Gold, Silver, Metal Prices Commentary – April 22, 2010

Who You Gonna Call? Mythbusters!

Good Morning,

Gold prices retreated slightly overnight as Greek debt concerns continued to batter the euro and lift the US dollar. News that Greece’s current year deficit has touched 13.6% of its GDP pushed the common currency to the 1.335 level as the metals markets opened for action on Thursday. Meanwhile, the greenback rose 0.17 further on the trade-weighted index to reach 80.38 at last check.

Greece, however, is not alone in facing sovereign creditworthiness issues. Fitch’s Ratings cautioned overnight that the country’s current rating status remains at risk as its public debt keeps rising. Perhaps it was unrelated, and more technical in nature (after breaching its 25-day moving average) but the Nikkei lost 140 points in Tokyo last night. Dow futures did not look all that good either this morning, albeit improving jobless claims numbers should have had a better effect. Earnings drops reported by Wells Fargo and Boeing added to downward pressure for the stock futures.

New York spot dealing for Thursday opened lower, as gold felt the dollar’s pressure and as crude oil headed for lower ground as well. Spot gold lost $5.50 to ease towards the $1140.00 level, while silver fell 17 cents to start at $17.90 per ounce. Support for the yellow metals is expected to become manifest as it nears $1130.00-$1135.00 but resistance remains equally manifest at levels above $1150.00 for the moment. For now, the former remains the market’s hope for this trading day. We are down nearly $15.

PGM group metals showed a mixed picture at the day’s start, with platinum adding $7 while palladium dropped by the same amount. The former was quoted at $1738.00 and the latter at $557.00 while rhodium was once again steady at $2900.00 per troy ounce. Risk aversion/ risk appetite — the powerful movers of spec markets continue to dominate. If it’s Thursday, it must be the former…

According to our market analyst and trader friends over at Standard Bank (SA), the metals flows in platinum and palladium are showing some interesting patterns under development of late. Namely, the most recent figures available for March reveal that platinum and palladium stockpiles continue to flow out of Zurich.

Switzerland was a net exporter of 130,000 ounces of platinum in March. In the first quarter, the country exported 605,000 ounces of the metal (as compared to a net import of 115K oz in Q1:09). Switzerland also exported 26,000 ounces of palladium in March, and a total of 138,000 ounces in the first three months of 2010 (again, as compared to net imports of 350,000 ounces during the same period in 2009).

Standard Bank analysts note that "platinum continues to be shifted for clearing Loco London. This shift in location at first glance makes demand for metal appear stronger than it is." They also noted that "China and Hong Kong also exported decent volumes of palladium to Zurich (almost 40,000 ounces), indicating that demand for palladium from China is on the decline."

Germany also exported a large amount of platinum (86,000 ounces) in March, as April –May "typically see weaker seasonal demand for autos in Europe." Given the high prices for platinum in March, automakers may have used the price level as an opportunity to sell metal back to market. Overall demand for the metal remains robust. However, at current prices, demand for metal for industrial use may be declining (as evidenced by China’s export of palladium and Germany’s export of platinum)." the Standard Bank analysts concluded.

And now, time for more myth-busting, courtesy of Commodity Online and Resource Investor. These sources ‘dared’ publish some mighty ‘heretical’ (in the minds of some) findings and one would do well to read them and ponder just what it is that some writers out there are trying to convince their readers of in order to have them believe something when reality is diametrically the opposite.

To wit: In an online opinion poll conducted by Commodity Online, a majority of the respondents have hinted at a possible fall in gold prices in the near future, and better earning opportunities will come knocking on the door. A sample size of 21,600 respondents selected from across the globe, revealed that 93% or 20,100 of the total sample size opined that there would be a fall in gold prices due to a recent upbeat mood in the global equity markets. Is that what you hear when trolling certain bullionbull websites? Why, of course not.

Most of the Commodity Online poll’s respondents maintained that (industrial) base metals can potentially become alternative investment instruments. They also expressed the view that the global economy is recovering and that risk appetite is leading global investors to undertake higher risks in investment instruments other than gold. Such trends could result in a reduction of gold demand for investment, thereby pulling down prices.

However, 52% of the respondents did not agree to the argument that increased risk appetite will bring down gold prices. Similarly, of the total poll respondents a majority of 53.1% believed that the US dollar will prevail over gold as regards a ‘safe haven’ investment, while 46.8% of the respondents contradicted that view and maintained their skepticism towards the dollar.

Next up, another myth that needed some heavy-duty busting. The idea that there is some kind of giant Ponzi scheme afoot in the gold market. Frankly, if anyone did believe such nonsense, they would be well-advised to steer totally clear of the bullion markets as their hopes of ever prevailing over the "sinister conspirators" would be about as slim as an alchemist’s chance of turning tungsten into gold. Fortunately, clear-thinking and level-headed people such as Bullion Vault’s Founder, Paul Tustain, are available to explain the situation. We think you should, his piece in its entirety. Here are some brief, but quite pertinent passages for now:

"SOME COMMENTATORS are alarmed that the amount of ‘physical’ gold in London is not sufficient to meet the immediate demands of the market. This concern is based on a simple misunderstanding."

"When a professional market analyst like Mr. [CPM’s] Jeffrey Christian says the open physical position exceeds the amount of gold in the vaults all he is saying is that the gold which is due for physical settlement next week or next month has not necessarily been shipped in yet. But he knows (even if he does not express it very clearly) that the seller of a forward is on the hook for making the gold available on the appointed settlement date. And of course the seller will incur a severe financial penalty for failing to settle, which is why forward sellers don’t sell gold without being very sure they can deliver it."

"The LBMA’s open physical position on its forward curve — far from being a risk — is a genuine benefit to the gold market’s smooth operation. It defines the daily rate at which real bars are needed into the future, and firmly places responsibility on the seller to make sure the gold arrives in good time. This helps keep the world of real bars settling efficiently."

"Some price ‘manipulation’ of futures contracts at expiry is not a "gold problem." It is a problem relating to futures markets in general. The artificiality of futures wrings profit out of unsophisticated investors who wish to speculate. Who’s to blame? The only people who can really be blamed for the expiry and rollover costs are the people who bought futures without both the money and the storage facilities to settle, and that’s usually those private investors who are its victims; which is ironic."

Cases closed. Everything is decidedly not what it appears to be at first blush. Some things are simpler than others. Numbers don’t lie but liars use numbers Facts don’t lie but liars twist facts (and people’s words). Okay, we have now officially run out of cliches.

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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