analysts now believe that the technical indicators show a maintenance of the bull trend in gold only if the $1032.50 level is convincingly penetrated. More proof that the $1K psychological mark is mainly good for newspaper headlines and gold dealer infomercials on the Rush Limbaugh Radio Show. We must, however, tip our collective hats to the metal’s ability to record a week’s worth of closings above that benchmark. And now, we also know why (see below).

In any case, Friday’s metals dealings started with a background of a slightly weaker US dollar (off 0.20 at 76.69 on the trade-weighted index and trading at 1.466 against the euro) and a slightly firmer crude oil (up 15 cents to $66.04 per barrel). Oil itself might have to deal with testing key support in the low $60s according to market analysts who watch it closely.

Gold lost $1.20 per ounce, to start the NY session at $992.50 while players assessed the market’s condition and sentiment following yesterday’s possible key reversal. Support at the $990/$995 area must become manifest and Indian buyers must become visible in droves this weekend, lest the gold price aims back down towards the $950-$975 zone in a hurry. And even that might not wear the label of a ‘significant’ correction, at the end of the day.

For the moment, we peg the gold trading range at between $985 and $1025 – admittedly wide, but we ain’t seen nuttin’ yet as volatility goes. And, October is still several trading days away…Thus, we would not be surprised to see a nearly full recapture of Thursday’s losses, or a drop of further and equal magnitude. But, we are still leaning towards the latter at this point.

The logjam has broken, and the long/short arm-wrestlers are all oiled up, even as their muscles are ridiculously mismatched. Silver was down 8 pennies at $16.12 per ounce – more than $1.50 lower than its level of just a few days ago. Platinum fell $7 to $1291 while palladium showed no gain or loss, at $292 per troy ounce.

The Pittsburgh G20 summit remains front and centre on most traders’ minds, as some kind of statement is still expected from the gathering regarding the future role of the dollar, the diagnosis of the global recovery, and similar issues. What we might more likely get from the group however, is financial institution regulatory talk and related bankers’ pay caps. Belated guilt, but better than never. One thing that is already known, is that we can kiss the idea of the G8 goodbye. There will only b a G20 going forward.

We have repeatedly expressed concern (it went unheeded, and was met with ire) not only about the size of the long positions in NY, but more so, about their ownership structure. This is why we had labeled the September Surge as anything but the start of the ‘lunar mission’ which every single perma-bull applied to it with wild abandon. To wit, had anyone cared to read compilations of opinion from various other sites and analysts – not just this writer’s- over recent days and longer, there would have been some inevitable conclusions to be drawn. Such as:

"Business Insider: Gold’s drop below $1,000 today in unison with a falling market, increased economic worries, and a strengthening dollar, should be setting off alarm bells for gold bugs inside their fall-out shelters. The market has taken a turn for the bearish… yet gold is down almost 2% in a day. "

"So what scenario exactly is gold hedging against? Should the current economic recovery come to a halt, deflation, not inflation, is likely to be the prime concern. Such a scenario would probably see the US dollar strengthen, making gold right now an asset class more correlated with stocks and economic recovery than crisis.

Thus gold could be investors’ version of World War II France’s failed Maginot Line — An expensive defensive hedge, yet unfortunately built to fight yesterday’s battles.Todays markets have changed, even for gold itself. Long-biased speculators… risk-takers, not the risk-averse, have taken hold of the market at current price levels."

"Commodity Online: the number of speculative longs at COMEX is almost 10 times higher than the number of outstanding short positions and this is a big concern and a big danger for the market because those are weak hands. Gold will be little defense against the deflationary panzers which any US economic slowdown may bring."

"Business Insider: If you are long gold, you’re no contrarian. U.S. Commodity Futures Trading  Commission (CFTC) data shows that the net long position of speculators in gold has reached an all-time high of 93.6%. Worse yet, nearly 100% of money manager speculators within this data, such as gold-related index funds and managed accounts, are long gold. There’s a dearth of traditional market players on the long side. Which has caused some professional traders to worry they might run out of people to sell to, once investment funds’ buying interest is exhausted.

"Hard Assets Investor: For now, there seems plenty of contracts on offer by others in the gold trading ring as commercials and swap dealers got even shorter last week. Even large noninstitutional traders and small speculators lightened up their net long exposure by taking some money off the table. Open interest is still building in gold futures, so new traders are entering the fray. But, with every trader category getting shorter, and only money managers as net buyers, you’ve gotta ask yourself: "What do these guys know … or think they know?"

There’s more evidence that evidence that you can be right about future inflation or dollar weakness, yet still be wrong by being long gold. Says Citi: "There is no obvious relationship between the gold price and inflation. There have been times when the gold price has risen when inflation is declining, and times when gold has fallen when inflation is rising. Inflation expectations may be just as important"

Obviously, there has been a sharp drop in inflation (US Consumer Price Index) most recently. Yet gold hasn’t budged, and actually went higher, arguably due to expectations that recent deflation is temporary. Yet if this is the case, then guess what could happen to the price of gold should current inflation expectations prove too high?

Just as stocks can get ahead of their earnings growth —  whereby earnings per share may jump 20% yet the stock still falls due to market expectations requiring even more growth — the same can happen with this metal. Thus the current price of gold may already price-in very high inflation (or very weak dollar) expectations, which if not met could lead to a sharp reversal for the metal. In this fashion, many gold bulls could end up correct in their inflation (or weak dollar) predictions, yet wrong in terms of the price they paid for gold relative to their prediction."

Well, at least one item we drew your attention to several months ago is right on target for a lunar landing. Sugar, still in a ‘perfect storm’ according to Bloomberg-surveyed analysts is still set to triple by next summer. Sweet commodity play. As long as you note the operative word. "Play." When it comes down to it, there is still a lot of ‘playing’ going on out there. Some of it, in the very midst of the End of the World we have experienced since 2006. Bubbles? Sure. But who cares, when you can caress and drive them every weekend? Collectible car prices have risen 60 (!) percent and have soundly beaten art, wine, stocks and gold, which is up 30 percent since September 2006.

PS. See you in Toronto, at the fabulous Cambridge House Resource Investment Conference this very weekend. We have one white, shiny, exciting surprise in store for you. Provided you attend the Kitco workshop, that is.

Best Regards and a pleasant weekend.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Check out CoinNews market resources at Live Bullion Spots, the Silver Calculator, U.S. Mint Collector Bullion Coin Price Guide. The Inflation Calculator easily finds how the buying power of the dollar has changed from 1913-2009.