Gold, Silver, Metal Prices Commentary – 3/15/2010

E.T.F. = Expect Tonnage to Flow. This Is A Two-Way River

Good Day,

Sovereign debt credit rating apprehensions once again arose in the markets as the mid-March sessions got underway worldwide. Such jitters lent fresh support to the precious metals complex overnight, however gains in gold were facing a stronger dollar, and the other side of the credit fears spectrum; that of China tightenting in the near future. Thus, advances during the nighttime hours were limited to the $1109 value zone for gold, and the yellow metal still had its work cut out trying to repair the worst weekly loss in values it sustained in seven last week.

Monday’s early price action was showing incipient signs of volatility as the markets looked ahead at possible Chinese as well as Indian rate hikes and/or tightening aimed at curbing red-hot growth and rising inflation. As well, anticipation about what the Fed might/might not say in its upcoming meeting kept things…lively in various trading pits, such as the base metals’ ones for example, where declines of 1.5% on average impacted the copper, nickel, zinc, and lead price tickers. "Chindia" took its toll in the way down as well, proving once again that there are no one-way streets inside the markets.

New York spot bullion trading started the new week off with mixed results. Gold was ahead by $4.00 quoted at $1105.50 per ounce as against the US dollar still above the 80.05 mark on the trade weighted index, and at 1.37 against the European common currency. Silver was down 9 cents, quoted at $16.98 per ounce, while platinum gained $6 to start at $1611.00 the ounce. The greenback added to its earlier gains following reports that the Empire State’s Manufacturing Index showed an eighth straight month of expansion despite the actual gauge’s slippage to 22.9 from 24.9 last month. Above-zero readings signal growth. Growth we had. At least in NY/NJ/Conn.

Palladium lost $1 to ease to $460 and rhodium was unchanged at $2400.00. Maintenance of the $1100 support levels is becoming the focus here once again, as the headwinds from various cardinal directions continue to present challenges for the bulls. As relayed in the Kitco Morning Metals Roundup, the "five-week-old price uptrend on the daily bar chart is in jeopardy of being negated."

One such challenge continues to remain on the horizon in the form of the expected shift in policy by the Fed. This week’s meeting may be the beginning of a more audible and/or visible Fed following a string of recent economic statistics that indicate that job destruction is probably over and that such a tectonic shift in the American labour landscape will be the catalyst for the rate-180 that the Fed is expected to undertake.

Marketwatch reports that: "At the Federal Reserve, the governors and bank presidents will meet this week in Washington to hash over their forecasts and plot their strategy for restoring health to the economy. No one expects any outward change in Fed policy to emerge from Tuesday’s meeting, but the calm exterior barely conceals the internal struggle over when and how to bring interest rates — which are now as close to zero as possible — back to a normal level of 3%, 4%, 5% or even higher."

Fed officials are therefore expected to steer the US central bank policy towards ‘normalizing’ short-term interest rates later this year; with some analysts forecasting the first such increase in the fed funds and interest-on-reserves rates by September.”

Here, now, some of the aforementioned market headwinds, in a bit more detail.

Even as sources report that some officials believe that the Greek credit odyssey’s final chapters are being written at the moment, the markets continue to meet such pronouncements with a high degree of skepticism. Bloomberg reported that former European Commission President Romano Prodi said last week that: "the worst of Greece’s financial crisis is over and other European nations won’t follow in its path." Such bold declarations are a bit…Fellini-esque in flavor, especially at a juncture when the European Commission says that Italy’s debt burden will rise to 117 percent of GDP in 2010, the highest in the EU after Greece.

Bloomberg notes that: "Investors don’t yet share Prodi’s optimism about Greece."Nor about Italy, or the U.K. for that matter. This morning’s buzz is that Old Blighty might lose its AAA rating. On this writer’s radar however, Italy continues to loom as the largest potential post-Greek crisis threat.

