Gold Nears $1260; Silver, Metal Prices Commentary – June 18, 2010

Never A Dull Momentum

Good Morning,

The final trading day of the week commenced with the euro maintaining its recently acquired strength and the US dollar slipping a tad more on the trade-weighted index. More bravado was on tap from the EU in the wake of a Spanish move to publish stress-test results. The EU fired another round in the direction of the debt vigilantes by reaffirming the decision to publish stress-test results of the region’s lenders.

The ECB, in turn, asserted that it will ‘absolutely not’ provide potential test-failers with capital. Spain itself has already projected that it might only need to use 30% of the available 99 billion euro bank rescue funds. Next up at the financial confessional booth: Italy. The Bank of Italy has said that it too will publish national stress-test results of banks in order to clear the apprehensive air.

As if the aforementioned background conditions did not exist, gold prices broke above the $1252 resistance zone and surged ahead to near $1260 the ounce, well ahead of the New York market’s opening on Friday. As mentioned, the momentum-fueled move took place despite apparently ameliorating conditions in investor in risk appetite and in perceptions about the eurozone crisis.

This past week has brought about gold price moves which one can argue are now disconnected from news on the euro, the dollar, oil, equities, the debt problems in Europe, the global economic recovery, and/or practically anything else one cares to think about. Not to mention internal market fundamentals. Just did.

New York spot precious metals dealing opened with across-the-board gains in the complex. Gold added $12.20 per ounce to start at $1257.40 while silver gained 30 cents to open at $19.03 the ounce. Palladium rose $1 to the $481.00 mark, while platinum held firm at the $1575.00 per ounce bid figure. No change was noted in rhodium at $2380.00 the ounce. Physical offtake remained subdued in India and is not expected to be particularly buoyant as the weekend starts.

Despite a brief recovery due to lower gold prices in the early part of 2010, there is yet another region where gold jewellery is having a tough time. GMFS reports that "Last year was the worst on record for many Saudi Arabian jewellery traders. The sharp rise in the gold price, coupled with the economic uncertainty associated with the global financial crisis drove domestic jewellery consumption to an all time low of just 78 tonnes. Moreover, the Saudi market, once boasting consumption in excess of 200 tonnes per annum just over a decade ago, has fallen more than 65% from these buoyant times, driving many family run fabricators and retailers from the industry."

For the moment, gold price targets above current levels include the $1271 figure, while support levels have become previous resistance markers ($1230/$1240). Very likely, the EW analysis to be offered at day’s end could allude to a possible $1340 target before this move comes to a close, now that a breakout above $1252.35 has taken place. Notably as well, there is a total absence of the mentions of the ‘New York 9 o’clock whack’ — the alleged pouncing on rising gold prices by sinister forces; one that is supposed to take place every morning when markets open. Not a polite thing to mention amid 98% bullishness levels. Must be that Darth Vader has fallen asleep at the controls.

Unions in South Africa put planned strikes on hold for the time being and thus Eskom’s ability to supply electricity to customers got a three-day extension. In the background, the US dollar climbed modestly, adding 0.04 to 85.70 on the index, while crude oil dropped nearly $1 to 75.81 per barrel. The euro continued steady; last seen at 1.238 and awaiting fresh eurozone news.

Mineweb’s seasoned market observer Lawrence Williams opines that –albeit a rising trend still remains the order of the day– a ten-fold explosion in gold values (as some are emphatically prognosticating) is not only unlikely, but probably unwelcome (on many critical levels).

Mr. Williams writes that "it will take a major economic collapse beyond the Central Bankers’ and governments’ ability to mitigate it to see this [kind of rise] happen.  One can’t rule this out, but if it were to happen – again as we have said before – the whole social and economic structure could break down to such an extent that even one’s holdings in gold may not be enough to protect us from the potential of ensuing chaos and anarchy!  In the words of Ian McAvity – gold holders be careful what you wish for."

Recent opinion from a long-time participant in the metals market furrowed quite a few eyebrows when it tendered that gold is not a currency (in the sense that it is unlikely to be bartered for croissants at Starbucks when the aforementioned Lawrence Williams/Ian Mcavity-offered scenarios possibly become reality).

We will now relay potentially equally eyebrow-furrowing analysis that opines that silver may itself not be a monetary metals any longer. Go ahead, shoot the messenger. That’s what they are for. GFMS veteran analyst Rhona O’Connell offers this take on the white metal and its trading patterns:

"Daily trading correlations for the month of May show that silver sustained a correlation of 44% with gold, but between 69% and 72% with aluminium, copper, lead, nickel and zinc. On the basis of this daily correlation then silver should, prima facie, be expected to run with the base metals during periods of economic uncertainty, and take little notice of gold’s price performance."

Does this imply that people who fear calamity will no longer buy silver and that they will be overcome by those who buy the metal strictly out of economic optimism and due to perceptions that it remains a highly useful commodity? Probably not. Coattail effects from surging gold prices will still manifest themselves going forward. People who feel gold is ‘unaffordable’ will likely look to the ‘poor man’s version’ of the yellow metals and help bolster its own value equation. Maybe even to $25 the ounce.

However, does any of this mean that we are now also facing $50, $1000, or $200 per ounce silver? Only if you are a subscriber to the $10K gold theory. Mind you, the right silver dollar could probably secure that stale croissant in the "Day After Tomorrow" post-apocalyptic world. Much sooner than the mini-Krugerrand.

In the interim, to paraphrase Mel Brooks’ (or any realtor’s) "Location, Location, Location" it is "Momentum, Momentum, Momentum." Noting of course, that no one has yet come up with a perpetual motion machine. Tread carefully. Or, is that: trade carefully?

Happy weekend.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

CoinNews: United States Mint bullion coins moved higher Thursday. The following table shows sales movement from Wednesday to Thursday, with the exception of the smaller sized 2010 fractional Gold Eagles which show increases between Monday and Thursday.

U.S. Mint Bullion Coin Sales in June