Gold, Silver, Metal Prices Commentary – May 4, 2010

Calling a Bubble With Swiss Precision

Good Morning,

Whatever ‘victory’ the Greek bailout is thought to represent for the euro (i.e. that a devaluation of its currency did not have to take place due to the very fact that it uses the common currency) it was certainly of the Pyrrhic variety, and it was obviously still not reflected in the currency’s trading level as of this morning. Neither was the rescue package news greeted with any cheer among Greek state workers who escalated their protests against the coming austerity measures.

Hardly anyone is not on strike or planning not to go on strike over in Greece anymore. That includes pilots in the air force who reported they were ‘too sick’ to fly yesterday. Sick from coming pay cuts, that is. The euro fell to 1.308 at last check, while the US dollar surged another 0.49 to reach 82.85 on the trade-weighted index. As the quest for a euro alternative continued, specs continued to lift gold and the dollar in tandem, while white and noble metals took various haircuts this morning (in large part due to Chinese tightening and slowing demand growth fears).

Spot gold opened the Tuesday session with a $6.10 gain, quoted at $1188.40 as participants staged yet another assault at the $1190 price marker. Gold bulls are taking the parallel rise in gold and the dollar in stride, and the focus has shifted to euro-bashing from last fall’s incessant dollar requiems. Whatever excuse works. The IMF’s gold reserves declined by 18.5 tonnes (595,000 ounces) in March on the heels of a 5.6 tonne sale of gold in February. While that figure appears small relative to the big plays in the futures and/or ETF markets, it represents a full year’s worth of global bullion coin sales by a leading mint.

Meanwhile, yesterday’s $800 future gold forecast by a Barclays strategist engendered howls of disbelief among die-hard dyed-in-the-wool gold bugs who chose to shoot the messenger rather than allow for any variance in perma-bullish opinion (currently, once again, at a fever-pitch). However, one of the longest-standing and most respected names in this business has now also scaled back on edge-of-space price projections.

Robin Bhar (analyst at Credit Agricole in London) said in a report this morning that gold will likely trade at $1100 in half a year and at $1050 in one year — those figures lower by $150 and by $125 than previous estimates. Go figure. Must be that everyone at every institutional source is drinking some wicked, bearish Kool-Aid. This should be good for another 23 pieces of hate mail. Folks, we call’em as they see’em, even if they are a 1:100 minority. You do want to be fully informed, no?

Silver declined 8 cents on the open, starting the day at $18.72 per ounce. Meanwhile, platinum shed $6 to open at $1715.00 and palladium fell $5 to the $535.00 level on profit-taking and the aforementioned apprehensions related to Chinese demand. In fact, Chinese Purchasing Managers Index levels have fallen to 55.4 from a 57 reading recently. Mining firm shares continued to receive a drubbing this morning despite the gain in gold, as Australia’s proposed 40% ‘Henry Tax’ on resource company profits (even though it won’t come until mid-2012) kept sellers busy and buyers at bay.

No change was once again reported in rhodium — still parked at the $2800.00 bid level. Technicals indicate that — mentioned yesterday-little stands in the way of achieving the $1200 psychological mark for the bulls at this point. Albeit physical markets show increasing resistance (scrap flows) above the $1180 area, futures market spec longs remain in the driver’s seat and are currently calling the shots. The overt stratagem is to continue to plant fears of the Greek contagion engulfing all of the PIIGS and the EU collapsing into a smoldering pile of default rubble, with more than a few bull spokespersons alluding to the US as being "next in line" for staging a Greek-style tragedy.

And now, back to…bubbles. While Paul Krugman has an excellent article on bubble denial as applicable to the former housing-flavoured one in the USA in the NY Times (and, again, here) another bubble study has caught our eye on Before It’s News.com yesterday.

Here we have an experiment conducted by Prof. Sornette from the Department of Management, Technology and Economics in Zurich. Prof. Sornette asserts that financial markets are not random, and that one can forecast bubbles within them. First, for some nuts & bolts definitional issues: How does a financial bubble develop? The key: herd mentality. Much like what you see today in the gold market.

"Whilst the behavior of individual actors cannot be predicted, their collective behavior certainly can. Individual investors do not behave independently of one another, but rather are influenced by collective mechanisms like imitation, herd instincts or the media. Imitation and herd instincts trigger an increase in collective actions: if increasing prices are expected, it leads to even higher expectations of increasing prices and so on. Through this self-acceleration, growth, which on average is typically presumed to be exponential on average in a stable economy, is faster than exponential in such phases. This hyper-exponential growth is one of the indicators of a bubble."

The other key element in the Swiss experiment and bubble-sniffing tool is to identify ‘regime shifts’ — i.e. phases of strong growth being replaced by one that manifest only moderate patterns of same, or perhaps even declines. The Swiss Prof. selected Brazil’s IBOVEST, the Merrill Lynch bond index, gold, and cotton for his recent study. The results? Ponder for yourself:

"Gold: Forecast: between 10.13.2009 and 9.7.2010 the probability of a regime shift is 95%; between 11.5.2009 and 2.25.2010 it is 60%. Result: the regime shift occurred within the forecast window: the price dropped by 11% in 20 days and 13% in 68 days in all. The other indicators confirm this."

The work being undertaken at the Financial Crisis Observatory should remain on your radar as we go forward. The team was among the first to try and figure these things out with the application of some science rather than ‘gut check’ pronouncements. They took four quite disparate assets, forecast that they would form bubbles within the ensuing six months, and when such bubbles might develop. Will the findings change the behavior of crowds? We doubt it. Should they be considered before jumping into the next ‘hot’ thing? Goes without saying.

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

In addition to bullion 2010 American Silver Eagles that are already available, the United States Mint this year will also issue 5 oz. bullion America the Beautiful Silver Coins that are duplicates of the America the Beautiful Quarters. The first five of the coins will released this summer. To see the U.S. locations honored on all the coins, check out a sister CoinNews site and its page America the Beautiful Silver Coin Release Dates.