Gold, Silver, Metal Prices: Commentary – 12/30/2009

Good Day, 

Further price weakness was on tap for gold as the last full trading session got underway this morning in New York. Following yesterday’s breach of the $1100 mark, the yellow metal encountered additional waves of year-end selling and sank to lows near $1087.50 overnight.

Dollar strength, final book-squaring, and thin participation were cited as the prime culprits in gold’s renewed descent. Precious few bargain-hunting oriented buyers emerged in the wake of stop-losses being triggered and thus the action remained largely one-way, bringing gold values to a one-week low.

There was also a bit of forward-looking psychology at work in the market, as players were seen not welcoming the idea that US economic growth in 2010 might dent gold demand (which, as was illustrated yesterday, was quite poor during Q3 in tonnage terms) among speculative investors.

That particular species fueled gold prices for the better part of 2009, taking it to record highs, and making for the current year-end net gain tally (last seen as a positive 25% for those who held it up to now). The monthly loss in gold is now getting closer to 7% following the metal’s retreat from $1225 per ounce.

New York spot dealings opened with a $2.50 per ounce loss in gold, which was quoted at $1093.40 as against the US dollar sitting atop the 78 perch on the trade-weighted index (a gain of 0.12). By 10 am NY time, the yellow metal was off by nearly $10 and broke under the $1085 level as well. Crude oil was asleep at the wheel, losing 4 cents at $78.83 this morning.

Silver broke under the $17 level, dropping 26 cents in early trade. Platinum initially gained $1 to $1464 but quickly fell $11 to $1464 as profit-takers raided the pits in that metal as well this morning. Palladium, by contrast, opened with a $6 gain and rose an additional $1 later on, to $391 per ounce. No change was reported in rhodium – steady at $2340 per ounce.

Two notable market commentators summed up this late 2009 situation as follows, when queried by Bloomberg: "Gold may fall to $900 before investors and the public at large try to buy and hold the market," said Bernard Sin, head of currency and metals trading at bullion-refiner MKS Finance SA in Geneva. "I am dollar bullish because I believe the U.S. economy can grow." MKS is a world-renowned refiner and fabricator of investment products in the precious metal.

"The 20-day moving average for spot gold at about $1,120 an ounce is "perilously close" to the 50-day moving average of about $1,118 an ounce, according to Rhona O’Connell, managing director of research company GFMS Analytics Ltd. in London. A drop in the 20-day price to below the 50-day price "would not be good news at all" for investors betting on higher prices, she said. "Technicals look horrid."

Recycling Today has posted a very interesting piece on scrap flows in the precious metals markets. For today’s closing section, we bring you highlights from their study:

"Tough times run up precious metals prices and bring materials out of nooks and crannies. The current crunch is no exception. The housing market is dead. The dollar is weaker than any time in recent memory. Business is slow almost everywhere. As a result, prices of gold, silver and PGMs (platinum group metals) are up. For recyclers who make a living on the spread between their buy and sell prices, things are fairly comfortable right now.

Materials are flowing. Even the PGM area, where dismal car sales generally mean fewer vehicles scrapped, has a bright lining in the form of Cash for Clunkers. With an increase of palladium scrap from Europe, especially in the second half of 2009, recycled palladium could see increases of some 13 percent back to near 2008 levels of 1.1 million ounces. Platinum could post more modest gains in 2010 over last year, perhaps up 10 percent to 820,000 ounces, while rhodium could rise to 195,000 ounces, or 11 percent," Kumar says.

Platinum supplies are forecast to climb by 110,000 ounces to just above 6 million ounces. That 2 percent increase comes in the face of soft demand. This is despite a decline in basic mine production. About 655,000 extra ounces of palladium were on the market as 2009 closed, despite a drop in supplies of 1.8 percent to 7.2 million ounces. Again, less demand for catalysts is depressing consumption as is the fall in industrial and chemical industry demand. Catalyst demand ended 2009 off by about 12.7 percent at 3.9 million ounces. The low price of palladium–in the $300- to $400-per-ounce range–will boost demand.

"Investment demand still appears to be the price driver in the metals markets," Kumar says. For platinum, exchange-traded-fund (ETF) holdings of physical metal have risen to a total of more than 600,000 ounces as of the end of October. "The amount of physical platinum held in London vaults to back investor purchases of ETF securities has doubled since the start of January 2009, when stocks totaled only 307,930 ounces," he says. Additionally, speculative positions for platinum on New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM) now total 1.5 million ounces.

"2010 will bring some recovery in automotive and industrial demand for platinum," Johnson Matthey says. "Supplies are not likely to grow to the same extent and the market could move into a modest deficit." This would be good news for platinum prices. Johnson Matthey projects platinum will trade between $1,280 and $1,550 per ounce during the first half of 2010.

"It is easy to argue that platinum may be set for a correction, given that the price has risen $250 an ounce, or more than 20 percent, in the past quarter alone," Kumar says. "But with speculative investors seemingly intent on raising gold above the $1,200 mark, platinum could certainly breach $1,500 an ounce in the short term." However, he says any short-term strengthening of the dollar, particularly in reaction to talk of a reversal in current liquidity policies, could adversely affect commodities, and platinum at some point could re-trace its recent gains back to test support at $1,350 or even overshoot down to $1,250 per ounce, before resuming its longer-term upward trend.

Palladium should trade between $290 and $390, according to Johnson Matthey economists. With mine production soft, sale of the rest of Russia’s state stocks and demand in Europe for better pollution controls on diesel engines, the price could be at the upper end of that range by June. A strong dollar or a serious drop in gold and platinum would push the trading range down to the low $300s or less. Kumar cautions that, should palladium sustain its recent move above the $375 level and continue to firm toward $400, significant additional supply of the metal could come to market, which could dampen further price increases."  

Have a nice Wednesday.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

For US Mint gold bullion coin news of the day, read 2009 Fractional Gold Eagle Sell Out Figures and 2009 Gold and Silver Eagles Jump.