Gold, Silver, Metal Prices: Monday Commentary – Update

Rubber, Chickens and a Forgettable Anniversary

Good Day,

A long-feared trade war appeared to be shaping up between the US and China following Friday’s tit-for-tat protectionist actions and words by each country. The US imposed a 35% import tariff on Chinese-made tires, a move that prompted China to warn that U.S. cars and chickens would suffer a similar fate if this trend were to continue.

As a result of the rubber-and-chicken spat, the US dollar picked up a bit of lost value during the late part of the weekend and it -along with the yen- became sought after not only by safe-haven seekers and short-coverers alike. Orderly as the greenback’s decline has been to date, potential triggers such as the 1.46 mark against the euro remain squarely at the centre of speculative consciousness.

Gold prices turned away from their 18-month high recorded last Friday and fund selling pushed the yellow metal to the low $990s prior to Monday’s NY session start. The prime mover of the retreat was indeed the dollar’s advance back to the 77 level on the trade-weighted index in the wake of the blossoming trade friction mentioned above. Also at play in gold’s overnight decline was the usual mix of fading Indian demand and lack of growth in ETF holding balances. Buy orders in India appear to be concentrated at levels under $990 an ounce.

Although the greenback slipped a bit against the yen in early going this morning, it remained but one digit away from the 77 level on the index and its bounce -coupled with crude oil’s drop to under $69 per barrel kept fund selling pressure on gold as it neared its NY opening time. Nevertheless, the ‘correction’ seen over the weekend remained as shallow a one as we observed last week, and gold started the week off very near the psychological level that the $1K figure represents.

Spot bullion dealings opened with a $5.20 per ounce loss on Monday, quoted at $999.90 as the background conditions of the charts versus the longs versus the physical buyers and sellers continued on the nervous, standoff-ish side. Silver fell 23 cents to start at $16.50 per ounce, while platinum and palladium also recorded mild losses. The former dropped $7 to $1310.00 and the latter declined $2 to $289.00 per ounce.

The latter part of the trading session had the yellow metal virtually turning in small circles around the $1000 mark and kept traders guessing whether or not a close above or below that pivot was in the making for the day. At last check, gold was showing a very similar position as it had at the opening bell; namely, a $6.60 loss and a spot bid quote of $998.50 per ounce. Silver was down 15 cents at $16.58, while platinum was off by $6 at $1311. The lone standout for the day was palladium, which at one point gained $2 to rise to $293.00 per ounce. It was $291 at last check.

Aside from anemic physical demand, there were of course other factors that contributed to gold’s post-weekend pullback from the four-digit zone it had once again entered on Friday. Chiefly among them, the very situation that UBS alluded to over the weekend. "Allude" is a bit of a euphemism as you can see by the following snippet from the Telegraph, titled: "Gold investors warned to liquidate after ‘buying frenzy’

"London’s leading gold forecaster has advised clients to liquidate holdings of gold and silver until the latest speculative fever abates, warning that futures contracts on New York’s Comex exchange are flashing warning signals.

John Reade, an analyst at UBS, said the number of "net long" positions held by speculators reached 29.02m an ounce last week, a record high. Investors watch Comex contracts as an indicator of froth in the market. Last week saw a jump of 6.4m ounces in net long contracts, a rare occurrence. When such sudden moves have occurred in the past, gold has fallen 5 percent over the subsequent month on average. Mr. Reade, a repeat winner of the London Bullion Market Association’s forecasting prize, said speculation in silver futures is even more extreme by some measures.

Demand for physical gold – as opposed to paper contracts – has been flagging, with Indian jewellery demand well down on the levels a year ago and poor volumes reported in Turkey and Switzerland. The metal is trading at a discount on Istanbul’s exchange. "We recommend that nimble investors take profits on any long gold and silver positions, looking to re-enter after a correction," said Mr. Reade. His price target is $950 over the next month, with fresh rallies in 2010.

The last time net long contracts on Comex reached levels close to last week’s high was in February 2008 as gold screamed to its historic peak. Prices crashed by $150 an ounce shortly afterwards. However, chartists say the technical signals are entirely different this time. Gold appears to be breaking through a "triple top", which could push prices much higher."

