Gold, Silver, Metal Prices: Commentary (10/16/2009)

Rich Gold Now Sold (By, And To, The Rich)

Good Day,

A second day of falling prices in gold was once again, brought to you courtesy of a strengthening dollar. Initial support at $1048 was once again breached early this morning, precipitated by a gain of 0.35 in the USD on the index (now at 75.77).

Gold spot prices have touched a low of $1042.20 in the minutes following the NY market’s opening. The emergence of profit-taking is becoming a bit more visible, although Thursday’s afternoon settlement at $1050 appeared to manifest continuing hardiness among the longs.

The same can be said about the rebound to $1048 seen within the first hour of Friday’s market action. The overriding component in this morning’s near $6 drop was attributable to dollar strength, as seen on our newly-launched index, below.

New York spot gold prices commenced trading on a down note once again this morning, with the yellow metal showing a $5.40 loss in the first few moments of action, quoted at $1045.20 per ounce. Silver fell 13 cents at the open, and was quoted at $17.21 per ounce. Platinum lost $10 to start the session at $1339.00 an ounce, while palladium was flat, trading at $324.00 per troy ounce.

The break below the $1048 level might signal that a more meaningful correction has been set into motion. The current objective for such a move is near the $1,030 per ounce level. However, a U-turn to back above the $1,055 an ounce current resistance area could bring the $1065 figure back into discussion. The market requires a daily close at above the $1,065 mark in order to signal that the chances of a short-term correction are not a remaining threat.

"People seem to be getting tired of buying gold," said a Tokyo analyst to Reuters this morning. "[But] the Dollar’s outlook is weak, so gold’s basic strength will be kept intact."

Noting that Thursday’s drop was the first move lower in 10 trading sessions, Scotia Mocatta’s technical analysts point to the "Doji" warning in Wednesday’s action — where prices opened and ended the day virtually unchanged after a run of strong gains.

"With [Thursday’s] lower close, the reversal is confirmed. We expect to see liquidation of long gold positions over the coming days. Initial pull back target seen at former high of $1024."

Daily market commentary from a large German-based NY metals dealer reads as follows this morning:

"There have been some comments this morning that due to this rally there has been substantial gold scrap selling in Asia. Meanwhile as you know, we have been telling you for a while that there have been substantial quantities of being sold here in North America. So now the market is starting to consider this as that maybe the actual owners of physical, metal dumping at these prices, may indicate an overbought condition from the investment side. Meanwhile, the only taker at these prices is the investment market where we can see record high stocks [positions]. Will this bear down to bring pressure on the price? Well that is hard to determine as that [recent] kind of inflow of money can continue to hold these prices at these artificially high levels."

Continue? For how long? Up to what level? Hey, what about next week? Nine out of the 16 traders, investors and analysts –or 56%- surveyed by Bloomberg’s London bureau overnight, said bullion would fall next week, as the record reached this week could prompt further profit-taking, and as fabrication demand shows signs of being in a crisis due to current high prices. The survey has a track record of being correct 58% of the time. As of this writing, gold appears headed for its first weekly loss in three, showing signs of dwindling steam supplies to keep the vertical trajectory going.

Economist Dennis Gartman summed up the situation as follows: "We are fearful that far, far too many people are involved with this market and that a correction of some consequence is now upon us. Those who had been hoping to see material Indian buying of gold ahead of and during the Diwali festival may find their hopes dashed."

But, do they listen, Dennis? Nah. What gold perma-bull pays any attention to the world’s largest physical gold consumer when an amount equal to the country’s annual imports (in a good year) has been piled into paper positions in NY? Party on, in the house of cards. Oh, and please, quit spreading the nonsense about the putative intent of the longs to take delivery of any or all of the gold. That forum-quality urban myth story –and the resulting default of COMEX- is the only thing that failed (circa last December, to be exact). Same as the so-called gold price suppression fairytales that permeate the blogosphere.

Meanwhile, holdings in the SPDR Gold Trust, continue to remain static at 1,109.31 metric tons, and were unchanged for a sixth session. Commerzbank sources indicated that: "Notably, the price gains of the past few days were not accompanied by meaningful inflows into gold ETFs. In view of the large amount of speculative net-long positions, the risk of a correction is increasing." The Commerzbank reference was to the net long positions held by speculators on the Comex, which rose to a record high of 239,668 contracts (745 tonnes!) in the week ended Oct. 6, according to the latest weekly report by the Commodity Futures Trading Commission.

