Gold, Silver, Metal Prices Commentary – August 3, 2010

Good Morning,

A Wall Street Journal story alluding to the possibility that the Fed might be considering the purchase of fresh batches of assets in lieu of allowing its portfolio to shrink naturally lit quite a few speculative bonfires in various, hitherto angst-ridden, carry-trader camps.

While such a move might first of all depend on more weak US economic data actually reaching the news wires, and while such a move amounts to a very small ‘policy’ shift at the end of the day, none of that matters to the cheap dollar junkies out there. Nevertheless, such speculation contributed to the US dollar’s breach of technical support and its dip to under its 200-day moving average (@ 80.72 on the index) earlier this morning.

For the type of player who makes a living off of such central bank accommodations, the only way things are ‘right’ is when the Fed stays in perpetual QE mode and when there is an ample supply of zero-cost dollars with which to go and inflate various bubbles that yield fat profits. Behold the price of crude rising to a three-month high ‘as the dollar weakened.’

Never mind that the WSJ story actually underscores another, far scarier possibility; that which comes complete with a spiral into serious deflation. For now, we shall wait for Friday’s jobs data and see if the Fed really needs to consider such policy changes. It is too early to bet the farm, but certain players are doing just that (plus, not only the farm, but the oil field, and gold mine, and/or certain currencies). This, despite indications by Chairman Bernanke that his team is rather disinclined to offer more of the same until and unless clear signals of a sharper slump are visible and threaten to derail the economic train that is soon set to depart for station ‘2011.’

With the dollar last trading closer to 80.60 on the index, and with the euro rising to 1.322, gold prices picked up a few dollars’ worth of gains in pre-NY trading this morning. Indian buyers did make an appearance overnight in the wake of recent declines which brought gold prices to under $1180.00 per ounce. Indian sensitivity to gold prices remains the defining feature to local demand patterns, but, on occasion, the calendar rules even stronger.

Albeit locals do not consider the first week or so of August to be a particularly auspicious period during which to buy bullion, the epicenter of global gold demand — Kerala — reports a jump in sales ahead of Onam, a festival which will take place at the end of this month. Also helping buoy bullion values were overnight reports that China plans to further liberalize the trading of gold and allow more domestic banks to export and import the yellow metal.

New York spot metals dealings opened in the plus column for all but platinum this morning. Gold posted a $5.30 gain on the open, and was quoted at $1187.30 the ounce. Gold remains within the confines of the now month-and-a-half-old downtrend channel and a convincing breach beyond the $1200-$1220 level is required before the ‘almost all is well’ signal can be sounded.

Silver gained a nickel, starting the day off at $18.40 per ounce on the bids side. Palladium rose one dollar, reaching $510.00 per troy ounce at the market’s open. Platinum did retrench just a tad, losing $10 to ease to $1587.00 after having made a foray to above the $1600.00 mark on Monday. Rhodium was static at $2170.00 per ounce this morning.

Gold miners continue to be delirious with the bounty that current gold prices continue to bestow upon them, and they are still quite visible out there in financial media-land, offering truly outlandish gold prices forecasts. Nothing but blue (make that…yellow?) skies on offer from these gentlemen. Multi-thousand-dollars-per-ounce golden visions notwithstanding, the industry is in the midst of an unprecedented takeover fever.

It (buying other firms with the oodles of extra cash on hand these days) is, still, a more likely to succeed strategy to throw $7 or $11 billion at the next takeover target, than to try to find new metal to mine. As a result, advisory firms such as BMO, Merrill, and HSBC, have been laughing all the way to the..bank (wait, they are the bank) on the fees that are involved.

Meanwhile, not all is well in the glamorous world of commodities trading. Alleged uber-evil gold and silver price suppressor, JP Morgan, did not do so well at either keeping a lid on gold prices (say, in July) or in keeping the coal market (for example) from collapsing by 24 percent in Q1 of this year. As a result, income at its fixed-income unit (which includes commodities trading) fell by nearly 28% in Q2. The implosion in revenue has sparked defections, layoffs, and dismissals at the famous firm, even as the head of the commodities biz at JPM (one aptly named Ms. Masters) claims that its competitors are "scared xxxxless of us." Evidently, the Goldman ban on bad words has not reached over JPM just yet…

Finally today, some cogent observations from a veteran analyst in the precious metals niche. Commentator and mining share expert Marino Pieterse (whose articles are a regular feature on Kitco) recently tendered some views on a few topic of current interest in the gold market. Needless to say, Mr. Pieterse does not go for hype or speculation when it comes to gold and its function in the modern world. While still offering opinion, Mr. Pieterse blessedly chooses to strip such perspective of frightening overtones and TEOTWAWKI flavor. Thus, without further ado, a few quotes from one of his most recent articles, published in "Commodity India" this month:

On the IMF, ECB and the BIS gold swap:

"Forced by the euro crisis, I expect further sales from the IMF and ECB gold holdings in an attempt to strengthen or to save the euro and expect that the deposited gold of the recently announced 382 tonnes BIS gold swap will not flow back to the countries being involved in the swap…The recent intervention of the IMF and BIS to sell and swap gold, respectively, underpins my view that the pure monetary function of gold has become replaced by an economic function as a bridge financing to bail out financial institutions in countries facing serious economic troubles."

On the monetary role of gold:

"Gold has already lost its monetary function since it doesn’t represent a realistic option to replace paper money as a reserve currency due to the relatively small size of gold holdings compared with the value of dollars circulating…In summary, it is wishful thinking to believe that the current monetary position of gold justifies significant[ly] higher gold prices than the current $1200 level."

On the fundamentals of gold:

"Primarily, one should look at the investment merits of gold from a fundamental point of view based on demand and supply… A misconception is that the strong increase of the gold price since 2001 was fully driven by growing investment demand. The truth is that the impact of de-hedging over the last ten years has had been the bigger impact…It is a misconception to believe that consistently declining production will support a higher gold price. Actually…world gold production has reversed its modestly declining trend [owing to emerging countries’ production]. As well, the top ten gold producers representing 45% of total world gold production hold an average of 17 years of reserves related to their actual annual production."

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

Original article link: It’s Tuesday. Carry-Oke Time!

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.

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