Gold, Silver, Metal Prices Commentary – July 20, 2010

Good Morning,

The ongoing decline in the precious metals complex…went on overnight as a stronger dollar and a slightly lower euro coupled with losses in the Nikkei index conspired to keep sellers active and buyers less so.

In London trading, the yellow metal fell to a fresh eight-week nadir intensifying its lengthiest losing string of trading sessions in nearly a year. Although the almost 7% loss in value since June’s record $1265.30 level appears small up to this point, the consensus that we may have seen the highs for 2010 appears to be gaining adherents under these circumstances.

New York spot gold started Tuesday’s session with a $4.50 per ounce loss, quoted at $1179.60 after having touched a fresh low of $1174.80 just minutes prior to the market’s opening. Slackening investment demand was cited as the prime culprit for the decline. The best-laid plans of those who shorted the euro and loaded up on [too much] bullion in anticipation of an aggravated crisis in Europe are becoming unraveled by the common currency’s refusal to roll over and simply die.

Kind of like what happened to the US dollar late last fall, amid firm assurances that the world would be dollar-less by this time, this year (at least as regards global reserves, Chinese reserves, and such). You already know what happened; just don’t mention it to certain dyed-in-the-wool factions. Someone, quick, better find a new fiat currency to pounce upon. A tall order, given the recent finding that the yen (!) is showing all the signs of assuming the ‘strongest’ currency role. We’re out of ideas.

That the gold market has become totally (and perhaps dangerously) dependent on investment demand was recently underscored by the CEO of research firm GFMS — Paul Walker. Mr. Walker opined that: “to maintain gold at current levels you have to have investment flows every hour of every day. If you can make an argument for rising investment demand for gold then the price of gold is likely to stay where it is. But I haven’t seen an asset class where investment flows are only up. Take that [investment demand] away and you’ve got a good argument for gold going down."

Nothing particularly new, or revealing in the above analysis; however, recall that nearly the entire past year has been spent at price levels which have disregarded market fundamentals and based on tallies which showed only one component of the supply/demand equation as healthy. Even that segment, robust though it has been, can largely thank speculative funds for its growth (see the July 13 commentary on perhaps why such interest has been rising).

At the moment, gold has run into the same type of trouble that derailed its ascent in 2008. Almost to the date, in early July, fears of Deflation overtook apprehensions about deficits, inflation, and assorted types of crises. This shift in the nature of fear has been at the core of the shifting trend in the safe-haven asset’s price since that time. BMO money manager Jeremy Grantham –not an unfamiliar name to market aficionados by any means-has joined the deflationist camp at this juncture.

His observation that loan demand remains virtually invisible, and that the velocity of money is shrinking is correct and should suffice as an excuse for tilting into the "D" camp. However, Mr. Grantham also sees something much more significant afoot; the resolve among governments to reduce debt and their willingness to usher in now-fashionable austerity programs, one after the other.

Couple the above with the growing willingness among market gurus and hard-core analytical minds to openly use the term ‘double-dip’ –and not in connection with their last visit to the ice cream parlour or a Mexican salsa bar- and you have the ingredients necessary for a sea-change in sentiment.

A certain type of sentiment that leads erudite folks such as Robert P. Murphy (Pacific Research Institute) to conclude that: "the alleged economic recovery is unfortunately just as illusory as the prosperity of the housing-bubble years. It is disturbing to consider that if this is the calm before the storm, then the pending crash will be painful indeed. In the current debate on the direction of the economy, those predicting a “double dip” have the stronger — if more depressing — case."

To further underscore such perceptions, housing starts in the US fell 5% in June — to an eight-month low. This, as federal tax credits for buyers ("cash-for-condos?’) expired and brought the American housing sector right back to where it was. A year ago, that is. Which was not a very good place, to be in, to be sure.

Silver prices started the day with a 7-cent loss at $17.54 while platinum and palladium both continued lower as well. The former fell $16 to open at $1491.00 the ounce, while the latter dropped $9 to start at the $435.00 level. Rhodium was steady at its new, lower level of $2220.00 the troy ounce. The same, double-dip-flavoured fears are cooling investment among specs in the noble metals complex. For the complete nitty-gritty on the subject, please read the excellent summary written by Kitco News’ Debbie Carlson, here.

And now, for something completely different; manipulation. You already know where this scribe stands on the issue. That angle will not be today’s concern. The very definition of the term is what’s important this morning. This, because the recent passage of President Obama’s financial industry overhaul will make it quite easy for regulators to prove cases of manipulation (up to recently, a difficult task).

Bloomberg reports that "under current law, manipulation cases hinge on a four-prong test that begins with proving that prices were "artificial,"or outside the bounds of normal supply and demand, Markham said. Then the government must prove that the accused had the ability to cause an artificial price, took actions to cause it and intended it. Proving intent typically requires evidence such as traders’ e-mails or taped telephone calls."

Enter the financial overhaul legislation. It "will push most of the off-exchange contracts to be processed, or cleared, through third-party clearinghouses and traded on exchanges or similar systems. All trades will have to be reported to trade repositories, which will allow regulators a view of the overall risk in the market."

Words such as ‘spoofing’ or ‘banging the close’ and/or ‘smashing’ that relate to various trading ‘actions’ will be on the CFTC’s enforcement radar as this new, sweeping legislation takes hold. At least one source says: "Good Luck With That." Lawyers –at least– could not be happier.

"It’s going to be very much like the standard for pornography," said Gary DeWaal, general counsel for Newedge USA LLC, the world’s largest futures broker."The CFTC is going to say, we know orderly when we see it. And that’s going to be a bone of contention."

As we always said: PROVE IT. You have very little to do, thereafter.

It’s like the Steve Martin instant-wealth advice from years past: "How To Become A Millllllionaire! "

"Okay, FIRST, get a million dollars….then….."

Happy Trading. Legit trades only, please.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

Editor’s Note: Meet the Kitco Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration www.kitcoeconf.com.

Original article link: The Skinny on Dipping

The United States Mint began issuing American Eagle Silver coins in 1986. To learn about the first silver versions, visit sister CoinNews site and read 1986 Silver Eagles.