Gold, Silver, Metal Prices: Monday Commentary (10/5)

Too Fast and Too Furious – Istanbul Drift

Good Day,

Gold’s incursion at figures above the $1000 level continued overnight, as the dollar came under renewed pressure following tepid pro-dollar statements from the Istanbul conclave of the G-7 this weekend.

Group of Seven finance chiefs stopped short of singling out the weaker dollar for criticism and stuck to their mantra that "disorderly" swings in currencies threaten economic growth. Although the round-table generated no less of a dollar-supportive statement than that made in the spring of this year, currency traders took the absence of more forceful and/or explicit concerns about the dollar’s current state of weakness as a sign that they could continue selling it for the time being. And, that, they did on Monday as well.

Curiously, and for the past several sessions, gold reacted quite a bit less than expected to the dollar’s daily gyrations. We have seen this emerging pattern in the declines in gold of previous sessions (when the dollar’s rise was not equated by more significant sell-offs on gold) as well as in today’s dollar fall, which did not engender a more robust (than $1-$3) gains in bullion. For today, at least, we will attribute the muted response in gold to the continuing sell-off in crude oil (down another $1.60 to 468.35 pbbl). But, the trend of disconnects is worth keeping an eye on.

The situation is – in part- reflected in the COT report issued this morning by our friends at GoldEssential.com:

"In previous analysis, we suggested that long liquidation was "long overdue". We are however somewhat amazed that not the magnitude of the long liquidation is particularly striking, although the decline in speculative shorts is. Whereas liquidation on both sides has resulted in a drop in open interest and a decline in the absolute number of speculative long positions, it hasn’t cooled our Net Speculative to Open Interest ratio – which shows how the market is skewed when incorporating the market participation -, given the exceptional decline in speculative short positions .

 We are a bit worried about this relatively odd evolution, given it has pushed our NSL to OI indicator further into uncharted territory, leaving the market even more prone to corrections in prices, given the significant opportunity for fresh (speculative) shorts to be established (from a balanced market point of view). That said, we accept that the apparent abandonment of beliefs (and bets) that prices will decrease – which comes with the liquidation of shorts – could be perceived as "surrendering of the bears", opening for speculative blow-offs to the topside. That said, given the underlying skewed market positioning, such a scenario will ultimately result in better levels for a steep price correction, as sustainability of upside from hereon should be questioned. We feel that a medium-term corrective pullbacks towards $850 (6M) would result in a healthier market."

New York spot dealings at futures closing time were seen at $1003.60 on the bid side, and showing a $1.30 gain on the day. Silver was ahead by only one penny, quoted at $16.15 per ounce, while platinum rose $2 to $1281.00 and palladium climbed an equal amount, to reach $297.00 per troy ounce. Not much change on the technical side for gold at this time, as the supports extending from $995 to $985 remain in place, as do the overhead resistance barriers at $1010 and $1020 per ounce. It’s still a dollar story, and it is more than confirmed by the post G-7 punditry out there. Say, in the latest from Bloomberg:

"Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," G-7 ministers and central bankers said in a statement late yesterday after talks in Istanbul, repeating language they used in April."

For others, the story extends beyond the US currency, and it takes into account the global markets in equities and in commodities. Bloomberg finds that one notable voice remains skittish on the valuations currently being seen in stocks and ‘stuff’ and is calling for eventual adjustment in these areas.

"New York University Professor Nouriel Roubini, who accurately predicted the financial crisis, said stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors.

"Markets have gone up too much, too soon, too fast," Roubini said in an interview in Istanbul yesterday. "I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year."

Stocks have surged around the world in the past six months as evidence mounts that the economy is emerging from its deepest recession since the 1930s. The Standard & Poor’s 500 Index has soared 51 percent from a 12-year low in March while Europe’s Dow Jones Stoxx 600 is up 48 percent. The euphoria contrasts with the cautious tone of Group of Seven policy makers, who said after their meeting in Istanbul yesterday that prospects for growth "remain fragile."

"The real economy is barely recovering while markets are going this way," Roubini said. If growth doesn’t rebound rapidly, "eventually markets are going to flatten out and correct to valuations that are justified. I see a growing gap between what markets are doing and the weaker real economic activities."

The International Monetary Fund predicts the global economy will expand 3.1 percent in 2010, led by growth in Asia, after a 1.1 percent contraction this year. That is still "anemic" and "very weak," Roubini said. U.S. stocks fell last week after manufacturing expanded less than anticipated and unemployment climbed to a 26-year high, fueling concern the economy is rebounding more slowly than forecast. Gains in the S&P 500 have pushed valuations in the index to more than 19 times reported operating profits from the past year, data compiled by Bloomberg show. That’s near the most expensive level since 2004.

The performance of the U.S. economy is probably more sluggish than reflected in stock markets, risking a correction in equities, Nobel Prize-winning economist Michael Spence said last month. U.S. stock-market investors have "over processed" the stabilization of growth in the world’s largest economy, Spence said. The global equity rally has added about $20.1 trillion to the value of stocks worldwide since this year’s low on March 9. Governments have poured about $2 trillion of stimulus into the global economy while central banks have cut interest rates to close to zero in efforts to revive growth.

"In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets," Roubini said. "For the sake of achieving growth stability again and avoiding deflation, we may be planting the seeds of the next cycle of financial instability."

There is fallout from such bubble creation, and we can observe it in the gold bullion market as well – no exceptions. To wit, a second major gold consuming country switched flags during the course of this year and turned into a net exporter of the metal:

"Soaring prices of gold have upset the bullion markets in Pakistan to the extent that even at the peak of wedding season there is virtually no buying of gold jewellery. The price of gold crossed its highest mark in history by reaching Rs 31,300 per tola (11.6 gm) a fortnight ago. When the price of gold reached this level, people completely stopped buying and came in for selling. Due to increased rates, Pakistan is exporting instead of importing gold. The yellow metal saw a sudden surge in prices at the start of this month during which the price rose about Rs 2,000 per tola. This abrupt upward rush occurred due to bulk buying of gold by India from the international markets.

India, which is one of the largest exporters and importers of gold, reportedly did the buying for the upcoming Diwali season. Gold brokers say in the last one year gold has seen a vast increase in price in Pakistan. Last Ramazan gold stood at Rs 22,500 while this Ramazan its price rose to the unimaginable Rs 31,300, marking a 33 per cent increase. This rise occurred in the local market without much change in the international bullion rates. This shows how much the Pakistani rupee has depreciated this year.

The difference between gold rate in the local and the Middle Eastern market has also narrowed down to Rs 25-30 as against Rs 300-400 a year back. Pak traders buy physical gold from the Middle East. Gold dealers and buyers are equally perturbed over this issue. Gold dealers say that although it was the peak season of Eid and now weddings, with New Year following up, yet the markets are devoid of good customers.

Market people say there is no alternative to gold due to deep-rooted cultural ethos. With this increasing demand of silver the gold dealers have started focusing more on silver jewellery to address the needs of the non-affording masses. The yellow metal being one of the main components required in eastern weddings, has put most of the buyers in a difficult situation. However as the concerns of the affected masses continue, market people believe that upward trend of gold may stay for some time due to the uncertain global markets."

And thus, the world turns. Signs that imminent Armageddon is upon us: McDonalds (!!!) will open an outlet at the entrance to the Louvre. King Phillppe-Auguste spun out of his grave and was last seen in orbit near Neptune. Nothing is sacred. Or, immune from corporatism. Vive la plutocracie.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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