Gold, Silver, Metal Prices Commentary – August 16, 2010

Gold prices on Monday continued to benefit from safety-buying that began to resurface last week as the yellow metal rose 0.9 percent.

U.S. gold for December delivery was up $9.30 to $1225.90 an ounce as of 10:53 a.m. EDT.

Other metals were climbing as well. September silver was 31.6 cents higher to $18.425 while October platinum was up $8.70 to $1,534.90, and September palladium was $7.00 higher to $484.25 an ounce.

Following immediately is the daily precious metals commentary, compliments of Jon Nadler, senior analyst at Kitco Metals, Inc.:

The Expendables? Beware the Sequel.

Good Morning,

Something we have alluded to in previous posts became official overnight: China overtook Japan for the title of ‘world’s No. 2 economy.’ Following thirty years of relentless hard work and unwavering determination, the country can now boast that it is, in fact, on course to capture the top global economic spot as well — in about another two decades-and wrest it away from the United States.

This rosy future is, of course, something that will only come about provided that there are no social ‘bumps in the road’ such as the ones you will read about, further below. Suffice it to say that the head of China’s Bureau of Statistics cautioned earlier this year that we should all have a ‘sober understanding that China remains a developing nation.’ One saddled with a large segment of its population still in poverty. However, the ‘expendables’ should be viewed as anything but. More on that, at the end of this post.

Mind you, many an economist warns that using quarterly data to compare Chinese versus Japanese GDP has its own risks and that the two countries continue to overtake each other, depending on the season and the metrics used for such calculations (such as forex differentials, for example). At any rate, the news from China helped set into motion a set of market moves overnight, the echoes of which were still being felt this morning.

Specifically, the US dollar was mostly lower on the news, losing 0.54% on the trade-weighted index and reaching 82.44 at last check. Risk appetite was initially tempered by the news that China achieved such a feat mainly on a quite disappointing slowdown in Japan’s Q2 GDP. The Japanese economy is now slated to grow at only about 1.4% next year, as against earlier projections calling for a 1.7% rate of growth.

The euro, on the other hand, gained just a tad, rising to $1.280 against the greenback. Eurozone inflation picked up the pace, according to reports issues this morning. The region experienced a core price rise of 1% (with an overall reading of 1.7% — the highest in 20 months). Meanwhile, surprise! — net foreign purchases of US long-term debt instruments rose by about $9 billion in June, even as those same investors sold US equities and corporate bonds on a net basis.

One more forum-based urban myth was dealt a bit of a blow with this morning’s news. Recall that — for most of 2009 — we were solemnly promised not only the demise of the US dollar, the US stock market, the US housing market, and assorted other markets, but also the advent of a tsunami of loan defaults. The dominoes entailed — in short succession after the mortgage delinquency debacle-auto loans and credit card loans.

Well, Capital One (yes, the one with those friendly barbarians at the gate) announced this morning that its credit card defaults fell for the fourth straight month. This is the third largest issuer of little bits of plastic bearing the VISA logo, folks. What else did Capital One have to report? That its auto loan charge-off rate was 2.6% in July — down from 2.72% in June. Charge-off rates and delinquency rates also fell at Capital’s international operations. Hello, hello.

US stock index futures indicated a lower opening, as the Japanese GDP data had market participants fretting about global economic conditions despite China’s advance in the race. The Dow finished its worst performance in a month-and-a-half last Friday following poor US economic data and a fretting Fed that appears to be out of ammo with which to stimulate growth.

On the back of such apprehensions, gold prices added nearly one additional percent to Friday’s closing values as the market opened for a new trading week. Spot prices came within striking distance of overhead resistance thought to be found just above the $1230 round figure. The yellow metal opened with a $9.40 per ounce gain this morning, and was quoted at $1224.80 on the bid side.

The most recently available CFTC data indicates that the speculative length for COMEX gold rose for the second week in a row. Gross long non-commercial gold positions on the exchange amount to 747 tonnes (the net long figure is 669 tonnes) as of last week, up 7 tonnes from the previous reporting period.

Analysts at Standard Bank (SA) note that: "While the rise in speculative longs is still marginal and well below 975 tonnes reached in May, non-commercial shorts continue to decline. This may indicate that short positions are now less confident of a gold price decline in coming weeks." Over the weekend, some physical offtake ahead of a festival next week was noted in India, but not all that much, to be sure.

Once again, our local sources confirmed that at levels above $1,200 per ounce, local would-be buyers turn into willing sellers — the calendar, notwithstanding. Commerzbank metals analysts opine that sharp gains in gold could be truncated by the ebbing of physical demand from the all-important jewellery segment (as seen in Asia).

None of this has stemmed the flow of ultra-bullish news from permeating gold forums once again. Why, there is even a trend to quote (gasp!) Goldman Sachs (you know, the uber-evil perpetrators of gold price suppression/manipulation schemes) as the best evidence of an upcoming gold ‘moonshot’ (even if Goldman only sees $1,300 in six months’ time). Now that they have said that, they are credible, folks. Whatever suits the agenda…

Silver advanced a dime, opening at $18.24 per troy ounce. Meanwhile, platinum and palladium staged their own mini-recovery, with the former rising $8 to start at $1529.00 per ounce, and the latter climbing $2 to the $478.00 level. No change was reported in rhodium, with a quote of $2,070.00 on the bid. For the time being, news of GM’s impending IPO offering is lending support to the noble metals group.

At what point the weak Japanese GDP data and global slowdown worries might come to impact the industrial and noble metals complex, remains to be seen. For the moment, the markets awaited the release of NY Fed data relating to the Empire State’s manufacturing activity this morning. The figures showed a bit of an improvement in the region’s conditions and the findings helped stem losses in Dow futures.

And now, back to China. Number two on the global economic billboard; but, at what cost? One you may not care to think about, but might soon have to. A study recently conducted on behalf of Credit Suisse found that there is a pool of unreported income approaching $1.1 trillion being stashed by that country’s most wealthy citizens under — literally-countless mattresses.

That staggering stash of cash represents about a third of China’s GDP. Buried in that seemingly appetizing (to gold and other commodity bulls) statistic is the fact that such a cash pile actually underscores the huge and widening gap between China’s haves and have-nots. It is one of the reasons this writer takes reports of putative gold shopping sprees in China with a large grain of MSG. They probably largely reflect the buying patterns of the same yuppies who are snapping up $4,000 snakeskin purses at the local Gucci franchise, and very little of that of the "man in the street."

Back in 2005, the government of China was urged to focus on ameliorating the plight of migrant workers and farmers. Even back then, the yawning chasm between the country’s newly rich and the perennially poor was seen as a potential threat to the country’s ‘social harmony.’ Now, Bloomberg’s Will Pesek reports that something known as the "Gini coefficient" — a statistical measure of "wealth equality," reached 0.47, a figure higher than the recognized "warning level" of 0.4. This was reported by the Economic Information Daily, a government-affiliated newspaper, this past May.

Mr. Pesek concludes that: "You can censor Google Inc.‘s search engine. You can’t hide the fact that a handful of Chinese are getting very rich from the billion-plus workers being left behind. Anger will rise, tempers will flare and things could get out of control. Try stuffing that under a mattress."

Food for thought. Hot sauce, not optional, in this case.

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.