Gold, Silver, Metal Prices: Commentary – 11/9/2009

Of Quads and a Moscow Hold’em

Good Day,

Overnight trading markets gave early indications that the first day of the new week might present a fresh record for gold prices (while also making life interesting in the oil trading pits), and that the US dollar would likely return to the pivot points it first visited in October (75 on the index and $1.50 against the euro). Following that, the New York spot markets opened with additional gains in precious as well as base metals, and oil. Since the day will be filled with travel once again, we can offer up only the starting gate numbers and a second half consisting of a roundup of background stories that were ‘canned’ prior to this morning. Today’ late developments will have to be covered in retrospect.

Gold opened with a $12.20 per ounce rise, and was quoted at $1110.00 this morning. Silver added 33 cents to start Monday’s session at $17.72 an ounce. Platinum rose $12 to $1355 and palladium climbed $2 to $331 per ounce. Rhodium remained unchanged at $1850 the troy ounce. Also at last check, the US dollar was seen at 75.05 on the index and oil was still up by $1.13 at $78.56 per barrel. Hurricane Ida was certain to be among the factors cited for black gold’s rise this morning, but the core reasons remain the ones you will read about below.

A larger-than-normal number of dollar-negative factors were seen feeding the carry-trade pipeline over the weekend, and they all conspired to produce that which we saw early this morning; namely, a continuation of the accelerated speculative trend now so visibly in place since September the 1st.

Facto one, was the statement by an assortment of policy makers from the U.S., U.K., Japan and 17 other nations, who said that it is still premature to take away the stimulus bottle from a global economy that is recovering unevenly, and uncertainly. Alistair Darling, hosting in the U.K. a meeting of finance ministers from G-20 nations, said his colleagues decided to keep supporting their economies.

"We agreed to maintain support for the recovery until it is assured," Darling said Nov. 7."We are not out of the woods yet." That kind of jawboning was all that equity and commodity speculators needed in order to place continuing bets on their respective money-making sectors. As reported here last week, finding a trader who anticipates liquidity withdrawals any sooner than about a year from now is a seemingly futile task for financial reporters. The unanimity in sentiment is however precisely what gives us cause for pause…

Drunken with an apparently endless supply of no-cost dollars, the funds got busy in a hurry and offered up a $1.18 gain in crude oil overnight, a 1.3% gain in gold ( to nearly four ones- AKA a quad – on the offer side of spot prices per ounce) and helped push the greenback to 75.08 on the index early on Monday. The euro also rose against the yen and the dollar after a fresh statistical report showed that Germany’s exports rose by more than economists had predicted.

For an example of what might be going on under the hood here, consider that, to date, the MSCI World Index has surged 66 percent (!) since March 9 as governments have spent some $12 trillion to extricate the global economy from the swamp of recession. In so many words, it might -at first blush- appear that if economists saw "green shoots" out there this spring, the spec funds are signaling the existence of "lush tropical forests" as here, and now. Oddly, precisely because people like Mr. Darling see the world as still lost in the woods. Pictorial evidence of ferns and dense bamboo would be still be nice to have…

"The International Monetary Fund said traders are probably using the dollar to fund so-called carry trades around the world and it may still be overvalued. The IMF said in a report published on Nov. 7 that while the dollar "has moved closer to medium-run equilibrium," it is still "on the strong side." The Federal Reserve last week repeated its intention to leave borrowing costs "exceptionally low" for "an extended period" as long as inflation expectations are stable and unemployment fails to decline." said Bloomberg this morning. The USD index earlier today touched 75.08 its lowest level since Oct. the 23rd. All that is left to ponder is not the ‘probability’ that traders are doing the carry-trade conga, but what those ‘medium-run’ equilibria numbers might be. Our feeling is that we are looking at them.

Premier Wen of China was also heard from. Said the gentleman -very politely- speaking from near the pyramids: "I hope that as the largest economy in the world and an issuing country of a major reserve currency the United States will effectively discharge its responsibilities. Most importantly, we hope the U.S. will keep its deficit at an appropriate size so that there will be basic stability in the exchange rate and that is conducive to the stability and recovery of the world economy." By our reckoning, a reassuring statement by Mr. Geithner directed at the Chinese Premier’s kind advice cannot be but hours away, and is likely being drafted right now. At least, as regards the first part of the Chinese leader’s statement. The second sentence, well, that’s a little harder to deal with. The ‘appropriate size’ of said deficit is what is about as hard to compute as the precise measurement of the age of the universe. Many, of course, will not accept anything but a zero. Yes, in another lifetime, and in a parallel universe.

Now, for a quick roundup of the technical and trading construct of the gold market as it shapes up on this second Monday of November. First, we consult the COT snapshot offered up by our friends at Belgium’s GoldEssential.com:

"Whereas we had expected to see fresh additions to speculative long positions over the last week, given the bullish movements in prices -, we find it somewhat counterintuitive that there was an eventual decline in speculative net long positioning, given the overweight of fresh speculative short positions. Speculative longs saw a 2.41 pct gain, whereas shorts were increasing by 22.57 pct.

Open interest studies showed a decrease, which is striking given both the increase of new speculative (non-commercial) long and short positions, with much of the decline being attributed to heavy declines in the "Non-reportables" category, which can be referred to as "small speculators." Small speculators were seen shedding nearly 60 pct of their short positions over the reported period, with also nearly 26 pct of long positions being sacrificed. This leads to the belief that small speculators have suffered considerably more than their larger counterparts from the recent record-breaking spree.

Net Speculative Length to Open Interest studies showed an increase (+0.52 pct), while speculative net long positioning was seen dropping 0.19 pct. The origin of this equally oddball increase lies in the fact that open interest has declined more than net speculative length, offsetting a decline. Again, large speculators were at the end of the monitored timeframe only slightly (-0.19 pct) less long when netting data.

