Gold, Silver, Metal Prices: Commentary – 11/30/2009

C.A.R. & Drivers

Good Day,

The Dubai-based financial sandstorm that roiled the markets late last week showed some signs of dissipating as the new trading week got underway. While the Dubai finance minister indicated that the emirate will not guarantee anything when it comes to local banks, such banks appeared to receive verbal support from Abu Dhabi. The UAE’s stepping up to the plate to support institutions that have exposure to what was to be the ultimate amalgam of Disneyworld/Las Vegas ultimately led to a bounce in emerging market stocks and a resumption of the trend in the dollar and commodities.

As Monday’s markets got underway, the US dollar had broken back to under the 75 mark on the trade-weighted index and had slipped to the 1.50 level against the euro as well. Oil prices did not manage to recoup much of their Friday losses, but equity markets appeared promising in the wake of a 264-point gain in the Nikkei overnight, and judging by a bounce in the emerging market indices.

Gold’ scary $60 Friday range gave way to a more moderate pattern to Monday morning’s initial price action. The yellow metal appeared to manage to hold support at the $1168 trend line and while uncertainty persisted in the marketplace even as the imminent threat of Dubai default appeared to recede, traders were back at work to deal with pressing matters such as the December futures contracts’ expiration.

New York spot dealings opened with mild losses in gold, which was quoted at $1171.40 bid, down by $5.30 the troy ounce. The ‘risk’ (to the shorts) of a V-recovery in the metal remains there, with further attempts to clear the $1200 psychological hurdle about as certain as the prospect that someone, somewhere, will lose some (hefty) sums in the emerging Dubai debacle.

Gold remained under mild selling pressure (the Kitco Gold Index reveals that about $8.50 of today’s $6.40 loss as of 8:46 NY time was due to predominant selling of the metal, and that the US dollar’s 0.12 loss on the index mitigated only about $2.10 of such a loss – in other words, gold would be down by more than $10 if the dollar were unchanged on the day) even as the dollar fell slightly.

Silver spot prices traded down by 7 cents at Monday’s market opening, quoted at $18.18 per ounce. Platinum fell $1.50 to $1435.00 and palladium declined $3 to $359.00 as the new trading day got underway. GM may decide this week on the fate of its Saab unit. According to automotive industry watchers, such a fate may involve euthanasia as opposed to a rebirth of any kind. Just the reality in the ever-shifting automotive landscape, where strictly the fittest survive. Some, even then, only based on taxpayer-flavoured life-support.

The Friday dip in gold, on the other hand, revealed a couple of other, also hard to ignore, realities. One is that a highly speculative (and significantly overbought) condition in the marketplace can, and does, on occasion – result in stop-loss selling that cascades as only so many dominoes that have been set up in a wonderfully intricate pattern. The other thing that came to light in the action we witnessed late last week, is that when panic hits -real panic- the ‘safe-haven’ quest among the panicked, reverts back…to the dollar. Yes, the "debt-ridden, soon-to-be-dead, good-for-nothing but T.P." US dollar was being bought, hand-over-fist, on Friday.

Gold and oil, two of the most liquid assets available under such circumstances, were being let go of, on the other hand. Perversely, perhaps, ever so briefly, perhaps, but still the case. Go figure. In some ways, the Friday roller-coaster underscored that which prompted John Neff (who managed Vanguard Group’s Windsor Fund for three decades), to offer this take on the precious metal when queried by Bloomberg: "It’s not an investment, it’s an emotional experience."

Daily Finance observed -pointing to conditions in place prior to Friday’s gold market narrative- that: "[recently] investors have debated how much of the gains are the result of fundamentals as opposed to speculation. The conventional wisdom holds that rising prices are the market’s verdict on the Federal Reserve’s decision to pump massive amounts of cash into the financial markets.

The gains [in gold] may be part of a self-feeding cycle, with desperate fund managers under the gun — chasing assets that seem to be rising — to show performance as the year ends. And despite perceptions of safety, the recent gold rally has also coincided with the purchase of riskier assets like stocks and junk bonds. Previously, gold tended to move in the opposite direction to those risky assets.

More than any hedge on inflation, the current run in gold seems to riding "a rush with liquidity," veteran market analyst Dennis Gartman told DailyFinance in a recent interview. That is, as cash goes searching for higher returns, gold is attracting a lot of that liquidity along with stocks and other rising assets. The problem for investors, of course, is knowing how to time the end of the party. With no underlying cash flow, gold is notoriously difficult to put a price on.

