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

Good Morning,

Gold prices slipped back under the $1190 level on the heels of yesterday’s deflation-tinged remarks by Fed Chairman Bernanke and ahead of the release of European bank stress test results tomorrow.

The metal appears caught between those who attempt to load up on some ounces at levels they perceive as relative bargains, and those who believe we have seen the highs for the year and that the bounces to the $1200 and up to the $1220 value zones present selling opportunities as well as cash-raising ones.

For the moment, the deflationist crowd appears to have the upper hand, although there is indeed a growing faction of players who are throwing in at least a portion of the golden towel on the perception that the sky will no longer fall in Europe and that is any future crisis can be expected in the US, it might be a deflationary one.

That is quite a switch from the positioning intended to avoid the deleterious effects of what was seen as hyper-inflation coming down the road, as well as from the fear-driven, crisis-obsessed safe-haven bids that the yellow metal received in spades in May and June.

Let’s put a couple of things into perspective here; the euro has rallied more than 8% from a multi-year low recorded just last month. Some of the PIIGS have successfully managed to sell bonds-to the tune of some 50 billion euros, actually. Europe’s manufacturing and service sectors have shown signs of expansion.

And now, some of the names that were thought to be on a ‘do not resuscitate’ list when bank stress test results will be announced — names such as the Bank of Ireland, or Allied Irish Bank — will not only not require life support but are seen as quite able to raise the capital they might still need down the road. As Supertramp’s (oft-used by doom & gloom economists) album cover asks: "Crisis? What Crisis?"

Gold opened with a gain of $1.40 per ounce this Thursday morning, quoted at $1187.50 on the bid side. Silver opened with a 13-cent gain and was quoted at $17.81 per ounce. Platinum and palladium climbed by modest amounts, with the former up $2.00 at $1515.00 and the latter higher by $5 at $450 the troy ounce. A $10 rise was on tap for rhodium, which started the day with a $2140.00 quote on the bid side.

Over in the supply/demand picture for the noble metals, platinum producer Lonmin announced this morning that it expects to meet its 700,000-ounce sales target for the year despite the series of furnace failures it has experienced at its facilities over the past three years. On the other side of the noble metals’ market equation, our friends at Standard Bank (SA) report that China’s demand for platinum from Switzerland has been declining steadily since the start of the year.

However, this situation did change in May, when platinum imports from Switzerland to China jumped. Swiss customs data for June has confirmed China (and HK) have continued to import platinum, with 170,000oz of the metal flowing from Switzerland to China in May and June. China also turned into a net importer of palladium from Switzerland in June. After consistently exporting palladium to Switzerland since December last year, China has imported 11K oz of palladium from Switzerland in June.

All of the above were being recorded as against a 0.49 drop in the US dollar on the trade-weighted index but a steady (at $1.286) euro and gains in European equities as well as US stock futures. Growth in the European service and manufacturing sectors as well as better than anticipated British retail sales overpowered Thursday’s remarks by Mr. Bernanke that the US economic outlook is ‘unusually uncertain.’ Only the dollar appeared to take a hit from his observations.

The take-away notepad from yesterday’s testimony by the Fed Chairman contains a simple but perhaps quite telling statistic: Mr. Bernanke talked about stimulus exit strategies more than about further accommodations (easing) by a factor of ten. Not a misprint. Ten. "Unusual Uncertainties" notwithstanding (the new slogan to replace "extended period?") the message implicit in Mr. Bernanke’s words ought to be clear to anyone still deluding themselves about what the Fed might do.

It is (still) just a question of when. The lifeblood of the carry-traders is slowly but surely running out. Thus, despite a concrete pledge of a specific date and an exact hour when the exodus from stimulus shall commence, Mr. Bernanke — in effect — pledged that it shall be done. So much for a Fed seen as ‘asleep at the wheel’ in some circles. And, yes, we disagree with projections that rate hikes from the Fed will not come until 2012.

Last week we brought you opinion that the recent lavish attention bestowed upon gold by certain speculative funds was really all about profit and that silly word "contango." Now, Bloomberg cautions –in a lengthy, but excellent expose on ETFs of the commodity ilk- that that silly word is perhaps more sinister than silly. The real silly word award goes to …drum roll…."pre-rolling." No, not the latest installment in the Cheech and Chong film series.

"Contango isn’t the only reason commodity ETFs make lousy buy-and-hold investments. Professional futures traders exploit the ETFs’ monthly rolls to make easy profits at the little guy’s expense. Unlike ETF managers, the professionals don’t trade at set times. They can buy the next month ahead of the big programmed rolls to drive up the price, or sell before the ETF, pushing down the price investors get paid for expiring futures. The strategy is called pre-rolling." Read all about the wacky world of commodity ETFs and why you are more likely to lose money than to make it, here: http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html

And now, in closing, for something completely different: Forum chatter. Underground talk. Speculation intended to explain the perhaps inexplicable. Could it contain kernels of truth? Only The Shadow knows…At any rate, as gold prices were caving last week, one explanation (tendered over at ZeroHedge.com) was that one name — recently seen mentioned in the same line with the word ‘gold’ — was among the culprits responsible for the drop. Could it be? Well, it turns out, it could –especially when other components of your portfolio are hurting. Here is what was seen on the Internets one day last week:

"With a holding of 168 million shares of BAC and 506 million in Citi, Paulson and Co. is down nearly $300 million on just its top two positions alone. When one adds the other top ten positions, which include $3.5 billion worth of GLD, as well as massive positions in ANG, CMCSA, STI, TRE, RIO, BSC, COF, WFC, MGM and many others, it is not surprising that the market is rife with rumors that the once vaunted bearish and now very much bullish (who according to Goldman’s carefully crafted settlement press release yesterday, only achieved his subprime-related wealth due to prospectus misrepresentations by Goldman, which is now permanently in the public record) is down about $1 billion for the day so far.

Of course, on a NAV of $31 billion this is not all that big, but likely will not help with the recent surge in redemption requests…. Or the need for liquidations. Gold is plunging, and according to market rumors the primary culprit is once again JP, whose GLD holdings that are merely a type of share class (which needs to be indexed lower as the AUM drops) are getting liquidated, pushing spot far lower."

We are not ones for rumours. But. Whether it was "JP" whose fund was bailing, or other ones, the pesky words ‘need for liquidations’ keeps resurfacing. Kinda like it did in 2008. And when that kind of need arises, much bathwater -and a number of babies as well — are thrown out to meet it.

Happy Trading. Watch for choppy conditions to rival a summer flight over Kansas.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

Original article link: Big Wheels Keep on Pre-Rolling

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