We remain worried about the bullishly skewed direction of this market going forward, with the conclusion essentially unaltered; we believe this very extensive (speculative) long positioning to be unsustainable on the medium term, although we acknowledge that the pronounced bull-run has to run its course.

Following that, the technical picture as seen through the lens over at Commtrendz Research. As reported from one of last week’s EW mini-updates, the push towards a potential $1025-$1032 peak appears to have remaining fuel, but there is always a ‘but.’ Commtrendz sums it up as follows:

Important support is now at $1,080 and breach of this level could trigger stops. As we have been maintaining a bullish view for some time based on the big picture charts, our view stands vindicated as gold prices tested $1,100 levels. As long as the crucial weekly support at $1,073 remains intact, we feel gold futures could again inch higher towards $1125 or even higher. The rally does not indicate any signs of exhaustion yet. Unexpected fall below $1,073 could trigger a corrective fall towards $1,025 or even lower towards $1,011. Only a deeper fall below $1,007 will indicate bearishness. Such a fall could take it lower towards $980 or even lower towards $928.

Elliot wave analysis indicates a possible fifth wave move in progress. This has been confirmed on rise above $978. A potential fifth wave target lies at $1,100, which has been met. RSI is in the neutral zone now indicating that it is neither overbought nor oversold. However, signs of negative divergences are seen now. The averages in MACD are still above the zero line of the indicator indicating the bullish trend to be intact. Therefore, look for gold futures to test the resistances levels and then correct lower subsequently. Supports are at $1083, $1,072 & $1,045. Resistances are at $1,100, $1,125 & $1,160."

Finally, we revisit the echoes of last week’s Roubini-Rogers verbal dukefest. As previously mentioned, the media is simply eating this one up. No wonder, as major market peaks, valleys, or pivot points always give rise to memorable statements by those to whom one normally flocks for guru-flavoured opinions. Readers of all such articles are eager to learn and be led.

Some are looking for words of wisdom that only validate that which they so fervently believe, and will dismiss anything else as ‘heresy.’ Others, are confused and do not want to make the wrong decision at the wrong time. They seek wisdom from the people supposedly ‘in the know.’ No wonder then, that in the wake of any/all such utterances, one either takes them as gospel or holds them up against previous forecasts made by the same source.

Mr. Roubini’s recent call for the eventual birth of the crisis of ’08 gives him the edge going into this recent battle. However, it is not as if Mr. Rogers shows up without ammo for this fight. Let Boomberg’s William Pesek fill us in on the fight (between the hyper and the dis inflationists) that is taking on the flavour of "300" – complete with flying limbs:

It’s a, well, golden opportunity. [for the media, say we].

Investor Jim Rogers thinks gold will double to at least $2,000 an ounce. Economist Nouriel Roubini says that’s "utter nonsense." As these well-known market personalities duke it out, they’re doing us a favor by highlighting a critical debate: Which is the bigger threat — inflation or deflation?

Inflation, though not to the extent many fear. [thinks Mr. Pesek]

Saying this opens me up to a rebuke from the National Inflation Association [Who? Oh, wait. We found it. One of its author-less posts recently predicted $5400 per ounce gold,]. It chided Roubini last week for arguing there’s no inflation to drive gold that high. The group said he "doesn’t understand inflation and deflation." Then again, who really does these days? If you’re looking at economics and markets through traditional lenses, very little makes sense. Many concepts that seemed like rock-hard truths two years ago are looking shaky.

Just ask John Reed, who helped engineer the merger that created Citigroup Inc. Reed last week apologized for his role in building a company that has taken $45 billion in direct U.S. aid, and said banks that big should be split up. Turns out, the 1999 repeal of the Depression-era Glass-Steagall Act separating consumer banking from those involved in capital markets was a terrible idea after all.

Up has become down, and down has become up. Amid such disorientation, the risk is that policy makers will apply old ideas and relationships to new and diverse challenges. One such error would be prematurely taking away the stimulus that’s only now stabilizing growth. Only a fool would dismiss inflation risks at a time when the Federal Reserve, Bank of Japan and Bank of England are holding short-term rates near zero and the European Central Bank isn’t far behind. Central banks are starting to unwind emergency measures introduced to stave off disaster, and that’s appropriate.

The risk is that policy makers go overboard looking for exit strategies. That, in a nutshell, is Roubini’s shtick and it’s hard to refute the views of the New York University professor. Yes, inflation must be contained, but so must the forces of deflation in the short run. To me, Roubini’s worries are more persuasive than Rogers’s bet on gold. That also goes for Roubini’s view that bubbles pervade rallies in emerging-market stocks. They do."

If one needs any father proof that not even those who are tasked with knowing what to do next know not what to do next, look no further than the very latest gold market-related news item to hit the wires from Russia:

"Russia’s central bank does not exclude further rate cuts before the end of 2009 and may buy gold from the state repository, Gokhran, the bank’s first deputy chairman, Alexei Ulyukayev, said on Monday."We will buy (gold) only if conditions are adequate," Uluukayev told reporters. Last month, Russian media reported that the government planned to sell 20-50 tonnes of gold, possibly on the local market, from the repository."

Monty Python would call this ‘confuse-a-cat’ but one could also easily call it a good game of poker. Complete the with faces one makes in the process. The nature of the cards being held by all of these actors is known only to them.

Good luck until tomorrow.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Check out other site market resources at Bullion Prices, Silver Coins Values and the US Inflation Calculator which easily finds how the buying power of the dollar has changed from 1913-2009.