As regards gold in particular, another set of worries has surfaced over the weekend, via the alleged use of the metal to back the now oft-mentioned and perhaps soon-to-be-created European Monetary Fund. The news has not yet been sufficiently clarified to elicit a clear verdict on what it all means for the market going forward –especially as the essence of the story remains contested. For example, the German magazine Focus reported on Saturday that the German finance ministry was considering the possibility of euro zone countries using their central banks’ gold reserves to back an "EMF." However, no sooner had the electronic ink dried on that story, that Reuters UK reported that: "Germany’s Bundesbank would oppose any government initiative to use its gold reserves as backing for a European Monetary Fund (EMF), a spokeswoman said."

Said spokesperson also said that it was "up to the Bundesbank to decide autonomously about the use of its gold reserves and not the government or the European Central Bank." We say, think about it: a fund which could, as a last resort, offer help to euro zone states facing bankruptcy, withgold in its coffers, as the asset of last resort. When/if someone trips and falls, what gets mobilized? The bars in the proverbial basement.

If one does not buy and/or hold bullion for that exact purpose, then what other? EU policymakers have been debating ways of providing support for Greece and other troubled euro zone members. The creation of such an EMF and the earmarking of some bullion to provide the reach-to asset seem like an expedient solution and one that does not require much-dreaded cheque-writing.

The other topic of potential interest is one we have been forewarning about for at least the last year. It concerns the gold ETFs. While the advent of such vehicles gave a significant boots to gold prices by virtue of the accumulation mode they were in since their launch some five years ago, few have pondered what might happen when such instruments plateau, reach critical mass, or are simply faced with a sideways-to-downward phase in the gold market cycle. Credit Suisse opines that we might find out — sooner than one might wish.

Miningmx.com reports that: "The much-vaunted gold-backed exchange-traded funds (ETFs) could play a critical role in determining the gold price this year if holders of the instrument start selling out and cause a large amount of physical metal to come onto a market where demand is relatively weak. Warnings about a waning gold price have long been in the market where the metal has risen above $1,000/oz and remained resolutely above that level."

One of the most prominent and blunt warnings came from GFMS CEO Paul Walker back in April 2009 when he warned investment in gold may dry up over the next five years after a spell of strong interest from investors, who were concerned about the dollar, interest rates and economic upheaval, pushed prices to record highs.

A fresh warning this time comes from David Davis, a precious metals analyst at Credit Suisse Standard Securities, and it points directly to the potential for increased divestment from ETFs and what this means for the price of gold and the supply/demand fundamentals. "We believe that a major problem is looming on the horizon should investment demand remain muted and/or should investment demand start falling away over the next three to five months," he said in a research note.

The World Gold Council (WGC), using data compiled by GFMS, said in February demand for gold fell 11% in 2009 to 3,386 tonnes compared to abnormally high levels in 2008 when global financial markets tottered on the edge of collapse.

In January [2010], there was a net disinvestment of 22 tonnes of gold from ETFs and some expect the February figure to be fairly similar to that. By way of example, the South African gold ETF, NewGold, has been reporting divestments and the fund now stands at 1.598 million ounces of gold from 1.7 million oz in November last year.

Davis believes if the gold price remains above $1,000/oz investment demand will remain muted but if the price drops below that level annual demand for the product could fall to between 300 and 350 tonnes.

In the three years before 2009, an annual average 280 tonnes of gold was absorbed by ETFs. "We are of the view that there is increasing downward risk to the gold price should the pace of sales increase. We estimate that institutional divestment alone has the potential to release between 200 tonnes and 300 tonnes in 2010," Davis said.

Folks, this is not the IMF. This is not the group of CBGA signatories. This is the world of gold ETFs. No knocking on India or China’s central bank doors, looking for would-be takers. No self-imposed limit on daily/monthly/annual sales here. Holders want to redeem? Pay them, you will. Fast. The gold? It lands in the market. At a price. Whether or not such flows materialize in 2010 or 2011, is not the material issue here.

What is salient, is that: a) the funds have not grown since their June 2009 peak b) that disinvestment shows signs of having begun at a time when we are told there should be nothing but purchases on record and c) that the funds have the capacity to offload sizeable amounts of bullion onto a market that is ill-prepared (from a fundamentals-oriented angle) to absorb another 200 or 300 tonnes. Unless, of course, you’re reading various gold forums where the news was treated with the usual cavalier pronouncements of ‘It does not matter. Back up the truck, honey." Better bring a big truck, not the F-150.

Good Day.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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