In The Lead – Shifting Grounds

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Gold prices retreated towards the $1,650-$1,655 area this morning as crude oil experienced a small setback and as the dollar climbed slightly on the trade-weighted index (last quoted at 79.82).

According to the latest Bloomberg survey of gold traders, the crowd is showing the lowest level of bullishness in circa sixty days in the wake of gold having erased more than half of 2012’s gains recently.

However, with an RSI figure nearing the 38 level (with 30 or so generally being sufficiently oversold to ignite some kind of recovery bounce) there is scope for a bit of a repair to take place in the metal.

Of course, that could depend on what the markets have yet to learn in coming days about the Fed and the US economy. On the physical side of the market, bullion markets in India shut down for a third day as participants tried to show their displeasure with the government’s proposal to hike import duties on bullion in an effort to address the country’s burgeoning current account deficit (to which gold demand has been a very significant contributor). We advise keeping a close eye on developments on this front.

Not much change was noted in the euro (seen near $1.315 against the greenback) despite data showing a fairly robust current account balance surplus gain for January. The common currency experienced hefty outflows that month from both portfolio and direct investment sectors. Black gold traded down 40 cents at $106.68 per barrel. Dow futures were flat-to-lower and most folks were mostly curious about what Apple might have to say about its huge cash hoard and what it intends to do with it. This [Dow] really has been an "Apple market" of late, many have proposed.

Silver dropped to the $32.25-$32.35 area as no fresh price drivers materialized in the early part of the morning. The white metal’s net speculative length declined once again in the latest CFTC reporting period. More than 205 tonnes of silver were shed from such bullish positions in the week that ended on the 13th. Forexpros.com analyst Abigail Doolittle cites silver’s Bear Pennant formation as targeting the $27.50 level and she notes that unless silver makes a fast U-turn to above the $34.50 mark, the bearish elements in the metal’s current market paradigm could make for a decline of as much as 30%.

Platinum climbed very slightly to reach $1,679 on the offered side of spot this morning. Palladium fell $4 to $695 on the bid-side. The CFCT-reported speculative picture in the noble metals offered a mixed bag of findings. Platinum shorts added to positions and ETFs sold some metal for the first time this year, while long-palladium players added nearly 17,000 ounces to positions as they appear to anticipate that metal to do better than the rest of the precious metals’ complex.

There are a couple of background developments and impact factors worth keeping in mind at this juncture as gold tries to find its footing and the debates about its near and medium-term fate continue to rage on. First, it is quite notable that currency traders have not been as bullish about the US dollar since 1999. Not a typo. We have now had 26 consecutive weeks during which futures market bets on a stronger greenback have outnumbered their bearish counterparts. We have noted here recently that — without making specific forecasts- the cliché that gold will go where the dollar does not will be the one to keep in mind in 2012 and beyond.

That kind of pro-dollar speculative positioning and confidence level was last seen thirteen years ago, at the beginning of what turned out to be a three-year rally in the US currency. UBS market observers have labeled this tectonic shift as "structural" and not some "flash-in-the-pan" passing fancy for the greenback. Doomsday predictors have repeatedly assured us all that the American dollar would be dead-and-gone by not only now, but by the end of each of the past five years as well.

China ‘quietly’ raised its US dollar-based securities’ holdings for the first time in six months this January. The dollar has climbed 1.3% this month. However, market observers also opine that a more substantial move to higher ground may not come in the US currency until the Fed actually executes its first rate hike and commences the process of exiting from accommodative policy. In the interim, the dollar will likely receive the major part of its support from continuing (and speculators hope for more of the same) improvements in US economic metrics. A CNBC survey shows a strong rise in the number of people who now believe the Fed will have to hike rates well before 2014 — as ‘promised.’

The other factor that needs to be noted at this time is the fact that, despite allegations of "printing 24/7" being issued at the rate of about one per minute by certain hyper-inflation flavored alarmist camps, the CPI levels that such publications keep warning about have not only not materialized, but are a far cry from event the levels that helped gold first achieve a record-breaking feat back in 1980. Consider the fact that in the period from 1971 to 1980 US consumer prices climbed by and average of 7.9% annually. Consider the same indicator climbing by only 2.4% per annum and never having exceeded 4% in the period from 2001 through last year.

