Gold, Silver, Metal Prices Commentary – May 26, 2010

Sabres Rattle, Bulls Do Battle

Good Morning,

Additional overnight gains in precious metals were prompted by continuing Old World debt-related jitters and more so, by nervousness over the "by-now-normal" May geopolitical stuntsmanship by North Korea’s Kim Jong-il. Mr. Kim tested a nuke in May 0f 2006 and the UN threatened him with a ‘time out.’ It is May again, and it must be time to ratchet tensions up.

The two Koreas have engaged in a (hitherto verbal) war over who did/said what. The North severed some ties with the South, apparently taking offense at being accused of sinking an SK warship. Loudspeakers blaring propaganda across the border have once again been wheeled out in certain areas of the DMZ. So have several large electronic billboards flashing "anti-whatever-the-other-side-says" messages.

Meanwhile, world stocks rebounded from Tuesday’s dismal slides (the MSCI World Index hit a nine-month low) and commodities rallied following a facts-and-suggestions-rich report by the OECD on the state of the global economy and finances. The OECD found that the world’s industrial economy is coming back to life, and at a more rapid rate that had been expected. It also observed that threats remain to said recovery from sovereign debt problems and possible overheating in certain emerging nations.

A few areas of concerns and advice bear pointing out in the OECD’s report. The organization suggested that the US Fed should gradually withdraw the stimulus it injected, that the Bank of Canada should start to hike rates ‘without delay’ on account of a ‘vigorously rebounding’ economy, and that the Bank of Japan should…continue to fight deflation until such time as ‘underlying inflation is firmly positive.’ As previously mentioned, there are, indeed, such things as ‘desirable levels of inflation’ –contrary to conventional wisdom.

Meanwhile, the latest country to join the slimming-belt fashion trend is stylish Italy. PM Berlusconi turned his attention from parking meter-maids to budget-cutting and offered some $30 billion worth of tightening as part of a broadening campaign (Spain and Portugal have already made similar announcements) to convince someone/anyone, that the eurozone countries can/will get deficits taken care of and ensure the common currency’s survival. The latter did not appear to be able to maintain its footing above the 1.23 level too well however, albeit the downside momentum appears to have run out of some steam as shorts started to fret about possible ECB currency market intervention (see yesterday’s post).

New York metals markets opened with robust gains across the board, reflecting the premium that the lack of resolution on the two crises (euro and Koreas) is conferring on the complex. Spot gold rose $12 to open at $1213.20 and was seen trying to maintain above $1210 after having run into resistance at the $1215 area overnight. Indian gold demand continued on the lackluster side for a third day as bullion prices hit yet another record in rupee terms overnight.

Meanwhile, mine nationalization talk continues to be floated around South Africa with the ANC Youth League president Julius Malema proposing the creation of a state-owned mining company as a precursor to such an epic shift in the ownership of mines and mineral rights. Nearly one year ago, the Minister of SA Mineral Resources –Ms. Susan Shabangu-said the country would not nationalize mines despite calls by the ANC and the COSATU (trade union) to do so.

The World Gold Council released its gold demand trends publication for Q1 of 2010 this morning, and found that global gold tonnage demand fell by 25% as against Q1 2009 levels. The 760.2 tonnes of bullion demanded in the first three months of this year was also off by 11% vis a vis the figure recorded in Q4 of 2009. Investment demand dropped 22% from Q4 2009 levels.

Gold-backed ETF offtake in the Jan-Mar period plummeted by 93% from the final three months of 2009, while industrial consumption of the yellow metal showed no change from Q4 of 2009, at 103.2 tonnes. The WGC however remains optimistic and expects 2010 demand to become ‘strong’ as investment and jewellery demand might likely expand.

Silver gained 30 cents at today’s open, starting off at $18.25 per troy ounce. Platinum and palladium also managed decent gains as the midweek session got underway. The former climbed $18 to open at $1536.00 while the latter added $12 to rise to the $449.00 per ounce level. Rhodium continued with no change, quoted at $2630.00 the ounce.

Fresh reports from the US Commerce Department reveal that durable-goods orders took a strong forward leap in April. A 2.9% jump in orders for ‘stuff’ (led by high-flying demand for civilian aircraft) marked the fourth such increase in the US in the past five months. Dow futures appeared to be pleased by the news item albeit not all components of the statistical tables were as rosy-looking as the airplane orders numbers. The greenback surged to 86.89 on the index following the news release, while the euro took a bit of a further hit in the wake of same (one ‘large account’ was reported to be a seller). Crude oil also made strong post-durable-goods-news advances this morning, gaining over $2 per barrel and climbing to near $71 per barrel.

Final good news item of the day: Iceland’s pesky, ash-spewing volcano went to sleep and left the skies over Europe fully fit for flying for the first time in over a month. Do not try to pronounce Eyjafjallajokull unless you have tongue-insurance. Here is one hole in the ground that instead of producing valuable stuff, has cost nearly $2 billion in lost airline sales. But, hey, Europe has slightly larger than $2 bn ‘issues’ to contend with…

Keep an eye out for the euro near/under 1.23 and of course on the Dow as the bulls trot out their own version of the ‘top kill’ plug following Tuesday’s scary dip. Oh, and do keep an ear out for flowery, unparalleled rhetoric from the world’s last remaining expert at same: Mr. Kim and his team. A sampling, as used to describe South Korean leadership: “There is no need to show any mercy or patience for such confrontation maniacs, sycophants and traitors and wicked warmongers as the Lee Myung Bak group."

Happy Trading. Or as RBC’s Olivia Burwood-Taylor brilliantly advises: "Live Long and Break Even"

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America