Gold, Silver, Metal Prices Commentary – July 2, 2010

Much Ado About Something

Good Morning,

Thursday’s massive meltdown amounting to nearly 4 percent dragged gold to below $1,200 an ounce for a brief period. It was the worst decline the yellow metal experienced since early February and it ushered in a major technical breakdown on the charts. Gold however was not alone in being abandoned by some investors for the comfort of cash. Disappointing U.S. and Chinese economic indicators also engendered major sell-offs in crude oil, copper and certain equities.

Not much was spared as the mood for risk appetite evaporated with a swiftness not seen since one early day in July just two years ago. The final tally for last night’s closing markets in New York showed gold down $43.00 per ounce at $1199.40 bid side. A major 86 cent decline was seen in silver which fell to $17.76 per ounce. Platinum suffered a $33 loss to finish at the $1500.00 round figure and palladium fell $12 to end at $431.00 per ounce.

This morning’s market action had gold prices all over the place once again as players trying to right the ship encountered plenty of others unwilling to do so and still jumping aboard cash-laden lifeboats. Spot prices ranged from $1202 to $1214 and early corrective gains gave way to more selling as the market opened. On the ‘good news’ front, India’s gold shoppers made a rare (of late) appearance and picked up some bullion on the back of the price slash offered by overseas markets. August brings more festivals and hopefully more gold buying. To be continued…

Spot gold started with modest gains, rising $3.20 per ounce to the $1202.60 level. Recovery, yes, but a feeble one thus far. Previous support at $1225 now becomes resistance. Participants awaited key US jobs and joblessness figures and were more than likely looking beyond the news and to the time when they could close trading books and head for the shore after such an eventful week. Silver opened with a nickel’s worth of gains, quoted at $17.81 the ounce while platinum added $5 to start at the $1505.00 level.

Palladium and rhodium were not quite so lucky; the former lost $2 to open at $429.00 and the latter shed $10 to level off at $2430.00 the troy ounce. Impala Platinum failed to reach a pay agreement with its largest union today. Third-party negotiations are slated to commence on July 19th. In other news, Chinese gold output fell by 2% in May and totaled 28.31 tonnes. The country remains the top global gold producer.

In non-surprising news from Down Under, the "Henry Tax" now RIP. The Globe and Mail reports that "Australia’s government on Friday retreated from a planned 40 per cent tax on booming profits in the mining industry, defusing a damaging row with big business and clearing the way for national elections to be called at any time. Mining companies had campaigned mightily against the proposed tax, and it was a key factor in the sudden ouster of Kevin Rudd as prime minister after he refused to negotiate. Friday’s announcement from new Prime Minister Julia Gillard effectively removes the issue from the political agenda."

In the background this morning, the US dollar lost 0.05 on the index (at 84.49) while the euro continued to flex newly acquired muscle and traded just above 1.255 against it. Black gold was off only marginally, losing 40 cents at $72.55 per barrel. Private sector payrolls were up 83,000 in June and the unemployment rate stood at 9.5% (down from 9.7% earlier) in the US. On the face of it, good news. Look under the job market hood however, and learn that total job growth dropped last month for the first time this year.

Dow futures, the dollar, and oil futures appeared to take the Labour Department news with a show of anxiety. Gold held steady near $1205.00 the ounce. The headline number that traders will apply to today’s gambles they take in the markets will be: 125,000. The number by which nonfarm payrolls contracted in the US. Economists had anticipated as many as 115,000 jobs to be added to the ranks of the employed in June. So, will it be risk aversion or risk appetite? Depends on your take of how long it will take to achieve full recovery for the US economy. Eight million jobs were lost since 2007. The math that computes duration based on monthly job creation would not be too difficult to pencil out. Were it not for one-off surprises that invariably work their way into such formulae.

Friday morning punditry offered all sorts of explanations for what took place yesterday. Comments ranged from obviously panicky damage control statements (made by fund managers who continued to pile into the long side of the market even as the new quarter brought questions about the rally’s sustainability), to the terse "I told you so" and to somewhat more rational explanations of the event. There certainly is no shortage of text trying to place the situations into some kind of context, although much of what happened points (as usual) to irrationality, human emotions, (oh, wait, we just said ‘irrational’), etc.

Others focused mainly on chart data and concluded that not only has a top been put into place in gold but that –inevitable upward corrections notwithstanding-the metal is headed for significantly lower value zones. One such detailed analysis –made just three days prior to yesterday’s bloodbath-is certainly worthy of the ‘replay’ button being pushed (maybe several times even) in the wake of the Thursday cave-in. Active Trading Partners’ David Banister appears to have been among the very few who rang the alarm bell prior to the conflagration in the market.

One of the best chalkboard presentations on the meltdown and shift in sentiment came from Daily FX’s John Kicklighter. For starters, he correctly identified the emerging underlying conditions that led to the rush for the exit doors: "There is little argument to be made against the claim that risk aversion has picked up considerably over the past week. Most of the risk/growth-linked asset classes have contracted sharply while the fluidity of the credit and financial markets started to stress."

However, Mr. Kicklighter delves further into the debacle and finds that some rather disturbing and certainly unusual bedfellowship took place on Thursday. Namely, that: "benchmark equities index tumbled alongside the US dollar and gold. Savvy investors know this is unusual considering the greenback and gold are safe haven assets that typically appreciate when typical capital markets fall and speculative capital seeks shelter."

While conceding that "indeed, a demand for liquidity could have set gold tumbling and temporary reprieve for the euro could have led to the dollar’s slump" Mr. Kicklighter argues that:"should this divergence turn into the norm; we could be seeing a fundamental shift at work" and concludes that despite all of that "the fear and greed of the mob is not easily defined." The take-home lesson from his classroom is to keep a sharp focus on investor sentiment and the events that alter its course and act somewhat early as there comes a point at which momentum takes over in a market (any market) and selling pressure becomes self-feeding just as was the case with buying pressure and momentum on the way to a top.

Wishing our US readers a safe, sane, and Happy Fourth of July Holiday! Canadians near the border (most of them) will now have a second chance this week to smell the BBQ in the air…what would national holidays be without it?

Happy (and still careful) Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

In addition to bullion American Silver Eagles that are already available, the United States Mint this year will also issue 5 oz. bullion America the Beautiful Silver Coins that are duplicates of the America the Beautiful Quarters. The first of five coins will be released this summer, with the remaining four to follow in short intervals. Check the above link to visit a sister site to CoinNews for more information on the new series.