Gold, Silver, Metal Prices Commentary – 3/9/2010

Which Part of "Bu Dui" Is Unclear?

Good Day,

Gold prices fell to a one-week low of under $1115.00 per ounce overnight as the US dollar continued its recent climb and reached 80.74 on the trade-weighted index. The rallies in risk assets came under pressure as perception resurfaced that this type of speculation has been largely underpinned by generous liquidity and ultra-low interest rate and that it has a finite shelf-life in the big scheme of things.

The euro also continued under selling pressure early this morning as the Greek situation appears to remain without an obvious and/or imminent solution. The common currency was last seen trading near 1.354 against the greenback ahead of the closed-door meeting between US and Greek leaders today.

Prime Minister Papandreou will sit down with US President Obama today and will discuss not only possible solutions to what ails Greece, but also quite likely, the recent calls for clamping down on credit-default swaps made by German Chancellor Merkel and Luxembourg’s PM Jean-Claude Juncker – both of whom very much want Mr. Obama to align himself with the need for such oversight. "Unprincipled speculators’ are being pointed at, as possible catalysts for a new global financial crisis. This is about to get   interesting. A bit late, but interesting nonetheless, unless one is one of those ‘unprincipled’ persons…in which case, things might become very interesting…to say the least. Curb thy greed. Fast.

The precious metals complex opened with moderate-to-heavy losses across the board this morning, as the stronger dollar and a hefty drop in crude oil kept players on a selling tilt. Spot gold fell $7.80 at the session’s start, and was quoted at $1115.90 per ounce. Within the first half-hour of trading, the yellow metal sank to a low of $1107.60 per ounce as sellers kept up the pressure. The other factor undermining gold was a set of comments coming from China (more on that ‘delicate’ matter, below).

Silver started Tuesday’s price action with a 25-cent loss, quoted at $17.00 per ounce, while the noble metals also handed back some of their recently-achieved gains. Platinum sank $13.00 to $1579.00 and palladium dropped $14 back down to $457 the troy ounce. Rhodium showed no change at $2400.00 per ounce.

Gold needs a quick rebound towards the $1140.00 per ounce area, but now, maintenance of the low $1100’s or that figure itself become the focus of the day for gold players at this juncture as the heavy dose of thinly warranted bullishness that was recently on display appears to be fading due to external factors. None of this has stopped the persistent calls (demands?) for $2K gold (before year’s end, at that) to continue to be voiced over some rather large megaphones.

Such extreme bullishness was dealt an unappetizing dish or crow overnight, as China’s head of the State Administration of Foreign Exchange made comments about his country’s reserves, gold, and related issues. To say that these columns attempted to put the Chinese putative –and presumably imminent- massive gold buying spree into proper perspective, is to resort to some cheap ‘we told you so’ pontificating.

However, as of late, it seems that each and every time a Chinese academic or a second-tier financial sector official made any comment that contained the word ‘gold’ or even mentioned the concept of ‘reserve diversification’ some were quick on the trigger to declare that we were going to be witnesses to a big ‘back up the truck’ event in the offing. Well, now, Mr. Yi Gang’s overnight comments bear the weight of not only his title (which is about a high and as official as it gets) but also of the level-headed and methodical (let’s just say, unemotional) manner in which his government broaches the quasi-religious topic of gold.

To be quite precise, this writer has repeatedly tied to explain that any possible future Chinese gold purchases are a multi-faceted subject and that such should be viewed within various important contexts. First of all, Chinese policy calls for a gold allocation of about 2% of overall reserves at this time. Second, as mentioned just yesterday, the country does not intent to ‘dump’ dollars from its massive holdings — certainly not in favour of a massive amount of bullion.

Third, the purchase of an amount of gold ten times as large as India’s $67 billion adoption of half of the IMF’s gold disposal amount would be a drop in the proverbial Chinese reserves bucket. Fourth, the market ‘damage’ (both to the upside for gold and- more importantly- to the downside for the greenback) would obviate any potential benefits from such an action. Fifth, the country would find itself stuck in a position where if it needed to mobilize only a fraction of its then sizeable gold stash, it would be met with an unreceptive, small, and comparatively illiquid market. Thus, at the end of the day, why bother disrupting the gold and currency markets? In order to please and/or vindicate certain gold propagandists?

Several brief statements made by Mr. Yi Gang came across the news wires last night, mainly via the China Daily and Reuters. The essence of most of them was one and the same; China can, and might buy some gold in the future, but China will not take a headlong splash into the bullion market. China has no interest in damaging its US debt and dollar holdings, and China might buy gold from internal sources and at such times, and at such prices, as it deems fit. In the words of Mr. Yi Gang:

"It is, in fact, impossible for gold to become a major investment channel for China’s foreign exchange reserves. We have 1,000 tonnes now, and even if I double that holding, according to current prices, that would be about $30 billion, it would just increase the level of gold (in China’s reserves) to about 2 percent from the current 1 percent. Gold prices in recent years have risen very nicely, but if we look at the price over the last 30 years, gold prices moved in great swings," he said. "So as an investment, its yield is not very good from a 30-year point of view."

Apart from the precious metal’s "unsound yield," Mr. Yi explained that since the world gold market is limited, large purchases by China would inevitably push up the international price further dampening any hopes of a good return. Perhaps the next statement made by Mr. Yi was even more significant that his downplaying the speculation about possible gold purchases. He said that; "The U.S. Treasury market is the world’s largest government bond market. Our foreign exchange reserves are huge, so you can imagine that the U.S. Treasury market is an important one to us." The remarks were made at a press conference on the sidelines of the annual session of the National People’s Congress, the country’s top legislature.

What happens next? Oh, well, let’s see: Mr. Yi’s comments will be dismissed as "posturing" and as "trying to talk the gold market lower so the China can then back up the truck" and other similar fairytales. We will also, once again, hear all about how "disgusted" China really is about the US dollar, US debt, and the US in general. Some will accuse Mr. Yi of being on Bernanke’s or Geithner’s secret payroll. Pravda will report that China has (once again) already bought the gold from the IMF, on the same day that aliens landed in a remote Russian village. And commentators will continue to comment based on little more than conjecture and/or innuendo as opposed to relaying hard quotes such as the ones above, whilst keeping their readers poorly informed. Ah, but what else is new? Plus ca change…

Happy Guessing.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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