Many "hidden statistics" followers have totally missed and misinterpreted the Fed’s act of creating reserves in tandem with the expansion of its balance sheet as effectively "printing" little green banknotes and literally flooding the economy with them. As we reported here last week, another metric-the velocity of money-has actually dipped to its lowest level in fifty years and it has neutralized the possible inflation that could have resulted from the creation of excess reserves of that order of magnitude. At this point, the removal of said excess reserves from the equation might not yield monetary growth beyond the 3 to 4 percent level. That is a far cry from the Weimar Republic and/or the Harare-on-the-Hudson scenarios so often being promised in hard money publications.

Finally, there could be a shift in gold investors’ psychology underway as well at this point in time. A former bank examiner and risk analyst, Mark Williams, who currently teaches at Boston U, wrote in a Financial Times op-ed piece that the last bull market in gold ended in 1980 with a price plunge of 60%. Mr. Williams opines that "the bubble is popping again" and that this time "gold could drop to $700 an ounce, more than $1,000 below its peak." The author does not only take his cues from the significant slowdown in ETF tonnage demand we saw in 2011 (the lowest since these vehicles came into existence in late 2004) but also from what the retail crowd might do in the event of a loss of confidence.

To be sure, gold-based ETFs have not (yet) been tested in a gold bear market and many too many have seen them strictly as a one-way demand-pull paradigm. On the other hand, Mr. Williams argues, small retail investors "tend to vote with their feet very quickly." He sees the "class of investors who are in gold because it’s a religion, a cult, a political statement" as the one segment to be on the lookout for as it could potentially be one of the principal catalyst that will spell ‘end’ to the multi-year gold bull run.

By the way, Mr. Williams is not saying that the gold bull is ending this minute, on this very day. He owns a small GLD position and is "not currently selling it." We have repeatedly concurred with the advice that the need for a core 6-10% gold insurance allocation in one’s portfolio (unless that basket is under $100K or if the person is elderly and income-dependent) is and remain essential, regardless of gold’s future price prospects. Mr. Williams does however advise those who have seriously overloaded in gold and silver to the tune of 40 to 50 percent (and there are throngs of such fear-driven folks out there) to lighten up and take some profits off the table and follow the old, time-tested adage that "You should never marry of fall in love with your investment."

Precious metals traded marginally weaker overnight as well, as the US dollar remained relatively firm after Friday’s slight setback on in the wake of a gas price-induced slippage in US consumer confidence. Weekend reports showing Chinese apartment prices falling in 45 out of 70 tracked cities added to apprehensions that the giant economy might not escape a harder than ‘soft’ landing. IMF chief Christine Lagarde warned in Beijing on Sunday that there is no room for complacency when it comes to the global economic recovery, which is, in fact, showing a few signs of drag at this time.

However, IMF deputy managing director Zhu Min is of the opinion that his country’s caving property market values do not necessarily imply that the ‘landing’ will be as "jarring" as what JP Morgan strategist Adrian Mowat (quoted here in Friday’s article) says is the case, and, is already happening. Chinese stock markets ended a tad higher overnight but analysts see gains as being limited until such time as investors get a better sense of what the country’s government might be prepared to do in light of the emergent economic metrics.

This week will see the release of corporate results from a bunch of major Chinese firms as well as of reports by three of the country’s largest banks. On Thursday, HSBC will announce the findings of its flash PMI for the month of March. Thus far this year, manufacturing activity contracted in China in both January and February. On the same day, the markets will also learn about the shape that Japan’s trade balance is currently in. Recall that last year, as well as this past January, the Japanese economy reported its first trade deficit in three decades. Experts have attributed the unusual (for Japan) data as being attributable to that country importing more fossil fuels in order to make up for lost nuclear power output in the wake of last year’s devastating earthquake.

Over in the USA, this week will bring a slew of important housing data that will also play figure prominently when it comes to the impact on the psyche of the investing crowd. We will get housing starts and existing home sales figures tomorrow and Wednesday and new home sales statistics on Friday. For today the National Association of Home Builders will release its findings on the sentiment in that all-important sector. Meanwhile, the markets will also be on alert for any smoke signals coming from speeches being given this week by Fed officials such as William Dudley, Janet Yellen and Chairman Bernanke himself.

Until Wednesday,

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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