Gold, Silver, Metal Prices: Commentary – 1/29/2010

G(reat) Domestic Product. Not So Great Fundametals

Good Morning,

Gold was still headed for its second monthly drop this morning, as the US dollar’s robust gains kept a lid on the enthusiasm (and manifest bets) that were all the rage in the opening week of this year. The greenback took out the 79 level on the trade-weighted index this morning and albeit some of its latest gains may appear overdone for the moment, the lack of firmness in its rivals continues to make for attractive bets for currency and commodity market speculators.

The final session of the final January trading day in New York opened with a $1.50 loss in the yellow metal, which was quoted at $1083.90 per ounce. Gold traded in a band of from $1078 to $1088 overnight, as few additional physical buyers (other than pre-Chinese New Year buyers) emerged to take advantage of yesterday’s further significant dip. Today’s GDP numbers may yet aim gold back towards yesterday’s lows.

Silver got off to a weak start, gaining one penny at $16.24 per ounce, while platinum was flat at $1510 and palladium dropped $4 to $415 per ounce. No change was reported in rhodium, which was quoted at $2310 bid per troy ounce. Carmaker Toyota is seen as losing some $2.5 billion per month for every such period that its sales of eight defect-plagued models are on hiatus. Ford and other automakers are trying to muscle in on Toyota territory while the recall campaign unfolds.

GoldEssential.com market analysts remarked that "traders remain cautious about entering fresh positions, given the uncertain outlook on the back of weak charts, a persistently strong U.S. currency, and unconvincing equity markets. Although gold has come back from the lower $1,080’ies repeatedly, there’s little reason to be optimistic. Effectively, there are no indications that gold should be materially higher right now; the dollar remains firm, investment demand has been very weak in 2010 thus far, and weakness in equity markets isn’t helping it either, given gold has become more of a risk trade than a safe-haven. The only thing that’s holding gold up is physical demand and the fact that key chart levels seem to attract some quick-money accounts."

While a quick, relief-rally might still be in the cards provided the US dollar undergoes a bout of profit-taking-driven consolidation, the possibility of a  breakdown below the $1070-1073 support area might engender selling that could extend all the way to the $1,050 and ultimately the $1,030 an ounce value zone for the yellow metal. "In essence" -said GoldEssential.com analysts– "we’re now seeing the inverse of what we saw for most of 2009; that is, that it is up to the physical demand to keep prices supported as fresh investment demand is really sluggish."

The euro continued its foray under the 1.40 mark this morning, with continuing hand-wringing over Greece’s economy seen as intensifying. George Soros said yesterday that despite the current headline-making woes that Greece is experiencing, he expects the country to get its act together and not collapse in terms of debt. He referenced a six-month turnaround by Hungary some time ago as an example of how a comeback can be achieved. That said, Mr. Soros also mentioned the fact that Germany is in no mood to pump money into the direction of what it sees as ‘profligate spenders in the southern parts of Europe."

The euro fell to a nine-month low against the yen and a six-month low against the dollar this morning. The markets’ main focus is now on the U.S. GDP numbers. Economists were expecting to learn that the US economy grew at an annualized growth of from 4.6 to 5.4% (according to estimates) in the fourth quarter, double from the quarter before.

The actual GDP numbers show this morning, that the US economy grew at the fastest pace in six years during the fourth quarter of 2009, gaining 5.7% versus the above-mentioned expectations. More ammo for the dollar to trade higher, that news is. Also, it gives the Fed additional validation for the implementation of its exit procedures in the not too distant future. Carry traders have been put on notice.

Traders, meanwhile, tried to interpret fresh data from Japan which showed a further fall in December’s CPI. This was the tenth straight month of annual declines, as pathetic consumer demand keeps the country stuck in deflation.

Something else that appears to be deflating rather fast, are values in various commodity markets. Bloomberg reports that: "Commodities [are] headed for the biggest monthly drop in 13 months on concern that demand may wane as governments seek to control economic growth. The Standard & Poor’s GSCI Index of 24 raw materials is down 6.2 percent this month, the most since December 2008, led by slides of 16 percent for zinc and 14 percent for lead. Copper has lost 6.6 percent this month, also the most in 13 months, and crude oil is down 6.8 percent, the first decline since July. Sugar, feeder cattle and platinum climbed.

