Gold Hits Record High, Silver Soars, Stocks End Mixed

New York gold futures surged to a new all-time high Tuesday as news hit the streets that the IMF sold 200 metric tons of gold to the Reserve Bank of India. Platinum rose as well, while silver soared to reach back above $17 an ounce. In other markets, crude oil ended higher and US stocks closed mixed.

New York precious metal figures follow:

• Silver for December delivery surged 74 cents, or 4.5 percent, to $17.180 an ounce. It ranged from $16.245 to $17.35.

• Gold for December delivery jumped $30.90, or 2.9 percent, to $1,084.90 an ounce. The yellow metal ranged from $1,055.50 to $1,088.50.

• January platinum rose $18.10, or 1.4 percent, to $1,356.20 an ounce.

Notable bullion quotes of the day follow:

"The reason for the gold move today is mostly India’s purchase," Doug Keller, managing director at Binary Research, a commodities research firm, said on MarketWatch.com

"There seems to be consensus among the central banks that it’s better to cut down on currency holdings and diversify into assets like gold, which has upside potential," Krishna Reddy, a precious metal analyst at Way2Wealth Commodities Pvt. was quoted on Bloomberg.com. "The Reserve Bank of India gold purchase is a clear reflection of this belief."

"The early morning hours brought a different set of conditions to the markets, inasmuch as the US dollar rose sharply on the trade-weighted index -gaining as much as 0.53 and touching the 76.75 level- but gold refused to give up," wrote Jon Nadler, senior analyst at Kitco Metals, Inc. The offset factor? News that the IMF managed to find a buyer for about half of the 403 tonnes of gold it needs to sell in order to meet funding shortfalls." [Click to read Nadler’s full commentary.]

In PM London bullion, the benchmark gold price was fixed earlier in the day to $1,061.00 an ounce, which was a loss of $1.00 from Monday’s PM price. Silver was set back 23 cents to $16.350 an ounce. Platinum was fixed $5.00 lower to $1,325.00 an ounce.

Gold, considered a hedge during times of high inflation and economic uncertainty, tends to follow oil and move opposite to the U.S. dollar. A rising greenback makes dollar-denominated commodities, like bullion, more expensive for holders of other world currencies.

Oil and gasoline prices

Oil prices climbed "as data showing rising orders for manufactured goods boosted hopes for a recovery in fuel demand," wrote Polya Lesova and Moming Zhou of MarketWatch.com.

New York crude-oil for December delivery climbed 93 cents, or 1.2 percent to $79.06 a barrel.

The national average for unleaded gasoline fell a half penny to $2.686 a gallon, according to AAA fuel data. The price is 1.1 cents higher than last week, 22.5 cents more than a month back, and 27.1 cents higher than a year ago.

U.S. Stocks

U.S. stocks closed mixed "as investors mulled improved auto sales, surging commodity prices and Warren Buffett’s buyout of railroad Burlington Northern Santa Fe," wrote Alexandra Twin, senior writer for CNNMoney.com.

"When you look at the fundamentals out into 2010, it’s still a mixed bag anyway you look at it. And, you have some people that have done so well for nine months, they’re just backing away," Peter Tuz, president of chase investment counsel was quoted on MarketWatch.com.

The Dow Jones industrial average fell 17.53 points, or 0.18 percent, to 9,771.91. The S&P 500 Index rose 2.53 points, or 0.24 percent, to 1,045.41. The Nasdaq Composite Index climbed 8.12 points, or 0.40 percent, to 2,057.32.

Gold, Silver, and Metals: Prices and Commentary – Nov. 3
by Jon Nadler, Kitco Metals Inc.

Indian Summer

Good Day,

Gold prices rose as high as the $1067 level, basis spot offer, during the overnight hours, building on yesterday’s gains in New York – gains that were not proportional to the slippage in the dollar. Analysts at GoldEssential had noted the de-couple emerging as far back as last Friday’s trading session. EW analysis summed up Monday’s rally as follows:

"The current "ABC" rise could morph into a five-wave structure and carry gold back above the late October peak level. Today’s $1063.40 high appears important. As long as prices do not exceed it, a credible case can be made that gold just completed an "ABC" countertrend push, culminating at the .786 retracement, as just noted. A decline beneath $1034.80, the "B" wave low of this "ABC" pattern, would confirm the bearish interpretation and indicate that the next leg down was underway. If gold rises above today’s high, odds would immediately shift and it would then appear probable that gold was reaching up toward the $1100 level prior to completing wave B (circle)."

Tuesday’s initial market action was seen shaping up as follows: Gold opened with a $2.20 gain in NY, quoted at $1061.80 per ounce basis spot bid, against a 53-cent drop in crude oil (@ $77.60 pbbl) and vis-a-vis a tick of 76.71 by the greenback on the index (up 0.48). More economic data is due in the pipeline today, however the focus is already shifting to tomorrow’s FOMC meeting and the dice are being cast on the eventual tenor of the post-meeting statement. Dovish? Hawkish? Neutral? Mesdames et Messieurs, faites vos jeux. And then some. That, because Friday’s jobs number could be the one to reveal the number 10. As in the percentage of US unemployed. As in red 10.

Silver opened flat, to start at $16.45 per ounce, while platinum and palladium declined in tandem – the former by $8 to $1327 and the latter by $3 to $319 the troy ounce. Reports received yesterday find that platinum jewellery is gaining in popularity among Chinese women. This morning’s manifestations of risk aversion (ahead of Fed and other central bank meeting slated for the week) however, dented copper and other industrial metals (the noble group, among them) while boosting the greenback. Conditions will remain nervous for the rest of the week. Book profit? Stay the course? Probably neither -too convincingly-until words uttered by certain gentlemen are thoroughly parsed.

