Gold, Silver, Metal Prices: Commentary (10/23/2009)

A Turkey for Turkey, The UK Lays an Economic Egg, and Russia Sells…Gold?!

Good Day,

Gold prices continued to remain ‘in the zone’ (the $1040-$1070 zone, that is) overnight, with little in the way of fresh market-impactful news making their way into the media stream. The US dollar remained at or very near the 1.50 pivotal level against the euro, but climbed away from the 75-mark on the trade-weighted index. Oil prices hovered just above $81.25 per barrel, while a lackluster session in the Nikkei ended with tiny gains.

New York spot metals dealings opened on a mixed note this morning, as pre-weekend book-squaring and dollar gains made for a bit more than the recently witnessed –and practically daily-one-way fund buying spree. Gold started the Friday session at $1060.00 exactly, basis spot bid, a gain of $0.20 per ounce, as against a tick at the 75.29 level by the dollar on the index. Today’s ‘to watch’ agenda contains US existing home sales data, and a Bernanke speech in Boston. Also keep an eye on closing levels – this is now the fourth week of potential gains before the tally is over.

SPDR Gold Trust remained static after having fallen by 1.22 tonnes yesterday -still not a good sign, as far as we are concerned — at a time when futures-based non-commercial long positions have exploded to record levels. But, try those longs will. And then, try again. Objectives for their theoretical targets could be spread out at levels from $1080 to $1130. Investor holdings in the gold-backed exchange-traded funds tracked by Goldessential.com were seen decreasing 17.293 tonnes (555,973 ounces) or 1.07 pct in the week from October 15th up to and including October 22th, in-house calculations based on official data showed on Friday.

The most immediate ‘flag capture mission’ by the spec longs, remains at or near the $1070 level. Unless, of course, ‘they’ run into a dollar trend reversal, following the currency’s 20% loss against the euro since just March. When such a flip might come, is as yet unclear. Its source, as well as odds of taking place however, is anything but. They remain pointed at the Fed.

We warned just a couple of days ago that the tenor of the rhetoric coming from the official sector is shifting towards being emphatic enough to give speculators a shot across the bow, before they become…shot at. Now, such ‘active management’ jawboning is being spelled out word by menacing word. Its source? Not the ECB, or US dollar-fan Christine Lagarde of France. Not even Ben Bernanke or Tim Geithner (yet). Canada’s own, Mr. Carney, is the latest of voices ringing a certain…currency interventionist-sounding alarm bell:

"Governor Mark Carney spells it out: If international investors continue to push the loonie higher, the bank will intervene. If the currency continues to surge, Mr. Carney stressed that he retains “considerable flexibility" to stoke the demand required to get inflation back to the 2-per-cent target. His options would include creating money to buy U.S.-dollar denominated assets or direct intervention in foreign exchange markets." Analysts now opine that "the odds of currency intervention within the next year are higher than a rate hike." Clear enough, Mr. Carney. Let’s see how respectful of those tough words the speculative crowd manifests itself to be.

Over in fundamentals land, while fresh indications from India reveal a possible slight up tick in festival period-related demand for the yellow metal (there will certainly be references being made to the much higher dollar value of recent sales – for obvious reasons), the year-end Indian gold import tally is likely to be anything but rosy. In addition, another pivotal country’s gold imports for 2009 are headed towards an incredible low water mark. Less than 50 tonnes of gold are expected to be brought in by Turkey this year — a historic low, and a 66% decline from 2008’s levels. Scarp flows and record-high gold values were blamed.

Finally, Russia — one of the frequently pointed-to favorite ‘insatiable buyers’ of the ultra bugs — is indicating it wants to…sell (?!) 20-50 tonnes of gold before year’s end. Go figure. Reuters says it thusly:

"Russia plans to sell as much as 50 tonnes of gold this year to help plug a budget deficit in the first major bullion sale by its precious metals repository since the fall of the Soviet Union, a high level source told Reuters. The sales from Russia’s State Precious Metals and Gems Repository (Gokhran) could account for 0.5 to 1.25 percent of global consumption of the metal, which soared in price to a record of $1,070.40 per ounce on Oct.14.

"More than 20 tonnes, but less than 50 tonnes of gold will be supplied this year," the source familiar with the matter said on Friday, adding that the sale was intended to increase state budget revenues. The source said the sale would be the first major gold sale by Gokhran since the 1991 fall of the Soviet Union, which kept a veil of secrecy over its sometimes significant foreign sales of gems and precious metals.

Two other sources in the Russian government confirmed the planned gold sale but declined to comment on the volumes involved. The sales will be carried out by state owned Almazjuvelirexport. Government spokesman Dmitry Peskov said a government resolution allowing the sale had not yet been signed. Gokhran, which traces its history to a decree by Tsar Peter the Great in 1719, holds the Russian state’s stocks of precious metals such as gold and palladium and gems such as diamonds.

At current prices, Russia could raise as much as $1.7 billion [or, about as much as Indian festival demand basically amounted to, over recent days] if Gokhran sells 50 tonnes of bullion. That would help it cover its first budget deficit in a decade that is forecast to total nearly $100 billion this year, or about 7.5-7.7 percent of gross domestic product. Gokhran is subordinated to the finance ministry."

In so many words, precisely the purpose of having a gold stash in the basement, to begin with. The rainy day comes, and…you mobilize your rainy day asset. It’s raining in Moscow. It might even snow.