Some value-conscious investors like Warren Buffett have steered clear of the metal, partially, as a result. And when gold price reversals do come, they tend to be violent. Commodities often take the staircase up and the elevator down, the old saw goes. While Friday’s move may merely have been a few stories down, it should serve as a wake-up call to overconfident investors."

Something else that has showed some signs of overconfidence – at least as far as spec fund book-talk is concerned- during the gold rally in place since September 1st, is the perception that mine production of gold is somehow headed into oblivion. You know, the ‘peak’ argument that was in heavy rotation, and being trotted out every time a market player talked about $200 oil being just around the corner, last year. No one will seriously debate that production problems persist in South Africa, or that Indonesia produced less than had been anticipated for 2008 )a glitch that could be resolved in 2009).

However, let us take a brief look at recent gold output in certain transitional economies. The reality is quite a bit different than what is being heard out there in fund promo land. BRIC s may be all the rage when it comes to equity buyers willing to take a flyer, but CARs could come to impact the gold market – and are already rolling. This, before the $40-odd billion that has been spent on gold exploration globally, begins to bear some low-hanging fruit of its own on the gold supply tree:

For example, In 2007 China produced 270.6 tonnes of gold, just ahead of South Africa’s 255.05 tonnes of production. In 2008, China produced 282.1 tonnes of gold, up 4.3% from the 2007 levels. We say, get set for a 15% hike in Chinese output in 2009 (vs. 2007’s levels). Why? Bloomberg reports that: "China, the world’s largest gold producer, may have record output this year as miners expand production after gold prices reached all-time highs, according to the China Gold Association. The country’s gold output may climb 10 percent to 310 metric tons, compared with 282 tons a year earlier, Zhang Yongtao, deputy secretary-general of the association, said at a conference in Kunming today. Annualized growth in China’s gold production was 9.5 percent in the past eight years, he said.

China overtook South Africa to become the world’s largest producer in 2007 and the World Gold Council said in July that the nation may pass India as the biggest consumer. Bullion touched a record of $1,195.13 an ounce Nov. 26 as a weaker dollar drove demand for precious metals as an alternative asset. "Record prices boosted profitability of Chinese miners, giving them incentive to expand production," Zhang said in a speech."

Over to the Great Motherland, where in 2007, Russia produced 161.73 tonnes of gold. By 2008, the country produced 183.5 tonnes and moved to the number five spot in global gold production. Get ready, we say, for a 27% hike in gold output by Russia (vs. 2007 levels) as it might just produce 205 tonnes in 2009. Gulfnews reports that: "Russian gold production rose 12.2 per cent year-on-year in the first 10 months of 2009, mainly due to the launch of large projects in its far east, the Russian Gold Industrialists’ Union said yesterday. The union, which is the main industry lobby, said in a statement gold output by the world’s No. 5 miner of the precious metal totalled 171.2 tonnes from January to October, compared with 152.5 tonnes in the same period a year ago. Russia produced about eight per cent 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."

Finally, over to a mainstream economy -the one Down Under- where in 2007, the country of Oz produced 245.7 tonnes and then lost about 28 tonnes from that number in its 2008 output of gold. Australia’s 2009 production could see a 3-5% rise when it is finally tallied up, and might reach 225 tonnes. Reports The Australian: "Australia is back to the No 2 spot behind China in global annual output of the precious metal. Industry consultant Surbiton Associates’ quarterly survey, released yesterday, states that Australia produced 112 tonnes of gold in the first half of this year. That compares with Chinese equivalent production of 147 tonnes in the same period, 105 tonnes from the US and 103 tonnes from South Africa." 

These are the "CARs" and, these are the drivers – of the gold market- in addition to scrap, fabrication, central banks, and investment. Cross the road and ignore them at your own risk. Some quick math indicates that the three countries in question are set to supply a possible 740 (or about 30% of total mine output for 2009) tonnes of the shiny stuff to the market when this calendar year draws to a close. Mine supply from market and transitional economies amounted to 2,363 tonnes in 2008. If our estimates are correct, the 2009 gold output from the mines in these two niches will come in at about 2,457 tonnes – on track for a total annual mine supply rise of nearly 4%.

Analytical firm GFMS has already tabulated a 7% hike in global mine output as of mid-year. It stood at 1,212 tonnes. This, of course, At a time when spec fund spokespersons (and even some mining firm CEOs) are telling us that we have nowhere to go but down. All good, provided the eager and willing takers of metal remain eager and willing. Surging scrap supplies (hitting a record 880 tonnes by mid-year 2009) are a story for another day…

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.