Gold, Silver and Metals: Prices and Commentary – Aug 17

Of Shanghai Surprises & Self-Consuming Snakes

Good Afternoon,

A surging US dollar-driven sell-off took a hefty amount of shine off the precious metals complex overnight and later on Monday. The better than 0.6% gain in the greenback pushed gold values to their lowest levels this month, to under $935 per ounce – all this, before the NY market opened for the new week.

The dive in prices was sparked by a significant, near 6% fall in China’s equity market – its largest percentage decline of 2009. One vividly recalls the 10% cave-in in Shanghai, back in February of 2007 – it was the clarion call for the two and a half years of sheer global economic chaos and pain that have followed.

Risk aversion remains the fastest and most obvious choice for participants when such potholes are hit. So is the favourable nod they give the dollar and the yen under such circumstances. This morning, therefore, it was not a Shanghai Surprise (after all, it was not as if speculators were unaware of tightening bank lending and lukewarm Chinese economic data), it was a Shanghai Shocker.

For those who had built a speculative house of cards on little more than statistical smoke and complacent mirrors lately, this was not to be a pleasant Monday, but more like a manic Monday. Behold copper, nickel, and other industrial metals losing between 2.2 and 3.5 percent off Friday’s values. Dow futures were indicating a less than happy start to equities trading in NY. Such advance fears materialized during the session and the index lost 165 points thus far on the day.

Some market gurus (Peter Eliades among them) feel that the Dow and the S&P have been living on borrowed time, supported by the species of bull that has given commodities their latest shine as well. A greedy, way-too-forward-looking bull who turns out to be easy to scare and be made to pull its horns in when confronted by news such as today’s. So, to some, the Chinese as well as the US bull – well, he is a she. A bit more placid, and shy. Surprise.

Thus, it did not take long for the ebullient commodity niche players who were swarming all over the media (and the trading floors) last week, to pull in not only their antennae, but also to pull quite a few wads of cash off the market table. Suddenly, it became once again fashionable to hold dollars while the storm rolls on. The trade-weighted index showed the US currency at 79.46 (up 0.57) at last check this morning.

As expected, a sizeable decline was unfolding in the oil pits as a result of all this. Black gold sank to under $66 per barrel as worries about a glut of same spread among the longs. Japan’s Nikkei was unable to celebrate the country’s emergence from a year-long recession -as shown in its GDP Q2 GDP gain- and lost 329 points instead.

New York spot metals trading opened solidly in the red zone. Gold started off with a $14.80 per ounce loss on Monday, quoted at $932.80 bid. Where this stops, that’s a good question. We had been intending to be neutral on the price prognosis for this week, but – hey, they don’t call it a Shanghai Surprise for nothing, do they? First supports ought to manifest themselves near $920 and Indian buyers could then become tempted. We think. Much depends on how deep the gloom reads following’s today’s session close.

Gold’s 1.98% mid-morning drop paled in comparison to the 6.12% (!) midday 90-cent fall to $13.81 in the price of silver, which led the metals fire sales parade. Outperformance by silver? Sure, so long as one acknowledges that is works in either direction on the price scale.

Latest (3PM) price checks from New York: Gold off $13.00 and $934.60, silver down 68 cents at $14.03, platinum losing $34 per ounce at $1223.00, and palladium down by $8 at $266.00 an ounce. A comeback in oil and a smaller gain in the dollar were the most obvious factors behind the mild recovery from the lows achieved in bullion.

The bigger range ($920-$970) has not been broken, even though the summer ‘doldrums’ have given plenty of false breakout announcement opportunities to certain hyperactive hyperbulls. Analysts at BMO recently opined that gold –albeit remaining in a bullish incarnation- might remain range-bound near $950 well into 2010.

So, what’s behind the new (although it is nothing new) ‘fondness’ for dollars? Surely, it could not be the perception that they are literally worth more than anyone previously estimated, due to the presence of cocaine traces on nearly 95% of all US banknotes. Bank of Tokyo opines that the US is set for the strongest economic recovery since the 1980’s and feels that the dollar is set for a rally of sizeable proportions.

Could it be that foreign demand for US financial assets grew to $71.3 billion in June, virtually doubling May’s $36.9 billion in long-maturity US securities sales? Seems like the urgings of some doomsayers to have foreigners ignore and/or dump US debt is falling on unreceptive ears. Keep traveling, keep talking. Something might stick, somewhere.

Something else that is making the dollar the currency of choice for the moment is China’s mounting set of internal problems. Why, we got headlines from the country that rabid dollar morticians and down-on-the-US newsletter scribes can only dream up, when it comes to America:

"News from the Chinese government that foreign direct investment in July fell 35.7% to $5.36 billion. That’s ten months in a row of falling FDI. The July figure is far worse than the 6.76% drop in June and the worst FDI number since last November, when the world was in the worst of the post-Lehman panic." said Business Week this morning. So, China may well be reducing its exposure to US Treasurys, but foreign investment isn’t exactly enamored with what it has to offer itself.

Thus, it is all back to the dollar – back to the Circle of Strife. A couple of passages by Mineweb’s Lawrence Williams come to mind. They were written quite recently, but their applicability is more…timeless:

"As we have pointed out here again recently, the strength of the gold price at the moment (early August) is all about the dollar. Under normal circumstances the dollar would be seen as incredibly weak given the huge U.S. deficits and the continuing release of more dollars into the system to try and stimulate the economy. However, as most other major economies are in a similar, if perhaps not quite so dire, a position, the dollar’s weaknesses are being mitigated. And then the silver price is dependent on the gold price, but in a more volatile manner, but has more of an industrial usage angle to it.

If one believes, as some respected analysts do, but others equally strongly disagree, that the dollar is effectively in almost terminal decline, then gold and silver offer a defensive option against wealth erosion. Whatever the picture going forward it seems unlikely that the dollar will strengthen significantly against most other currencies, in which case gold and silver make good wealth preservation bets, even if the green shoots some see in the global economy are real and not mirages.

If the global economy does continue to show strength then gold and silver may not perform as well as other commodities, but as many will tell you the maintenance of a significant part of one’s savings in gold and gold related instruments and investments would seem prudent (and in this respect one can consider silver a gold-related instrument given its price movement correlation with the gold price).

Wealth preservation is but one angle here. Some would have you believe the world needs a return to a gold standard as the only means of stabilising the global monetary system. This would require a massive revaluation in the gold price and one doubts the politicians and economists, many of whom have been actively denigrating the role of gold as a monetary instrument for years, have the will, or see the need, to implement such a move. This is almost certainly a non-starter, but then who knows?

It would certainly benefit those countries which traditionally have maintained a decent proportion of their reserves in gold despite the denigrators, but would probably be strongly opposed by those with little or none of their reserves in gold and these probably comprise the majority."

Au$

A Good Evening to All.

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 Price Guide, and the Inflation Calculator.