Gold, Silver, Metal Prices Commentary – April 14, 2010

G.F.M.S. = Gold’s Final, Mature Stage

Good Morning,

A renewed rise in the euro this morning helped bullion prices recover after two days of profit-taking and indecisiveness.

The US dollar was trading at 1.361 against the common currency, while it eked out a tiny 0.01 gain on the trade-weighted index and was last seen at the 80.42 level.

The gold bulls regained the upper hand and once again pushed the yellow metals to the $1160+ value zone, but once again the real significant action was in the noble metals complex, where palladium hit a fresh 2-year high bolstered by ETF attention and supply/demand concerns that appear to favour the bulls.

Gold prices opened with a $9.70 per ounce gain this morning, quoted at $1160.80 as fresh buying was manifest in the market. All but $1 of the opening gains came from predominant purchases, as opposed to dollar weakness. The technically-inspired move (now in its second week) could once again be targeting the $1165-$1175 price band, albeit significant resistance is expected up near those levels at this time. Thus far this morning, the precious metal turned away and slipped lower after touching the $1163 mark.

Silver added 24 cents this morning, starting the New York session off at $18.46 per ounce. As mentioned, platinum and palladium continued to tear up the market street, burning some serious price rubber. Platinum gained $10 to open at $1725.00 whilst palladium climbed another $18 to start the day at $545.00 the troy ounce. In the background, crude oil was ahead by nearly one dollar, trading at just under the $85 per barrel price-point. Rising risk appetite was also manifest in base metals, where an average gain of nearly 1% was seen in nickel, zinc, and where copper and aluminium added about half a percent each this morning.

The US economic statistics releases from this morning indicate that consumer prices in the US rose by 0.1% last month. The gain was mainly the result of an increase in prices for fresh fruits and vegetables.  The figure basically matched the expectations of economists, while the core CPI – which excludes food and energy prices – was unchanged in March.

That core CPI figure was expected to show a gain of 0.1% on the month, but it evidently failed to materialize. The US core inflation rate is up by only 1.1% in the past year, representing the smallest such gain recorded in six years. Marketwatch reports that "the last time the year-over-year core increase was smaller was in January 1966." Once again, no signs of the Weimar Republic or of Harare on the Hudson were imminent, but the persistent scent of Japanese-style price sags remains in the economic air.

So, you say you want to see $1,300 gold? Actually, many are saying they demand $2K, $5K, and $8K per ounce gold in order to be somewhat satisfied. Well, according to London-based metals consultancy firm GFMS, we may yet have to settle for $1,300 or so as more or less the top price, and may also have to allow for the fact that a move to such a level could signal the advent of the last stage of this now decade-long upward move in the yellow metal.

Our reporter friend Frank Tang, over at Reuters, reports this morning that GFMS opines that: "Gold is near the final phase of its 10-year bull run, but prices could still climb as high as $1,300 an ounce in 2010 driven by higher investment demand."

Philip Klapwijk, the jovial helmsman at GFMS Ltd. feels that "the rise of gold prices is not sustainable because jewelry demand has dropped to less than half of total demand, and record investment buying at some point will fall off."  

Mr. Klapwijk’s cautionary observations came during a Reuters interview that took place ahead of the release of one of the annual ‘bibles’ of the industry (the other being the CPM Group one): The "GFMS Gold Survey 2010." The publication will summarize the supply and demand story seen in the gold market during the epic year that was 2009. GMFS statistics are the mainstay of the market snapshots used on at least a quarterly basis by the World Gold Council (a non-profit organization funded by the world’s gold miners).

"There are pointers to the fact that we are entering the final stages of a bull market," Mr. Klapwijk also remarked today. "But that doesn’t rule out the potential for some fairly fancy price gains before it reaches a peak in prices. We are actually pretty bullish still in at least the next 6-12 months. By the end of this year, we believe prices will be near the $1,300 mark." he said.

Echoing that which has been oft-stated in these columns, but totally ignored (and even derided) by the gold uber-bulls, Mr. Klapwijk said that "gold supply and demand are not currently in a long-term equilibrium and prices at higher levels are not sustainable. This is not a healthy underlying market when the traditional mainstay of the gold market on the demand side, jewelry, is reduced to just 40 percent of demand."

The GFMS survey reveals the fact that jewellery demand was off by 25 percent (at 1,111 tonnes) over the past year.  Such demand is normally the mainstay of the gold market as it represents nearly 70 percent of total global gold demand. Gold investment demand in 2009 surpassed jewelry buying for the first time since 1980.

Ignoring such distortions solely because investment demand happens to be in a particular cycle (and cycles, by definition, do have ends) comes with risk. So does overloading a portfolio with it, with the expectation of dire scenarios that might not come to pass. All of this, at a time when the ‘easy money’ appears to possibly have already been made in this market:

"At some point, there will be a resumption of normalcy, and gold is going to look very pricey. You could see some massive volatility and significant swings in prices. Gold will eventually face strong headwinds, such as the end of governments’ emergency economic stimulus packages. Investment demand at some point has to falter," Mr. Klapwijk also said.

As of now, such stumbling is not yet manifest. There are all sorts of "pigs" still in full-flight over in Europe, there are countless bets being made on when/how/why/if the Fed will/will not pull in the interest rate trigger, and there are legion inebriated carry-traders still…carrying on, with the easy money at their disposal. Time, meanwhile, marches on. As usual, only the early trend-spotters will walk off with the big trophies.

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

In addition to the bullion 2010 American Silver Eagle that is already available, the United States Mint this year will also issue the bullion America the Beautiful Silver Coins. Click on the link to learn about the coin and the new bullion series from the Mint. To check the buying power of the U.S. dollar, check out the US Inflation Calculator.