Gold, Silver, Metal Prices: Commentary – 11/27/2009

Good Day,

Being called back to scribe duty by surprise developments has little appeal for those who thought the day might be spent navel-gazing. But, the news never sleeps, it appears. Just when conditions appeared to be defined solely by extreme euphoria, someone, somewhere far away, decided to have a not-so-little…crisis. Well, well. But, more on that, later. Let us take a look at the background situation that had developed up until the day before Turkey Day.

From Ned Schmidt’s updates in the Value View Gold Report we learned (and this should only come as a surprise only to those who have been in state of cryogenically suspended animation since September 1st) that: "speculation is rampant in the futures market for Gold. As we finished writing today [Wednesday], more than 800 tons equivalent of gold had traded on the CME. That approximate amount is four times what India bought and twice what the IMF is selling. Not one ounce of that Gold will ever be delivered. Every ounce will be ultimately sold. That this is paper gold that will never be delivered and will be sold needs to be understood.

The U.S. dollar continues, as we have said before, to be the play toy of the foreign exchange trading community. Electronic trading always pushes prices to an extreme that is both unsustainable and painfully reversed. The bet, at this time, should be that the dollar will begin to strengthen well before the end of the year. As the dollar has been pushed by trading to an extreme on the downside, the snap back will be more than most expect. Again the dollar is moving toward over sold again, as shown in the top chart. That development  is most similar to that which occurred prior to dollar’s 2008 rally. In the top chart on the first page has been drawn the parabolic curve off which $ gold is trading. No positive, or even neutral, resolution of a parabolic rise can be expected. Those patterns almost universally are resolved in a painful, and we add unexpected pattern.

A reasonable expectation of the resolution of the parabolic rise is a test of the old ceiling, now the floor, at US $970.

The overbought condition will be corrected. That the speculative excesses in gold and the over bought condition are being ignored in such widespread fashion suggests an emotional crescendo is being approached. And remember, at some point the central banks will act to punish the currency speculators, as they have done regularly in the past. Silver continues to be worrisome. If the gold move was real, silver should be considerably above $20. It is not, and the problem is not with Silver. The problem is what is happening in gold. Quite simply it seems that traders are shunning Silver in order to play in gold. If you can have lots of fun in one sandbox, why go play in another? [Downside] risk is to $14."

From EW analysis also released on Wednesday, we gleaned that: "gold remains in the late stages of a classic commodity run to a high. The final leg of these rallies are sharp to the extreme, and gold’s rise certainly conforms to the profile. The near-vertical moves, such as the one that led to the Primary wave 1 high and to the Primary wave 3 high, spike to a high and reverse violently. The current move should do the same. The Daily Sentiment Index of gold traders has been above 90 percent bulls for 17 straight days, challenging the previous record streak of 20 days from November 5 to December 6, 2004, which resulted in the December 2004 high that remained intact for 9 months. The current trend reversal should be intense. As noted Monday, a decline beneath $1129 will be an early warning signal that a trend reversal is taking shape, while a small-degree five-wave decline will indicate greater bearish potential thereafter."

Not to mention India. Oh, let’s mention it anyway. Or, at least the fact that the country’s November gold imports utterly collapsed, to but 15 to 18 tonnes -about half the level attained a year ago, and contrasted by once again rising scrap flows. No need to mention the cause of all this. It is on the upper left-hand corner on the Kitco homepage. It reads in four digits. The year-to-date gold imports are down to less than 160 tonnes – or by about 59%. In so may words, the 2009 Indian gold inflows are off by perhaps more than the 200 tonnes of same that its central bank took off the hands of the IMF in a much-debated story, recently.

Not to mention Russia, either. Gold production headed into oblivion? Well, not if you look at transitional economies (for starters, China and Russia). News from the Great Motherland is that Russian gold production rose 12.2 percent year-on-year in the first 10 months of 2009, while Russia produced about 8 percent of the world’s gold last year and plans to significantly increase this share by developing its reserves that are second only to South Africa’s. It aims to produce 205 tonnes of gold this year, up 11.1 percent year-on-year. "

Amid such technical and fundamental background environment conditions, it came as no surprise that even the mildest of contrarian news could potentially unravel the late-night party still going on in various currency and commodity pits as of Wednesday. The news, however, was not only not mild, but it was laden with all kinds of potential implications – the essence of which remains to still be digested.

In brief, that which hade been suspected for some time now, -that Dubai has some serious financial problems, and that a default on its nearly $80 billion of debt could be in the making- turned into headline material on Thanksgiving Day. Not much to be thankful for, in Dubai at least. "This certainly proves that the perceived immunity of the Gulf region from the credit crunch is a mirage and also puts doubts in investor minds on what else they are being economical on the truth with," said Philip Gillett of IG Index this morning, referring to the breaking news.

Thus it was suddenly noted (on a quiet market holiday day), that the dollar started to pick up some serious steam all of a sudden. Some thought it was the Swiss National Bank selling francs and buying dollars. To put it bluntly: "The SNB appeared to have run out of patience with the Swiss franc’s rise against the dollar and was suspected of wading into the market early in the European day with intervention to drive it back down against the U.S. currency. The central bank didn’t confirm the move itself but UBS issued a note stating that the SNB surprised the market with its move." Others saw the Japanese central bank also intervening in favour of the US currency. Were such talk to be validated, it would also not come as a major surprise – we have covered the (growing) likelihood of such eventualities in previous posts, after several dips to under the 75 level on the dollar index.

