Gold, Silver and Metals: Prices and Commentary – Aug 19

August 19, 2009

Good Afternoon,

Bullion update ... Price weakness continued to be manifest in the precious and base metals complexes overnight, as China’s stock market index fell another 4.3% and came to the point of requiring the ‘bear market’ label to be applied to it by market technicians. Albeit analysts see the Chinese market implosion this month as somewhat counterintuitive, there are other signs that point to justifiable apprehensions.

Like, say, the Baltic Dry Index falling 2.5% just yesterday. Over in Germany, producer prices dropped at the highest rate in sixty (!) years last month, signaling the possibility of deflation taking hold in the eurozone. Continuing on yesterday’s ‘end of crisis’ news beat, Goldman opined today that the US recession likely ended some six weeks ago.

The US dollar benefited from all of these jitters and rose 0.22 on the trade-weighted index, to reach 79.07 overnight. The chorus of calls for a significant dollar drop continues, with sources such as PIMCO and Mr. Rogers (Jim) envisioning a loss of reserve status for the currency. Curiously, neither party offers any realistic alternatives to the greenback when writing its pre-obituary. And, markets being what they are, essentially contradicted both, when the latest frissons of risk aversion created a few goose bumps in various trading pits.

Crude oil headed lower in the early hours, but lost only a fraction in value and was last seen at very near $69 per barrel. The upshot of all of these developments was that gold remained under selling pressure and essentially orbited around the $935 level prior to the opening of the NY session this morning. Not so, was the case for silver – it sank 35 cents to its lowest level in one month – it reached $13.52 overnight. Trader shop talk had pegged $13.50 in silver as the possible trigger point for a much larger slide in precious metals. Well, we came that close in that case.

New York spot metals dealings opened with a 0.55% loss in gold, which was quoted at $932.90 per ounce. Silver lost 42 cents to start at $13.55, while platinum was showing no change at $1227.00 an ounce. Palladium sank $4 to open near $268 per ounce. JM’s Platinum Today for…today, has a noteworthy story on the noble metal platinum, as regards its use in GM’s fuel cell vehicles:

"General Motors’ (GM) latest fuel cell stack is a considerable improvement on its predecessor, according to a new report on treehugger.com on Monday (17th August).The fifth-generation design by the Detroit giant offers 93kW of output and also requires lower amounts of expensive platinum components in order to function successfully.

This lower cost to the consumer is identified by the news provider as the most significant advance, particularly with a further reduction in the pipeline for the sixth generation. It noted: "GM engineers have reduced the amount of expensive platinum used by more than 50 per cent, from about 80g in the fourth-generation stack to about 30g in the fifth.

"GM’s roadmap also aims for a … goal of bringing the total used under 10g per fuel cell stack." Treehugger.com also highlights the fact that production of the fifth generation should be able to hit 10,000 units per year in 2015, in comparison with 500 for its predecessor. Furthermore, it explains that the fuel cells are now more robust after going through exhaustive tests and could be able to last for up to 120,000 miles from 2015 onwards."

These conditions changed fairly dramatically during the midweek trading session in New York however. The prime driver today was…surprise…oil. Hey, if it’s not dollars and stocks, we can always rely on black gold. The commodity surged following government reports of a sharp 8.4 million barrel drop in crude stocks. Oil jumped (a euphemism for the $3.21 spike seen today), drove the dollar 0.45 lower on the index, and gold found itself ahead by 0.38%, at $941.70 per ounce at last check this afternoon. High came near $947 an ounce earlier in the day. Profit-taking ate into them.

Silver was unable to shake the negative price tilt off completely today, but -to its credit- (and to the delight of some funds who jumped on it at near $13.50) it narrowed its losses to but 16 cents at last check; it was seen at $13.81 an ounce. Platinum advanced $12 to $1239 and palladium was still down $2 at $270 per ounce.

Today, aside from this oil-driven pop and some short-covering ahead of next week’s options expiry, market participants were mainly seen digesting a not-so-rosy report from the World Gold Council offered up this morning. A few Tums were in order. Here is the gist of the survey, as provided by our friends at Bloomberg’s London desk:

"Gold demand fell to a six-year low in the second quarter as recession curbed buying by jewelers and electronics producers, the World Gold Council said. Central banks were net buyers for the first time since at least 2000.

Global consumption fell 8.6 percent to 719.5 metric tons from a year earlier, the London-based industry group said in a report today. That’s the lowest level since the first quarter of 2003. Jewelry demand declined 22 percent and electronics, the biggest industrial use for gold, slid 26 percent. The World Bank said in June the global recession will be deeper than it expected three months earlier. Investors bought 222.4 tons of gold in the quarter, 46 percent more than a year earlier, as an alternative to stocks and bonds, said Rozanna Wozniak, investment research manager at the council.

"Tough economic conditions have impacted jewelry and industrial demand," Wozniak said. "Investment demandprovided a cushion and we do expect that to continue."

Central banks bought 14 tons of gold more than they sold, the first quarterly net purchases since at least 2000, according to the council, based on figures from London-based research company GFMS Ltd. The so-called official sector had net sales of 69 tons in the second quarter last year, the report said. Wozniak said GFMS wouldn’t identify any of the buyers.

Central bank purchases aren’t counted in the 719.5 tons of total demand because they are considered a traditional source of supply, she said. Other such sources showed gains, including a 6 percent rise in mine production from the second quarter of 2008, and a 21 percent jump in recycled metal, the report said.

In India, the largest buyer, gold demand fell 38 percent to 109 tons, while it rose 11 percent in China, the second-biggest buyer, to 89.6 tons, the World Gold Council said. Germany was the biggest investment market with demand of 28 tons, compared with 23 tons in the U.S. and 21 tons in India, the report said."

Compared to what market hype you have actually been fed by certain hard-money newsletters, starry-eyed commentators, and agenda-driven bullion vendors, the fact and figures above are somewhat of a…departure. In a nutshell, as we have warned our readers for several months, the key to the gold market does not exist in a vacuum that is maintained by investment demand alone. Not when the amount investment takes from the total demand pie is but a 30% slice.

As the Council says, it (investment demand) is a cushion (presumably from lower prices and tonnage demand, given these poor fundamentals), but no one should willfully ignore sizeable drops in essential areas such as jewelry and/or industrial usage. Nor should they try to mask or minimize the obvious effects of increases in supply from mines, scrap selling, or ETF behaviour. These are key factors that remain an integral part of the market’s fabric, and they will weigh in going ahead, just as much as they have counted up to now. Case closed. Under lock and key.

A case that’s far from closed, is the IRS versus UBS clients saga. While the bank may have settled its issues with Uncle Sam, the Uncle is now set to go after certain Americans who thought it cool to try to put one over him.

"The Wall Street Journal reported Wednesday that UBS will hand over the names of 4,450 clients to U.S. tax authorities as part of a settlement that will not include a monetary fine. The settlement follows demands from U.S. authorities that the bank hand over details on around 52,000 customers. Details on the settlement are expected at 9:30 a.m. eastern. In total the settlement is expected to yield around 10,000 account identities, including through a voluntary disclosure program and a prior settlement in February, the Journal reported."

Angry participants in some forums have demanded that the names be made public as suspicion abounds that some high-profile surnames might surface, and that they include asset lists ("hmmm, how much gold ya think these folks have stashed in Zurich?"). They are hoping that this

key turns into this key for someone.