Gold, Silver, Metal Prices: Commentary (10/9/2009)

Jawboning (and More) by Proxy

Good Day,

Gold prices dipped to under the $1050 level overnight, and for the better part of Friday’s NY session, as interest rate hike-oriented comments by Fed Chairman Bernanke lifted the US dollar and dampened enthusiasm in crude oil and other commodities as well (such as copper). On Wednesday, we warned that ‘shoe-pounding’ style dollar-oriented statements might come from Mr. Bernanke following the resounding lack of success of the pro-dollar jawboning attributed Mr. Geithner within the last week.

However, we also probably cannot take Mr. Bernanke’s Thursday words to mean that he will unleash the interest rate hike solution to sterilizing the potentially inflationary outcome of the last two years’ worth of liquidity injections today or next week. But, it’s a start, and, the ‘bogeyman’ that such a reversal of course represents for the speculative bubbles that have developed among dollar short-sellers and legion of commodities longs is quite real.

At the very least, it is fair to say that the Fed’s finger is on that very oft-cited trigger, and that all it awaits now is the target (manifest economic recovery) to be squarely in its sight. If we had to guess, that could be a matter of from 5 to 10 months, but one never can tell precisely. The Aussie central bank swung its lasso earlier this week and roped in the wild calf of liquidity with a swift little quarter-point move. A small step for a single central bank, a giant leap for the markets’ two year-old psychological state.

The dollar climbed back above the critical 76 mark on the trade-weighted index this morning, but it did not make significant progress beyond 76.30 at this juncture. Neither did oil dip much more than 1 percent following some emerging profit-taking in the commodities complex.

At last check, the spot gold ticker in NY indicated bullion down by $9.40 ( almost all of which was due to the jump in the greenback, as seen on the new Kitco Gold Index at: http://www.kitco.com/kitco-gold-index.html). Spot bid was $1045.50 as of 14:00 hours NY time. Silver slipped 16 cents and was quoted at $17.62 per ounce. Platinum dropped $18 to $1327.00 per troy ounce, while palladium remained flat at $319.00 per ounce. Rhodium was ahead by $25.00 at $1562.50 an ounce.

Is this IT then? The beginning of the apex of the roller-coaster -to use a characterization we encountered this morning? We surely cannot say. For the moment, it looks like nothing but a very shallow, unconvincing, Friday-like book-squaring move. But, to use the very words of another seasoned trader from NY written just a few hours ago -literally- in the midst of the mid-week euphoria: "I have nothing to say really. What is the point when reality doesn’t matter and the people with financial power are the movers. The herd has been moving in the one direction and leading everything else. The US dollar, which is a much bigger market than the commodities, has not moved with same volatility.

Is it truly lack of confidence in the US dollar or all just a game big money can play in a small market? If I thought there was a correction coming before, I am certain of it now. A bubble has formed, and for all the propaganda, when the powers that be begin selling, the buyers will be hard to find. Jobless claims today had absolutely no effect on the market, that should be enough of a hint that anything goes."

In Tuesday’s post-Aussie news environment, we opined that: " In the interim, and for so long as the dollar’s management team lags behind the rest of the central banks in doing what is needing to be done, the trade to be made will remain obvious. Lest currency market intervention by one bank or another takes precedence. Some have opined today that Mr. Geithner should have pounded a Khrushchev-like shoe…etc."

Not very surprisingly, CNBC reported last night that:

"Asian central banks bought U.S. dollars early in the global session on Thursday to weaken their own currencies, traders said, as the slumping greenback threatens smaller export-driven economies. Asian central banks said to be intervening in currency markets overnight by buying dollars included South Korea, Hong Kong, Taiwan, Thailand, the Philippines and possibly, Indonesia, according to analysts. Emerging market Asian nations, already struggling with the tepid U.S. recovery and weak demand for their exports from the world’s largest economy, have been doubly hurt because their currencies appreciated against the dollar, prompting repeated intervention.