Or, perhaps the SNB had some other news leak hitting the floor at about the same time. News from Dubai, perhaps? At any rate, the US dollar was still rising after midday in Europe on Thursday, driven both by fear of a debt default by Dubai World as well as talk of intervention by the Bank of Japan and suspected intervention by the Swiss National Bank. At any rate, there was a sharp shift in global sentiment as news broke that Dubai World, a holding company for the Dubai government, had suddenly shocked financial markets with a request for a delay in repayment on about $35 billion of its debt.

"Fear that the move could constitute an actual default led to a swift move out of risky asset markets with the Nikkei Index closing 0.6% lower, the Shanghai Composite Index falling 3.6% and most European bourses nearly 2.0% down soon after midday. The dollar was also helped up against the yen by verbal intervention from Japan’s Ministry of Finance. Although Vice Minister Yoshihiko Noda initially claimed that intervention wasn’t under consideration, Finance Minister Hirohisa Fujii said that appropriate action would be taken against "abnormal" moves in the currency. Fujii also pointed out that the yen’s rise was due to dollar weakness and not to yen strength. Analysts said this implied that action by the U.S. is needed to turn the dollar around. "There’s little sense that the government is about to act with intervention," said Steve Barrow, currency strategist with Standard Bank in London."

And  thus, we get to Friday. A still abbreviated trading day, but one during the early part of which saw the dollar picking up 0.56 on the index and rising to 75.36, and to 1.487 against the euro. A day on which crude oil fell nearly $4 per barrel. A day on which the Nikkei lost more than 300 points. And, a day on which base metals sustained losses ranging from 1.25% (copper) to 3.7% (nickel). Gold, which in theory should have benefited from financial crisis news, fell victim to the very factor which had helped propel it to within striking distance of the $1200 mark just yesterday; the US dollar and related market plays. A sixty dollar range quickly developed (peanuts, we say) in gold as the metal went into reverse without hitting the brake pedal first. Analysts at Belgium’s GoldEssential summed up the action as follows this morning:

"Gold was seen taking a hit on Friday, with prices succumbing to extensive profit taking following a bounce in the U.S. currency and as equity markets choked on Dubai credit worries, reigniting fears on the global economy. Carl Johansson at Goldessential pointed to "heavy stop loss selling in thin liquid market conditions as the EUR/USD pair ducked below 1.4850 and an equity sell-off intensified", which had pushed gold through the $1,160 and subsequently $1,150 an ounce support zones.

Technically, gold had broken below an uptrend-line that had protected the stellar run-up throughout November.  "This trend-support is around $1,160 an ounce", said Evelyne Winters, Sr. Precious Metals Analyst at Goldessential.com. "If we close today below this mark, we could see further weakness next week". She added that "next substantial layers of support are at $1,100 and $1,070". 

The latest Kitco-sourced tallies show the following price picture in precious metals: Gold spot, down $34 per ounce, quoted at $1158.10 as of 9:45 NY time. The day will see as early close, and most traders are still thought to be picking meat off the wishbones in their kitchens. One can only guess what the trading day might have looked like, had this been Monday. This was gold’s worst intra-day drop in a year, while commodities overall slumped by the most since July. Silver lost 85 cents (after losing as much as nearly a full $1) and was down to $18.00 per ounce.

Whilst it is entirely possible that gold could still stage a rip-roaring comeback following this dip to the $1136 level, the probability of such a V shaped snap is now (still) to be computed largely as a factor of whatever the dollar does, going forward. Our hunch is that while the Dubai ‘event’ will not kill off all risk appetite, it will put a serious dent into it for a few months’ time. And, if that is good enough for a stronger phase in the US dollar, without the advent of more central bank intervention on its behalf, then we could have a period during which the wild abandon with which gold was being bought of late, could also come under ‘review’ and shift into behaviour patterns that show a modicum of sanity.

Platinum fell $5 to $1428 and palladium slipped $6 to $362.00 per troy ounce. The above prompted some revisions in strategy among hitherto extremely gold-friendly funds: "Hinde Capital Ltd., the London-based hedge-fund firm investing in gold, reduced its fund’s investment in the precious metal to 50 percent, the minimum weighting, from 125 percent previously. Hinde Capital cut the holdings after the dollar rebounded and Dubai faced debt repayment problems, Ben Davies, co-founder of the fund, said today by phone. Gold fell as much as 4.2 percent today in London, the most since January, as the dollar rose 1 percent against a basket of six major currencies."

Other market gurus see a potential battleship turn here, on the heels of the news from Dubai. Namely, as Bloomberg reports this morning: "Dubai’s attempt to reschedule debt may spur a "correction" in emerging markets, according to Mark Mobius, while the global slump in equities shows government spending alone won’t protect financial markets, Arnab Das of Roubini Global Economics said. Mobius, who oversees about $25 billion of developing-nation assets as chairman of Templeton Asset Management Ltd., said a 20 percent drop for shares is "quite possible." Stock volatility and risk aversion may jump as countries and companies default on loans, according to Das, the head of market research and strategy at RGE, the advisory firm founded by Nouriel Roubini."

We close today’s ad-hoc, news-induced roundup with a devastating read on Dubai. Delve into it, if you dare. See possibly why we are reading about this place within the context of today’s developments.

                                   http://www.fastcompany.com/magazine/138/exodus.html

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.