Gold, Silver, Metal Prices Commentary – 3/1/2010

Stop Saving! It’s Bad For You!

Good Morning,

The new month started off with more uncertainties still manifest in the global markets and with a further boost in the value of the US dollar as it received additional safe-haven bids from increasingly risk-averse global investors.

Gold prices held up reasonably well in the overnight hours, trading largely near $1115 an ounce but still unable to overcome the $1125 resistance area. Other precious metals were showing mixed action during the wee hours. Most of the speculative excitement was still confined to, and visible in, the dollar/euro/sterling currency pits.

The Economic Times reported that gold buyers in India crossed their collective arms once again starting on Friday afternoon as domestic prices gained following a government imposed rise in precious metals import duties. Dealers surveyed by the ET were quoted as saying: “There were a few deals in the morning, but after the duty hike announcement, nothing has happened so far… We survive on thin margins and even a small hike could impact business,” and "We have plenty of orders below $1,100 an ounce.” — in so many words, "no dice on locals buying at this time."

New York spot metals trading opened its first session of March with mixed results in terms of price. Gold fell by $2.20 per ounce basis spot bid, opening at $1115.70 as against an 81.05 print on the US dollar index (up a very robust 0.73). Silver CLIMBED 2 cents to start at $16.51 per ounce, while platinum gained $6 to open at $1547 and palladium rose $3 to the $434 level.

Rhodium showed no change at $2430 an ounce. Gold remains under pressure to perform and overtake resistance at $1125-$1131.50 lest the sellers once again prevail and possibly take the metal down to the $1090s. The dollar will call the shots once again this week, but gold may shine in euro and sterling terms this week, given the goings-on in the Old World.

While the European common currency remained relatively steady against the dollar (at or near 1.352 at last check) amid optimism that a life-preserver package for Greece may be in the making, the sterling slid to its lowest in more than nine months versus the greenback on the back of British election-related uncertainties. The most recent U.K. election polls indicate that the Tories’ lead over Labour is shrinking rather fast.

This emerging situation elevates the hazard of a "hung parliament" — an outcome that may impede much needed U.K. deficit-cutting measures. Some however see more than just election fog surrounding the sterling. Scottish money managers — according to Bloomberg — are expecting no less than a 20 or 30 percent decline in the pound as The U.K. catches the contagion and follows Greece down the slippery slope.

A couple of potentially supportive metals market news came into focus over the weekend. The first was the unfortunate and devastating earthquake in Chile. The 8.8-magnitude quake that has already killed more than 700 people was said to have damaged highways and airports, resulting in the closure of some copper mines. Estimated economic damage may reach the $30 billion figure, (nearly15% Chile’s GDP).

Speculators were quick to jump on copper and other metals trades in the wake of the news, despite the fact that analysts remain skeptical about the quake having any significant, long-term impact on the global market. In fact, several news reports indicate that operations in at least some of Chile’s copper mines are resuming immediately.

State-owned copper-mining company Codelco’s El Teniente mine actually restarted operations on Sunday, and the Andina Mine was set to resume operations today or tomorrow. Therefore, "what the copper market is experiencing is more of a “sentiment reaction, rather than a fear that actual production levels will really be affected,” said one analyst.

On the other hand, the second news item that came out over the weekend could potentially disrupt some mine output of metals in a place quite far from Chile. As of March 7th, some of South Africa’s biggest gold mines could be faced with an "indefinite" strike. This could take place unless miner Gold Fields Ltd. is able to settle a dispute over a fitness test (!) with the country’s biggest labour union. The NUM is threatening to cease work at all of the Gold Fields’ operations.

The latest indications from Germany are that European officials are likely devising a plan to grant Greece nearly $34 billion in aid if the need arises. However, on the concrete side of things, all that was heard this morning was European Union Monetary Affairs Commissioner Olli Rehn saying (following his meeting with the Greek Finance Minister) that "Greece must deepen measures to reduce its budget deficit." We already know how locals have reacted to the measures that have hitherto been placed into action…

Interestingly, Greece’s efforts to curtail spending may not do the trick. It turns out that one of the culprits of the current mess is — oddly- discipline, frugality, and tight wallets — those of…the Germans. The Washington Post found that: "Greek extravagance touched off the biggest crisis in the 11-year history of the euro. But the world’s most ambitious monetary union faces a less obvious problem that might be even harder to lick — German frugality. Southern European profligacy is now the target of open distain in Germany, with many here ruing the day in 1999 that this nation of 82 million kissed goodbye to the once-mighty deutsche mark.

Germany is in a tight fix — loath to reward feckless Greece with a concrete promise of aid but fearful of the consequences to its own economy if it does not. “The Germans were catering a big party that was going on in the euro area, selling the food and offering the credit to the party guests,” said Thomas Mayer, chief economist for Deutsche Bank. “But the guests got drunk and ate too much, and now Germany is stuck with the bill.

What this tells us is that the euro model must be adjusted. Yes, the Greeks are going to have to make reforms, but the Germans are going to have to change, too.” Joining the global culture of debt, many here say, is simply not an answer. "I think we also have to say that there are some countries [where consumers] have spent too much.” said Joe Kaeser, chief financial officer for Siemens."

Spend? Save? Hold gold? Opt for paper? — Some, or all, of these questions are currently nagging many a central banker — and not only in the countries directly or indirectly affected by the current crisis. There are no sure-fire conclusions on offer either, just yet. In fact, the Financial Times finds that as counter-intuitively as it may seem at this juncture, and despite the possible implications of the present mess: "Gold risks being replaced in the long term by a basket of currencies in central bank reserves, according to a portfolio manager on the Smith & Williamson Global Gold and Resources fund. Bob Lyon said special drawing rights could be used to diversify currency exposure in central bank reserves instead of resorting to gold as a safe haven.

Emerging markets in particular mooted using special drawing rights more widely after the financial crisis and quantitative easing caused fears over the dollar. Using special drawing rights would remove one of the two major drivers from the gold markets, leaving jewellery as the chief catalyst for demand.

In the near term, Mr. Lyon said the chief risk to the gold price was a rise in real-term interest rates. If interest rates were to rise in the US, this would make the dollar more attractive, lessening demand for gold as a replacement reserve currency. For this reason, Mr. Lyon said, troubles in the eurozone had temporarily lessened demand for gold, as the dollar had appreciated against the euro."

As for your basket of reserves, we say: keep that core ten percent portion in gold. It can only be beneficial. Just hope it does not become critical. Your other assets will thank you. You will thank you.

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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