Gold, Silver, Metal Prices: Commentary (10/19/2009)

A Bubble in Bubbles Not So Tiny

Good Day,

Gold prices started the new week off in Asia overnight by reversing Friday’s slim gains and re-testing the $1050 level as a strengthening US dollar was once again part of the background picture. More than 13.5 tonnes of gold flowed out of the combined balances of gold ETFs on Friday. During a week when the metal inked new records into the books?

The overnight losses in gold did not amount to more than $5 however, and the yellow metal was able to retake the mid-$1050s prior to the start of Monday’s NY session. The European common currency also fell in the early hours, for a second day, due to concerns that Old World financial policy makers will discuss the currency’s recent strength and what to do about it, when they meet later today.

New York spot precious metals dealings opened with a light step into the red, with gold down by $0.10 per ounce at $1052.70 an ounce. This, as against a fresh small dollar decline (except against the yen) on the trade-weighted index (last seen at 75.51) and very small losses in crude oil (last quoted at $78.46 per barrel). Post-Dhanteras activity in India amounted to…not very much.

Reuters reports that: "Bullion holders from Indonesia cashed in their gold on Monday as the precious metal held near a record, but physical trading slowed to a trickle in Asia as the festive season ended in India, stirring price correction hopes." A valid question, that one. What happens after the festivals? Who picks up the slack? Silver added 3 cents to rise to $17.45 an ounce, while platinum rose $5 to start at the $1347 mark this morning. Palladium simply marked time, unchanged at $327 an ounce.

Analysts at GoldEssential over in Belgium opine that their conclusion on the market "remain unaltered in the sense that an unwinding of heavily piled up speculative long positions is overdue and unavoidable." They add that they remain very skeptical about any the notion that "gold will continue to have [nothing but] blue skies above." "The percentage increase in fresh speculative shorts has exceeded the increase in fresh longs for the second week as 13.39 pct fresh speculative shorts were added in comparison to 6.79 pct of fresh speculative longs." they wrote overnight.

"While it remains hard to foresee when any setback in prices or the unfolding of the aforementioned long-liquidation will take place, it leaves no doubt that the over extending of the speculative long bias has been one that has gathered significant capacity to depress prices should the tough get going. Subsequently, we believe that corrective dips have the ability to re-test at least the $1,000 an ounce support mark, although we add that it may be interesting to watch evolutions from thereon in determination of longer-term projections." their Monday report concludes.

The euro fell back from its 14-month pinnacle against the greenback before the talks by euro-area finance ministers in Luxembourg. "There is emerging wariness about policy makers’ remarks on the strength of the euro," said Tomokazu Matsufuji, a dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. "Along with losses in stocks, the dollar’s fall may take a temporary breather." -reported Bloomberg. Overnight, trading in Asian shares extended declines in U.S. equities, and it curbed demand for higher-yielding assets.

The Aussie and Kiwi also declined for a second session as bets increased about their recent gains having been too frothy. Those two currencies are not the only assets that have experienced such speculative-driven gains, however. Will Pesek over at Bloomberg opines that -of late- "It seems like the globe is experiencing a bubble in bubbles. Look no further than gold trading at more than $1,000 an ounce; 10-year Treasury yields of less than 3.5 percent."

The focus once again this week, remains on the US dollar and US dollar policy. The trading crowd is listening -very intently- to every word that comes forth from the US central bank, for hints that a turn in its accommodative stance is about to occur. We have previously opined that such a shift could be six-to-nine month in the making, but, that come it will.

According to the Washington Post, Ben Bernanke is slated to deliver speeches this week, from coast-to-coast. The first one, on the topic of "Asia and the Global Financial Crisis" will be heard at a San Francisco Fed conference in Santa Barbara, California today. The WP reports that "an open question is how much responsibility he [Bernanke] assigns to global imbalances — Asians saving too much, and Americans saving too little — in causing the financial crisis." Then, on Friday, the Fed chief plans to address a Boston Fed conference in Cape Cod. His subject will be : "Financial Regulation and Supervision After the Crisis."

"Neither of those speeches focus on the hot topic that is captivating Fed-watchers at the moment: when Bernanke might entertain raising target interest rates above their current level near zero or unwind other aggressive interventions. But both speeches are supposed to be followed by question-and-answer periods, and it is a safe bet that bond traders all over the world will be watching those sessions on hair-trigger, ready for anything Bernanke says that might hint at his inclinations — whether Bernanke intends to send a signal or not." said the Washington Post.

Over at Elliott Wave, the feeling on the US dollar and gold reads along the following lines at the moment:

"The US dollar index has been approaching the 75.14 level which is the lower trendline of an ending diagonal pattern. Typically, ending diagonals finish with a burst through the trendline and then a subsequent reversal back through, which confirms a turn. In this case, if it were to occur, it would mean a sharp drop beneath 75.14 and then a sudden and equally sharp upward reversal above it. This sequence would confirm a low. However, such a scenario is not required, and, if the dollar rallies above 77.48 it would also indicate that a turn has taken place.