 "The optimism that led into 2010 has dried up very quickly," said Jonathan Barratt, managing director at Commodity Broking Services Pty in Sydney. "Economies have been running off stimulus packages, not off genuine demand." The Federal Reserve this week said it is taking steps to prepare investors for an end to stimulus and China started to restrict bank lending this month.

Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by the metal, had dropped 1.9 percent this month as of Jan. 28, according to figures on the company’s Web site. "Speculators are still liquidating gold, with no physical buying in sight," Andrey Kryuchenkov, an analyst at VTB Capital in London, said today in a report. "Bullion is still trading on the back of swinging currency markets."

Bloomberg is not alone in reporting this January’s commodities slump. The World Bankon the other hand, is looking forward in its latest report, and envisions a flat -at best- commodities market for the current, as well as the coming year. Highlights from the report follow:

• The impact of the financial crisis will hold back commodity price growth in 2010 and 2011 as economies take time to rebuild. There were many uncertainties about the strength of any recovery seen in 2010 and TWB expects commodity prices to be near stagnant as a result of the low growth environment.
• Oil prices will remain broadly stable throughout 2010, at around $76 a barrel. Other commodities would only rise by around 3% per year during the next two years. ‘We cannot expect an overnight recovery from this deep and painful crisis, because it will take many years for economies and jobs to be rebuilt,’ said the World Bank’s chief economist Justin Lin.
• The Bank is forecasting global GDP growth of 2.7% this year, followed by 3.2% in 2011.
•  ‘As international financial conditions tighten, firms in developing countries will face higher borrowing costs, lower levels of credit, and reduced international capital flows.
• As a result, over the next five to seven years, trend growth rates in developing countries may be 0.2% to 0.7% lower than they would have been had finance remained as abundant and inexpensive as in the boom period,’ At the same time billionaire investor George Soros, arguably the most famous hedge fund manager in history, is warning that low interest rates could end up creating a gold bubble.

We promised you yesterday to bring you the latest in supply/demand figures as reported by the Fortis Virtual Metals Group. Without much ado, here are the raw numbers and their projections for 2010:

Conclusions based on the above? There are many. For starters, note the manifest surge in scrap supplies, engendered by high gold prices. The end of de-hedging is nigh, giving us one less source of physical buying. Central bank purchase projections are curiously lacking the thousands of tones of alleged purchases they are supposed to contain –according to the perma-bulls, even if central bank sales are apparently declining. The slump in primary fabrication use continues –also courtesy of said high prices. We would question the optimism on ETF-related demand at 700 tonnes, especially given what we have seen in this niche since last June’s peak in holdings and the recent lack of additional uptake.

Our good friend, GFMS’ Philip Klapwijk recently described the status quo as one in which: "The market has become a bit of a junkie, and is increasingly becoming more dependent on bigger and bigger fixes of inflow from the investor community." Swedish research group Raw Materials Group (RMG) states in its yearly forecast that the three key factors driving the [gold] price "are now history" and says that: "The fall of the dollar looks to be over for now, the move to more secure investments during the financial crisis has come to a halt as a result of the return of risk appetite, and the falling output of gold mines in 2009 has been reversed for the first year since 2001."

When Credit Suisse recently posited the possibility of a more than 400 tonne gold surplus for 2010, such a forecast was summarily dismissed with some loud howls (grunts?) from the bulls. VM Fortis sees a more than 700 tonne overhang in this market. We question: where will all of these the buyers come from, given the likely cessation of the USD carry party, the probability of higher USD interest rates, and more regulation aimed at the speculative funds which have torn the market away from its fundamentals since, oh, late 2007? Oh, if we only had the answers…

A couple of other conclusions: Core holders: stay the course. Speculators: keep the Maalox handy.

Happy Trading & Pleasant Weekend.

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.