Silver was seen barely ahead with a gain of 2 pennies, at $17.66 an ounce while platinum fell back from 14-month highs, losing $2 to start the day at $1364 an ounce. Palladium was also off by $2 at the triple-three level, and rhodium remained static at $1700.00 the ounce. The Kitco Gold Index shows gold as losing some $3.20’s worth of ground due to dollar appreciation, while an almost equal amount of gain in the metal’s value came from predominant buying — thus making for a virtual ‘wash’ in the net change on a spot price basis:

The large font in the news flows this morning was reserved for the letters U and K as the country’s unexpectedly continued to shrink for a sixth consecutive quarter. The tally brings the total output loss in the British economy to 5.9% for the past year. This is now the longest contractive period in the UK economy since records have been kept, and is dealing Mr. Brown yet another setback. Most economists had expected the figures to show at least a flat situation or perhaps a bit of growth by now, but it was not to be. The pound obviously lost ground following the news — one little bit of help for the greenback this morning.

By contrast, manufacturing activity in Europe expanded for the first time in nearly a year and a half, and German business sentiment turned sunnier yet –rising to its highest gauge since September of last year- as the near-$2 trillion of global liquidity injections have resulted in a tangible rise in factory orders, output, and end-channel sales of ‘stuff. Similar gains in industrial output were recently shown in the US and China. Much to VW’s joy, as it sold a record 150,000 cars in China last month.

On the theory and debate front, more of the same. Namely, that among all the screams about inflation -as in, here & now- are at least five years premature, and possibly wrong to begin with. Marketwatch’s Mark Hulbert sees it this way:

"Now, for an opposing point of view.

I argued in several recent columns that bonds are particularly vulnerable at current levels, which — if true — means that interest rates are likely to go higher. This was for any of a number of reasons, one of which is that inflation is likely to accelerate in coming years. I still believe that. The problem is that I am hardly alone in worrying about inflation. On the contrast, seemingly everyone I talk to these days shares these concerns. This in turn suggests that these inflationary expectations are already reflected in bond prices.

And, yet, bonds continue to trade at lofty levels, which is not consistent with high inflation expectations. What do bond traders know that the rest of us don’t? It could be that the answer is "nothing," of course. As we saw during the euphoria leading up to the market top in 2007, as well as during the buildup of the Internet bubble during the late 1990s, no group is immune from group think and collective denial. Still, we should never be too cavalier in believing that we know something that the market doesn’t. The graveyards on Wall Street are filled with those who had such arrogance.

This is especially good advice when it comes to the bond market, which is by far the largest in the world — much larger than the stock market, in fact. Some of the world’s biggest institutional investors, along with many of the brightest minds on Wall Street, follow this market meticulously every day, hanging on every basis-point change in yields. If there were some factor out there that makes bond prices obviously overvalued at current levels, it’s a good bet that traders would be selling bonds in droves.

That’s why I think it’s important to take seriously the notion that bonds are not overvalued right now, even though I have previously argued to the contrary. That, in effect, means taking seriously the notion that inflation and interest rates are not likely to go higher anytime soon. One of the more cogent recent analyses of the subject was conducted earlier this week by Joseph Kalish, a senior macro strategist at Ned Davis Research, the institutional research firm. Kalish provided several reasons to expect inflation risks to be low over the intermediate term of less than five years:

• Excess capacity. Kalish says that any of a number of factors point to high levels of excess capacity in the economy right now — everything from the unemployment rate to industrial capacity utilization rates to commercial real-estate vacancy rates. Those factors put "downward pressure on the inflation rate," he points out.

• Cyclical factors. Kalish points out that "following every recession in the postwar period, the inflation rate has fallen."

• Slower debt growth. The federal government’s total debt may have mushroomed over the last couple of years, but this has been more than counterbalanced by deleveraging in the private sector. "Historically," Kalish points out, "when debt growth has been below trend, the inflation rate has declined."

• High real interest rates. Nominal interest rates may be low, but real interest rates (the difference between long-term Treasury yields and the consumer price index) are at abnormally high levels right now, according to Kalish. High real interest rates "tend to discourage the use of debt and, therefore, excess consumption and investment, which puts downward pressure on the inflation rate."

What about higher commodity prices, such as for oil (which is at a 52-week high) and gold (which is at an all-time high)? Kalish acknowledges that they are a concern. But not overwhelmingly so: "Changes in commodity prices have only explained about 18% of the growth in the CPI one year later." To be sure, Kalish acknowledges, inflation is a big risk for the longer-term, which he defines to be further than five years into the future. Over periods less than that, however, his analysis suggests that inflation will remain low.

Is there a way of squaring Kalish’s arguments with the contrarian-based conclusion that bonds are vulnerable to a decline? I think there is, since his arguments apply to the longer term of up to five years and contrarian analysis is, at best, a short-term trading tool (applying to the next three months, at most). A view that integrates both perspectives would be that, short-term, bonds may have gotten ahead of themselves, relative to their long-term trend. But their resultant short-term vulnerability would not necessarily mean that their overall trend for the next few years will also be down."

In closing, and speaking of Russia, let’s not forget to go and read a most captivating reports on all things Russian, as regards the world of gold. Our good friend Nigel Desebrock – he of GoldBarsWorldWide fame – brings us the latest in names and lore from the vast Motherland. Enjoy, and learn! Certainly, it is fact-laden.

http://www.goldbarsworldwide.com/PDF/RU_NR_Composite.pdf

That’s a whole lot more than we can say about the continuing urban myths swirling around on the ‘Internets’ regarding tungsten-filled gold bars, ETF vaults filled with cardboard, imminent defaults by various exchanges, government confiscation, the death of the dollar, the end of the world as we know it in but 400 hours, and of yours truly being nothing less than an agent of the Mossad, having covered up "Operation Sparkling." Ooohhh, where are my Ray-Bans?

Have a pleasant weekend, everyone. Don’t stare at the sun for too long.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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