Gold had its "upward push" above $1062.00 per ounce. The next resistance remains near from $1080 to near $1100.00, depending on if and when prices reach that far. A decline beneath $1000 would be too deep a retracement to allow for any further bullish potential. It would instead indicate that a new wave down to below $680 was underway."

Based on the rumour and innuendo heard over the past two weeks, one would have to be convinced that-by now- there is some kind of mass bailout underway from anything US dollar or US debt-related out there. Surprise! Evidently, the love-hate relationship with the US currency has more than just the former of those two emotional dimensions working in the markets, at the moment. According to the latest findings by Bloomberg, global "investors can’t get enough Treasuries even as the U.S. budget deficit climbs beyond $1 trillion, the government sells a record amount of debt and the dollar declines to the weakest level since August 2008."

Foreign buyers increased their holdings for a fourth consecutive month in August, to an all-time high of $3.45 trillion, according to Treasury Department data released Oct. 16. U.S. demand is being spurred by a rising savings rate and concern the economic recovery may falter. Fixed-income funds have attracted 18 times more money than stock funds this year, according to data compiled by Morningstar Inc. and Bloomberg.

"The U.S. continues to provide one of the deepest and most liquid markets available for investing," said Wan-Chong Kung, who helps oversee $89 billion as a portfolio manager in Minneapolis at FAF Advisors, a unit of U.S. Bancorp.

Investors outside the U.S. bought 44 percent of the $1.6 trillion of notes and bonds sold by the President Barack Obama’s and Treasury Secretary Timothy Geithner this year, compared with 27 percent of the $631 billion issued at this point in 2008, government figures show. Barclays Plc, one of the 18 primary dealers that trade with the Fed, forecasts issuance to rise to a record $2.1 trillion this year, and $2.5 trillion in 2010.

The weakening of the dollar is "terrible news for practically all of the rest of the world’s economies," except the U.S. and China, Harvard University Professor Niall Ferguson said in an Oct. 16 interview on Bloomberg Radio. China, which manages the yuan’s appreciation, will "intervene to make sure the dollar does not weaken" relative to its currency, added Ferguson, author of "The Ascent of Money: A Financial History of the World."

Fed Chairman Ben S. Bernanke and his fellow policy makers cut the target rate for overnight loans between banks to a range of zero to 0.25 percent at the end of 2008. They will keep the target there until August, when central bankers will boost it to 0.5 percent, according to the median estimate of 47 economists surveyed by Bloomberg from Oct. 1 to Oct. 8.

"The economic news, while mixed, still portrays an economy which could fall short of people’s expectations," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. "The expectations are that growth in 2010 will be less than in the second half of 2009. Inflation is not expected to rise for the near term."

Pimco’s Bill Gross said that [Pimco] bought government-related debt last month and cut mortgage bond holdings to the lowest level since 2005. He said his firm was buying longer-maturity Treasuries because of deflation concerns. The rate of U.S. household savings rose to 5.9 percent in May, compared with 0.8 percent in April 2008.

Meanwhile, gold’s virtual hostage crisis continues to be manifest not only when one observes the mountain of speculative long positions that has sprung up in New York since September 1st, but out on Main Street as well. If predatory mortgage lenders took advantage of the poor and the illiterate, then the front end of the gold industry is playing upon the fears of nervous white guys with some assets to protect.

Advertisements for gold producers, or bullion or coin vendors, prominent ever since the medium’s creation, are virtually ever-present these days on American cable talk television. Such were the findings posted in an expose by Asia Times Online over the weekend. We plan to bring you bits and pieces from this lengthy article in coming days. For now, suffice it to quote one such passage. Between this, and Harrods’ placing 12.5 kilo bars on the shelf…

"Increasingly, the underwriting of the [cable television show] debates is being done so in the interests of gold. Advertisements for gold producers, or bullion or coin vendors, prominent ever since the medium’s creation, are virtually ever-present these days on American cable talk television.

Whether it be Fox News on the right, MSNBC on the left, or maybe even ratings laggard CNN for the muddled middle, if you don’t see an advertisement for gold interests during any 15-minute timeframe on these stations it must be because you’re watching a criminal being pursued by police on the Los Angeles freeways; not to worry; you’ll see plenty of billboards hawking gold as the previously fleet-of-foot prepares to face his destiny from out of the barrels of the terrible twinkling, tasers of social order.

"Government spending is out of control," the pitch might begin, perhaps with a not very flattering picture of President Barack Obama green screened into a background of riots and chaos. "Congress is spending away the nation’s wealth. Inflation will soon be skyrocketing, and your children and children’s children will be left with unimaginable debts."

Familiar ad tune. No need to name it. It contains two words. The second one is ‘agenda.’ As delivered with an urgent tone by…G. Gordon Liddy (!!!).

Until later,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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