Gold, Silver, Metal Prices: Commentary – 12/03/2009

This Is A Test. This Is Only A Test

Good Day,

Gold and other related precious metals markets appeared a bit winded following their overnight run to a new record (in gold at least, to $1222.70 basis spot offer) and retreated a bit  within the first half-hour of NY-based trading on Thursday. Gold spot prices eased by about $3.00 at last check (after a brief dip to the $1204 level), and were quoted at $1211.80 bid, following comments the ECB’s Mr. Trichet, who said that:

"The [European] central bank was prepared to begin gradually phasing out special liquidity measures that are no longer needed." One more central banker who is putting his hand where his mouth has been- on the trigger button. No longer a verbal test. Australia has now raised interest rates for three consecutive months. Gone past the ‘testing’ phase and into actual ‘hiking’ stage. Still, certain markets and certain players are nowhere near convinced that this it the "beginning of the end," or what they would call the ‘exodus strategy.’ We’ll see about that.

The US dollar was also seen as being supported by US ISM data this morning, in the sense that risk appetite was dented by not-so-positive realities on the economic front. Marketwatch reported that: "The service sectors of the U.S. economy contracted in November after two months of expansion, the Institute for Supply Management said Thursday. The ISM’s non-manufacturing index fell to 48.7% from 50.6% in October. Readings under 50% indicate more firms said business was worsening than said it was improving."

Finally, it may be only a "test" at this stage, but tests usually imply a "dry-run" ahead of the "real thing." Namely, "The Federal Reserve Bank of New York said Thursday it purchased $180 million in short-term Treasury instruments as part of a program announced on Nov. 30 to test one of the possible methods the central bank may use to reverse some of the massive liquidity operations in the last year as they are deemed no longer necessary."

At any rate, according to Mr. Bernanke, there is no "asset bubble apparent" in the US markets. "We do not see, at this point, any extreme mis-evaluation of assets in the United States," Bernanke said in testimony to the Senate Banking Committee. Guess that depends on the definition of the word ‘extreme’ and the idea of ‘mis-evaluation’ as a synonym to ‘over-valuation.’ With the very obvious carry-trade going on in various asset classes, we must assume that he was perhaps (?) referring to oil, which, -trading at under $80- has not yet triggered the inflationary effects and economic trip-up that it might, were it to be at $100 per barrel, or so.

Or, perhaps, he meant stocks, which, although have ‘come back’ by about 60% or so this year, are not regarded ‘white-hot’ by many a market participant wishing to make back all of last year’s losses in one fell swoop, right here, tight now. As for gold, "I cannot think of, nor have I read of, any coherent economic reason for gold at this level," said William Gamble, president of Emerging Market Strategies. "Gold has climbed too far, too fast."

Silver was down 26 cents at last check, quoted at $18.95 per ounce. Platinum declined $8 to $1489 and palladium was off by $4 as well, quoted at $384 per ounce. Rhodium fell $30 to an even $2,500 per ounce on the bid-side. As the daily Heraeus report read today, at a time when gold was still ahead, but the white metals were dipping already: "The rest of the [metals] group is not convinced this morning and is not following. On the physical side, the industrial demand has come to a grinding stop as end of year supply is already at hand and any larger new orders are being pushed off to January. Investment demand remains the only real fuel."

Spec fund "nitro" [read: carry-trade dollars] has been the addictive power liquid of choice in this market – dating back to September 1st (in the case of gold) but perhaps to more like spring. Whether or not the spec fuel gauge is near ‘reserve’ levels, remains the question of the hour/day/week/month. One undeniable thing is that top-calling is not so much in fashion since last week, as it has been replaced by ‘bubble-calling.

Otherwise, the overnight market conditions were unchanged for yet another session. Namely, the dollar sank against the euro as well as on the index, oil gained marginally, and gold – well, it continued to receive a fresh supply of speculative hot air with which to loom larger on the market landscape. So large, in fact, that Calamander Capital strategist Roman Scott (also the spokesman for the British Chamber of Commerce), opined in a TV interview that [he too], sees a bubble in gold, as:

"The fundamental outlook on gold remains gloomy, said Mr. Scott, warning that we’re in a bubble that "could pop". "I think there is a sort of mini-bull market that could potentially be a bit of a bubble in gold," Mr. Scott said on CNBC’s Protect Your Wealth. Politely, properly, veddy British in flavour. "A bit" (around here anyway), looks like some $300’s worth. For starters.

Of course, yesterday’s opinion by a Chinese central banker that gold is in a potential speculative-driven price bubble, and that at these prices there is very little interest in ‘backing up the truck’ at the gold warehouse, elicited incredulous derision among gold uber-bulls. It’s a game of Pusoy, you know. It’s "talking prices down" so that the "real" purchase can then take place. Not so fast:

"China may not find it "very necessary" to purchase bullion for its reserves after the price rose above $1,000 an ounce, Zhang Yuyan, an economist at the Chinese Academy of Social Sciences, or CASS, said Nov. 5. "The world’s total existing gold value is about $1 trillion so the liquidity of the market "isn’t that good," Mr. Zhang said." Sounds like someone who’s done his math, not a poker player. But, you cannot talk in church. Not even if you are Chinese.

But, talk they will: "China’s central bank views gold prices as very high and will be wary of "bubble" assets, the Apple Daily reported today, citing Hu Xiaolian, a deputy governor at the People’s Bank of China. "The long-term benefits must be considered when managing the overall configuration of foreign-exchange reserves", the Hong Kong paper quoted Hu as saying in response to a question about whether China’s central bank would buy gold." 

And then, they will talk some more. Someone we have discussed these ideas with in recent years at the Shanghai Gold Summit, reiterated some quite level-headed views to Reuters this morning. Gold uber-bulls should read the words of this man with care. They certainly help put things into the proper perspective -one that removes raw emotion and raw greed from the equation, while injecting sanity and logic into the same:

"China has the scope to step up gold purchases but should take a long-term approach, avoiding the open market. China needs to buy gold over a longer term, but not in the open market," said Zhang Bingnan, a senior official from the China Gold Association, told Reuters on the sidelines of a local gold conference in Shanghai, stressing that this was strictly his personal view.

China said in April its official gold holdings had risen to 1,054 tonnes from 600 tonnes in 2003, by buying on the domestic market and from domestic producers. China’s gold holdings make up just a small (1.9%) portion of its foreign exchange reserves worth $2.27 trillion, the world’s largest and mostly held in U.S. Treasury bonds. 

Speculation has been rife that China may follow India in buying from the International Monetary Fund in a bid to diversify its official reserves portfolio as the dollar continues to weaken. "If we adopt a too aggressive and rash manner, it is not practical," Mr. Zhang told the conference, reiterating this was strictly his personal view and not representative of the views of the association.

Well said, Mr. Zhang. Someone else, who is also a personal friend, reaffirmed gold’s intrinsic role and the proper way to treat it: not a tool with which to make money (an investment) but rather as a vehicle for capital preservation (a savings device). In such a context, the gold PRICE and where it was, where it IS, or, where it might be going, is the VERY LAST THING that matters. At ALL.

"Albert Cheng, managing director, Far East, at the World Gold Council. "Gold is not something that will make you rich overnight. But it will help you sleep well," he told Reuters on the sidelines of the Shanghai gold conference. People’s desire to hold gold reflects bullion’s role as a means to preserve wealth, he said."

Well said, Albert.

Pleasant dreams.

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.