Gold, Silver, Metal Prices Commentary – June 2, 2010

Paradox: The Rich List Poor on Gold

Good Morning,

Another day on the road, another abbreviated version of the daily usual.

Gold’s eight-day run to near the $1230 area appeared to run into a bit of profit-taking overnight as the euro stopped crumbling. At the same time, not much was given up in values as apprehensions about European bank writedowns remained visible. The Economist features a cover that looks much like a poster for the next installment of the movie "Jaws" and the title "Fear Returns" right on top of it.

This level of fear was also reflected in the lowest yields on two-year Treasurys in a week, which indicated a continuing flight to safety amid fears that Europe might tip certain economic recoveries into a double-dip. To wit, copper prices fell for a third day as the ideas that China is indeed slowing, Europe could fall back into a stall, and the US is still not fully back on track took hold among speculators.

However, it is not just the Chinese economy that is being questioned by global investors as we round the corner into the upcoming second half of 2010. Certainly not if judged by the latest collapse of the commodities’ sector. In fact, the single biggest slump in commodities’ prices since the time of the Lehman Brothers Holdings Inc. implosion is fast making mincemeat out of bullish forecasts not only for accelerating economic growth but also for higher prices for ‘stuff’ – basically, everything from copper to crude oil.

While the OECD (as we reported here) raised its global growth forecasts for 2010, worried investors who loaded up on oil heavily and drove copper prices to a doubling in values in 2009 are now bailing out of their commodities’ positions at the fastest clip in recent memory. Shades of the summer of 2008 being replayed in the (soon to come) summer of 2010 are unmistakable.

Bloomberg reports that "Commodities last fell into a bear market in 2008, when the CRB plunged 56 percent in five months as the U.S. suffered the worst financial crisis since the Great Depression, growth contracted on a global basis for the first time since 1981, and the Journal of Commerce index was below zero."

This is why it is conceivable that across-the-board asset liquidations may soon be making a return engagement at a market theatre near you. Hope not. However, John Kinsey, who helps manage nearly 1 billion in assets at Caldwell Investment Management Ltd. in Toronto frets that: "Commodities are being attacked with these concerns about the debt situation in Europe and the steps that China has taken to tighten.

There was not much to speculate about gold prices over in India, as local prices hit a fresh high of 18,850 rupees/10 gr. and as buyers remained on the sidelines, apparently still placing buy orders for the metal nearer to $1200 per ounce with merchants. The fulfillment of such pending orders depends largely on the ebb and flow of speculative activity in the euro.

Whilst the common currency has shown some incipient signs of having exhausted its downside momentum, the negative perceptions stacked up against it are still mile-high. One of the reasons, perhaps, why talk of the Swiss National Bank stepping in to buy it (and push the franc lower while at it) has resurfaced again. The effect of such a mini-intervention should be borne in mind. They do imply a double-edged sword of sorts:

Purchases of the euro by the Swiss National Bank to weaken the franc may also cause higher-yielding currencies to decline, BNP Paribas SA said. "Should the SNB come in we would immediately reverse our pro-risk trading strategies," BNP analysts wrote in an investor note today. "SNB intervention will absorb euro liquidity. European bank stocks would be immediately hit, forcing investors out of commodity and high-yield bets."

New York spot bullion prices opened with roughly half-percent per ounce losses, trading just north of $1215 as profit-taking ramped up just a bit. Unconfirmed reports that Lebanon fired at Israeli warplanes kept enough nervousness on the boil to support values (while not helping the action in US equities). News that Iran decided to allocate part of its reserves out of the euro and into dollars (Iran? Favoring the Great Satan’s currency? Such are the times…) and gold did not appear to move either asset too much within the first trading hour.

Silver fell about 20 cents in early going, reaching down towards the $18.20 per ounce level. Meanwhile, platinum declined $9 to the $1536 mark and palladium dropped $8 to the $447 level. Rhodium showed no change this morning, treading water at the $2590.00 per ounce mark. The US dollar once again benefited from the day’s turbulence-laden headlines, rising back to above the 87 level on the trade-weighted index. The euro did not fare very well once again, as it sank beneath the 1.22 figure as the trading day progressed.

Meanwhile, a notable absence of gold being mentioned in a recent Bloomberg survey of very well-to-do people and their favoured assets. While we suspect that a fair amount of the respondents probably do hold gold or look kindly upon it, it is perhaps the inherently private nature of a gold allocation that may be preventing them from naming it on a ‘public’ list of preferences. Either that, or the rich show no fear…despite the caution they profess to be driven by.

The Barclays Wealth-conducted poll shows…property and stocks as the ‘go-to’ assets for millionaires. Not quite what one would expect to hear at a time when the supposed preference for cash is what we are mainly hearing about. Wealthy investors globally are avoiding derivatives and hedge funds and turning to property and stocks following the global financial crisis and economic downturn.

Bloomberg reports that: "More than half of the investors surveyed said they are more cautious than they were before the crisis, Barclays said in a statement in Hong Kong today. About 2,000 wealthy investors who have more than 1 million pounds ($1.47 million) in investments from 20 countries participated in the survey in February and March, it said. "The uncertainty around the prospects and timing of the global economic recovery is causing investors to favor" equities and real estate." Almost 90 percent of the surveyed investors in Singapore said the property market is likely to perform well in the next 12 months, while 68 percent of the Australian respondents said they are positive on equities, according to the survey.

Final item for today: The International Monetary Fund confirmed on-market sales of 14.4 tonnes of gold in April, extending its programme of planned bullion sales following the disposal of 5.6 tonnes in February and 18.5 tonnes in March. The IMF has now sold 38.5 tonnes of the total 191.3 tonnes of gold it announced it would sell on the open market earlier this year. IMF total gold holdings now stand at 2,966.8 tonnes. Although the timing of April’s sales remains unclear, the yellow metal did experience a decline from the near $1160 area to the low $1130s by the third week of the month.

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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