The early morning hours brought a different set of conditions to the markets, inasmuch as the US dollar rose sharply on the trade-weighted index -gaining as much as 0.53 and touching the 76.75 level- but gold refused to give up much of the gains with which it settled at 5:15 pm NY time on Monday. The offset factor? News that the IMF managed to find a buyer for about half of the 403 tonnes of gold it needs to sell in order to meet funding shortfalls. When Mr. Shishmanian of the World Gold Council opined at the LBMA conference in Edinburgh that central banks might become net buyers of gold, he may possibly have already known what he was talking about.

"The transaction, which is in the process of being settled, involved daily sales that were phased over a two week period during October 19-30, 2009, with each daily sale conducted at a price set on the basis of market prices prevailing that day. The total sales proceeds are equivalent to 6.7 billion dollars. The Fund Stood ready for an initial period to sell gold directly to central banks and other official holders that may be interested in such sales. Thereafter, on-market sales of any amounts remaining from the 403.3 tons would be conducted in a phased manner over time, following the approach adopted successfully by central banks participating in the Central Bank Gold Agreement, according to the agency. The average price in the transaction with India was about $1,045 an ounce, an IMF official said on a conference call with reporters. The IMF also has said that it is ready to sell directly to central banks and later make transactions on the open market if necessary. The IMF official declined to say whether other central banks have expressed interest in purchases."

Clearly, not having to wonder where at least half of the gold sale tonnage might land removes one cloud from above the gold market. While all kinds of wild assumptions will surely be trotted out in the wake of the Indian purchase, the basics behind the action are very well worth a clear-headed look-see. First and foremost, India was -up to this point- in the 14th place among official sector holders of bullion. At 357.7 tonnes, as of September, the country had 4% of its reserves in the yellow metal.

Even following the addition of the 200 tonnes, India finds itself with a 6% share of gold to reserves. Compare that to the near- 70% share that France, Germany, or Italy currently hold. Then think about the fact that as recently as 1994 the country had 20% of its reserves in bullion. Reserves have mushroomed, gold did not keep pace. Although we do not know if India has an ‘official’ target for percentage allocations, the one thing that upping the gold proportion will likely provide it with, will be a larger voting share within the IMF. India is currently in 12th place among global economic players.

As such, the purchase is seen as logical, and has its share of assertion of stature behind it. The other reason for the allocation was explained by comments from an ECB official -we quoted them in Monday’s comment- simple asset diversification. Such spreading of risk is not necessarily a wholesale abandonment of the dollar, but a normal part of the process of foreign exchange reserve management. Reuters notes that the Indian purchase has not had (and likely will not have) an impact on the local demand for gold, as prices are near record highs and buyers are still largely invisible. As for the wisdom of buying said gold at and average of $1045 per ounce, well, we will refrain from giving an opinion out loud. Finally, consider a country in which the population holds about 15,000 tonnes of hoarded bullion – 30 times the amount that the central bank will now own…

We close today with a couple of possible an answers to a dilemma that is still often heard at investment conferences from investors who already have their core holding of physical or custodial gold. What do I buy in addition to such a core insurance allocation? Gold-oriented mutual funds, or gold ETFs? The Wall Street Journal cautions that:

"The decision can mean a big difference in returns. Ultimately, the choice may boil down to the reason for adding the yellow metal to a portfolio. At first glance, this year’s returns seem to point to stock funds as the clear winner. The average precious-metals stock fund is up 37%, according to Morningstar Inc., while SPDR Gold Shares, the biggest ETF directly tracking gold prices, is up 19%.

Gold-related stocks, which are predominantly mining companies, "are a leveraged play on gold," says Joseph Foster, a portfolio manager for Van Eck International Investors Gold. Here’s why: If it costs a company $800 to mine an ounce of gold, and gold is $1,000 an ounce, the profit for the company is $200. If gold rises to $1,100, the profit becomes $300. That’s a 50% rise in profits off a 10% rise in the price of gold.

As a result, gold stocks have, over time, tended to move twice as much — up or down — as the price of gold, Mr. Foster says. Of course, there are other factors at work when it comes to gold stocks and the funds that invest in them. Individual companies can run into production problems or financial issues. Stock-fund managers can make bad picks.

The bigger issue is, simply, that these are stock funds. If the stock market goes into a free fall, gold stocks will get sucked into the downdraft. Between August and October of last year — the height of the financial-market panic — SPDR Gold was down 21%, but the average precious-metals stock fund lost 52%, according to Morningstar.

"Gold stocks got creamed with everything else," Mr. Foster says. Then, once the height of the panic abated, gold stocks screamed back quickly. So, if the idea is to have a slice of the portfolio that acts as a kind of insurance policy designed to hold up better than other investments when Armageddon seems imminent, the ideal investment is one that smoothes out overall returns and doesn’t make things worse. In that case, the better option may be gold ETFs such as the SPDR or iShares Comex Gold Trust.

If the investment premise is that gold is in the midst of an extended bull market, perhaps because of rising inflation or monetary and fiscal policies that lead to a weaker dollar, then gold stocks may be the better choice. Of course, the risk with gold stocks is that gold prices in fact decline and that bang turns into an implosion."

Like we said, ‘faites vos jeux’ depending on your goals.

Our goal is to listen to Nouriel Roubini in tomorrow’s speech at "Inside Commodities" at the NYSE. The writer will participate on a gold panel later in the day. There may -therefore- not be a commentary posted on Wednesday. An attempt will be made, however.

Check out additional market resources at Live Spots, the Silver Coin Melt Calculator, and the US Inflation Calculator.