Those "fresh rallies" are in BofA-Merrill’s periscope somewhat sooner that the ones envisioned by UBS analysts. Marketwatch relays the firms forecast as follows:

"Gold prices may rise to $1,050 an ounce by the end of this year, helped in part by a weaker U.S. dollar, said Banc of America Securities-Merrill Lynch analysts in a report, made public Monday, entitled "Gold is breaking out." On Monday, gold slid 0.5% to 1,001.40 an ounce. Analysts led by Michael Widmer noted that gold had only increased modestly versus industrial metals, held back by weak jewelry demand in several countries.

That demand should return in the second half. Plus, the brokerage expects the U.S. dollar to fall to $1.50 against the euro by year-end, from about $1.46 currently. "Investment demand is often the marginal price driver for gold prices and it may pick up in the coming months with a weaker [U.S. dollar]," they wrote."

Whilst our colleagues over at GoldEssential.com also allow for the possibility that the market could still put it a short-lived blow-off top, should current sentiment have more energy, they also reiterate that the ratio of net spec longs to open interest levels is currently stretched beyond rubber chicken tolerances and that a potential correction by amounts beyond the $100 or so alluded to by UBS would make for healthier positioning in this market, going forward. Folks, we are talking here about a nearly 700-tone sized net speculative long position in gold. Nearly a quarter of a million contracts are betting on this golden horse at the moment. This is where the…rubber meets the speculative road – at the moment.

In the words of one London-based analyst, it comes down to: "This week will be crucial in determining whether speculators can keep gold prices underpinned without the temptation to book profits," Andrey Kryuchenkov, a VTB Capital analyst in London, wrote today in a note. "A reversal in the dollar sell-off trend would see severe profit-taking and intensive unwinding in speculative gold positions."

Meanwhile, GFMS analysts have reported a 7% rise in global mine output for the first half of this year. Also seen rising by 7% were gold production costs at primary mines – to just over $600 per ounce. All-in cash costs for the same period remained in check, averaging $457.00 per ounce. No need to dwell on the findings of an obvious global collapse in the fabrication demand for jewelry.

GFMS concurs that a ‘sizeable’ correction could be waiting in the wings of the current gold market if the steam supply runs thin in coming days/weeks. On the other hand, the research house envisions the next break above the $1K level as ‘decisive’ if dollar weakness aggravates and/or if additional currencies come into the column of ‘distrusted’ ones. The $1050 level also made an appearance in the GFMS presentation.

Today marked the first of ‘many unhappy returns’ of the epic Lehman collapse. A birthday that many on Wall Street would rather not be reminded of. US President Obama took advantage of the gloomy anniversary to reiterate the need he sees for the enactment of the most aggressive overhaul of the financial system since the Great Depression.

Closing loopholes, filling gaps, ratcheting up regulation and enforcement, and delineating responsibilities more clearly are all items marked as ‘priority one’ on his and his team’s current agenda. Bank stocks did not take well to the Obama presentation, in a different kind of replay of what health care-related issues have been doing vis a vis the much-debated plan to reform that sector. Change is a difficult task to accomplish –even if quite necessary. Fireworks will continue to accompany all of these transitions.

At any rate, today’s stock market action appeared focused on rubber and chickens, and the developing US-Chinese trade brawl. The Wall Street Journal however feels that the fallout from the tire tariff tirade may well be limited –not only in terms of the only $1 billion or so those exports truly represent- but also insofar as its effects on the economic recoveries on both sides of the ocean.

As for the dollar, it too appeared to be undergoing an internal battle between the ‘can’t lose’ sellers-at-every-opportunity of the US currency, and the daring buyers who see it receiving a boost from the nascent protectionism and oversold chart patterns it exhibits. This is not to say that there are not those who see a potential danger to the dollar arising out of the very same trade posturing.

At the end of the day, however, is appears more likely that China might let this one ‘slide’ after making the obligatory noises to the WTO, as a bounce in the dollar would- ironically- give it something less to worry about when it comes to those pesky reserves it holds. In…dollars. Oh, the irony.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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