There was also an indication that Russia bought as much as $4 billion this week, including $1.4 billion overnight, several market participants said. Russia was reportedly one of "at least six central banks buying dollars," said Michael Woolfolk, senior currency strategist at BNY Mellon.

Though some confirmation may come next week with the release of the Treasury International Capital flows report for August, most investors appeared to accept that central bank dollar buying is rational, if only as a hedge against more expensive safe haven flows at a later date. The risk of course, is that the dollar loses value, making purchases now a bad bet."

Of course, the other risk is that local currency appreciation and vanishing imports could hurt a lot more. In any case, weren’t the above suspects some of the very same ones that were supposed to be bailing out of the greenback en masse according to some commentators? What gives? Ummm…let’s call it…survival. We think the stage is being set for sentiment change. Yes, it could still take 5 or 10 months. But…

Meanwhile, the endless, overheated debate about gold, its performance, and its role in portfolios continues to saturate the airwaves. Scholars, traders, and amateurs alike are all orbiting around the daily market’s behaviour, trying to dissect and reassemble every nuance. Often times, a severe case of apophenia (seeing hidden meaning in insignificant or random data) overtakes the discussions’ thrust. Not a surprise, that. As we made the case in London, gold is a religion now. Here is a brief sampling of conflicting opinions from a wide range of sources (in terms of background and tilt) as relayed by Forbes last night:

"Investors attracted to gold now that prices are at record highs need to remember that it performs best during tumultuous economic times. In a Wednesday morning note, analysts at RBC Capital Markets noted that prices for gold mining stocks haven’t kept up with the precious metal’s spot price rally. RBC identified Barrick Gold, Kinross Gold, Goldcorp, Lihir Gold Limited and Yamana Gold as the stocks with the most room to run. But gold prices are notoriously volatile, especially if you look at the longer trends.

As the U.S. has run up ever growing deficits this decade, gold prices have gone up fivefold, up at $1,041 at noon Wednesday, while the U.S. dollar has gotten battered by political rumors strengthening the currencies of commodities-rich countries. It’s no surprise that short-term gold demand is on the rise. Thomas Cooley, dean of NYU’s Stern School of Business, writes today the global economic recovery is highly tilted towards producers of commodities rather than financial products. That can’t be good for the dollar and gold is where investors go avoid a sinking greenback.

Though gold performs well as a defensive asset in times of global economic strife, its long-term record is spotty. Over $1,040 an ounce is only a record if you leave inflation out of the picture. Factor that in and gold prices haven’t gotten near prices from the early 1980s. A 25-year gold investor (between 1973 and the previous price height at the end of 2008) would have earned 7% a year, outperforming cash by a narrow margin but trailing returns from stocks, government bonds, corporate bonds and real estate and with much greater volatility.

"High risk (volatility) ought to be matched by higher returns, which has not been the case for gold since it was un-tethered from monetary and exchange rate policy in the early 1970s," wrote UBS analysts Larry Hathaway and Kenneth Liew in a July 24 research report. The rise of the commodities rich countries and of China’s $2 trillion cash hoard changes the dynamic from previous decades. Though most countries invest reserves in U.S. dollars, their central banks need to buy other assets both for diversity and because returns for Treasuries are low.

The Maldon Institute, a conservative think tank with a long-time interest in precious metals cited the World Gold Council as reporting an increased demand for gold investment, at the expense of gold jewelry buyers. Traditionally, ornamental demand makes up 70% of the market. That’s down to 68%. Investment demand is now 19%, up from 13% two years ago. China’s diversifying is part of that.

The rise of gold exchange-traded funds, opening the metal to broader retail investor demand, is another. Management at gold mining company Agnico-Eagle forecast a short-term gold price at $1,300 ounce after its second quarter, Maldon reports. Maldon also reports that the Rand Refinery in South Africa, which makes gold Krugerrand coins, is reporting shortages despite running its mints at full capacity."

Have a restful weekend. One missed flight and a detour through Los Angeles later, we are ‘back in the saddle.’ Ready for whatever next week brings.

Finally, to all of our Canadian readers, a Very Happy Thanksgiving Holiday!

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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