Finally, what does the market possibly tell us when tonnes of gold are coming out of the woodwork in the hedge-fund capital of the planet? Either that desperate housewives need to supplant the absence of lavish hubby bonuses, or that said hubbies have urged said wives to sell into the bubble, by knowing its nature…intimately. Bloomberg sums it up thusly: "The people of Greenwich, Connecticut, the hedge-fund capital of the U.S., know a golden opportunity when they see one. With the price of gold futures reaching a record $1,072 an ounce this week, they’re carting watches, bracelets, rings and necklaces to a Hyatt Regency hotel off Interstate 95. There, representatives of Cash for Gold are writing checks for the precious metal. "Once the price of gold went over $1,000, I knew it was the time to do it," said Joy Kruger, a real estate agent who sold her unwanted jewelry yesterday for $2,700."

The dollar, on the other hand, advanced from almost a 14-month low against the euro after speculators began betting that the currency’s four-day decline to that level was overstated given the signs of a U.S. economic recovery. What recovery? –will ask some. The one that shows industrial production in the U.S. rose more than three times as much as anticipated in September, putting manufacturing at the forefront of it.

The 0.7 percent increase in production at factories, mines and utilities exceeded every forecast of economists surveyed by Bloomberg News and followed gains of 1.2 percent in August and 0.9 percent in July, Federal Reserve figures showed today. Is it ‘in the bag?’ Not by some margin. Countervailing the decent economic activity news, Bank of America Corp., the biggest U.S. lender, posted its second quarterly loss in less than a year, unable to shake off effects of the economic contraction that drove the company to take two taxpayer bailouts.

The US Dollar Index pared a second straight weekly drop amid speculation a report today will show industrial production rose for a third month. The pound headed for its biggest weekly gains versus the euro and the dollar in four months on speculation the Bank of England will suspend quantitative easing.

Adding to the dollar’s gains against the euro this morning, news that European exports declined the most in seven months in August as the region struggled to emerge from the deepest recession since World War II and the euro’s appreciation threatened to undermine the recovery. Exports from the 16-nation euro region fell a seasonally adjusted 5.8 percent from July, when they rose 4.7 percent, the European Union’s statistics office in Luxembourg said today. That was the biggest decline since January.

As of yesterday, Russia, which accounts for nearly half the global palladium supplies, does not appear to be in the mood to sell any of its stockpiles of the metal. No Russian palladium appears to yet have landed in the markets thus far in 2009. The head of Norilsk’s market development unit was quoted as saying that even if the Russian government commenced selling now, the flow of the noble metal would not be seen in the market until early next year.

The official cited existing customs data to validate the ‘no sale’ situation seen this year. Possible explanations for the absence of Russian sales range from having simply run out of metal to sell, to holding off in anticipation of higher prices to come. We wish we knew, but we suspect the latter. Russia’s Norilsk is (in Johnson Matthey’s estimation) thought to have mined 2.8 million ounces of palladium in 2008, or about 40 percent of the global supply of the metal.

And now, for something completely different: Another sign that the End (of this phase in gold) is nigh? Or, is it the ‘democratization’ of gold that will warm the cockles of gold miners’ hearts? Who knows? In any case, here is a Veddy British take from one of London’s own papers, on the news of Harrods starting to sell gold bars. If only Monty Python were around to make this into a humorous vignette:

"Yesterday we warned you of the perils of flogging your unwanted gold off to shifty online nugget-buying nuggets. Today, the other end of the precious metal market has reared its proud head like an Ecstasy-fuelled ox — Harrods have started selling gold bars. Britain’s most glamorous corner-shop proprietor Big Mo Al Fayed has linked up with Produits Artistiques Metaux Precieux (whoever the hell they are) to pedal shiny gold bullion and coins over the counter. But the move comes just as gold prices reach a record high (£662 an ounce), thanks to a weak American dollar. No doubt there’ll still be hordes of rich idiots queuing up for a nugget of their own."

Cheerio for now. Have an excellent weekend. We will report from the Money Show in Toronto next week. Speaking of which…

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Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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