Gold, Silver, Metal Prices Commentary – August 17, 2010

Good Morning,

Gold prices opened with mild gains this morning, after having touched overhead resistance at the $1,230.00 mark during the overnight hours.

The yellow metal started the Tuesday session off with a $0.60 per ounce rise, quoted at $1226.10 as against a 0.19 drop in the US dollar on the trade-weighted index (last seen at 82.26). Gold later slipped into the red column, losing anywhere from $1 to $2 per ounce while the rest of the complex remained firm.

July US industrial output figures were expected to show a 0.5% rise, following a rather thin 0.1% improvement in June. The actual number was a full percent gain, with much of it being attributed to the fact that GM (for a change) did not idle its auto plants this summer, in order to stockpile inventory. Field reports indicate that more than one US auto dealer is parched when it comes to the inventory of iron it has available to move into consumers’ hands.

Meanwhile, decent earnings reports from Home Depot and Wal-Mart helped buoy stock index futures this morning, in a welcome respite from the recent gloominess. So, maybe, the US is not quite ready to fall into the double-dip abyss that was being envisioned all over the place last week. Let’s see what today’s bounce in sentiment does to safe-haven asset values as the day wears on. Thus far, the industrial output numbers were somewhat countervailed by a less than robust gain in July’s US housing starts. And thus, the ‘unusual uncertainties’ and ‘uneven recovery’ continue to yield hot/cold daily news…

In the background, crude oil was trading a tad higher than its five-week lows, and the greenback was trading at $1.286 against the European common currency, while the latest quote on the yen was showing a reading of 85.26 against it. Providing yen quotes as a matter of routine may yet become…routine when talking gold. Why? Read on.

It turns out that as alternatives as to where to place one’s money dwindle to a precious few for Asian investors, the Japanese yen and gold have become de facto (if strange) bedfellows of late. Both assets are trading near decade or decade-and-a-half highs against the US dollar. The latter has of course been undermined by the presence on the scene of something we have harping about quite frequently in these posts; the carry-trade.

With ultra-cheap dollars (still) available to burn, courtesy of the Fed, the ‘carry-oke’ clubs of Asia have been courting (and more) assets such as the yen and gold. Simultaneously. For the moment, (in terms of performance) the yen is in the lead of the ‘most-requested safe-haven play’ list. Once again, a warning: recall what happened when the yen carry-trade expired. It is now wearing the label ‘the most recent global financial crisis.’ When the dollar-carry draws to a close (and it will), well, better not dwell on that now…

Silver added 16 cents at the market’s open this morning, and was quoted at $18.57 the ounce. EW analysis has raised the odds of a sharp, upward spike in the white metal (to at least above $20 per ounce) in the wake of certain chart/wave patterns observed by its resident analysts.

This, at a time when the same analysts see a topping out pattern in gold’s most recent ascent. Only a pole-vault to above the June $1,265 gold…bar would change that perspective. And, yes, there is still plenty to fret about as regards the lavish attention being paid to gold by speculative-minded funds. Like the one you’ve probably read about, just last night.

‘Quote of the day’ goes to ABN Amro’s VM Group snapshot comment on gold market conditions of late:

"It’s evident that while all those investors who have joined the bull-run are reluctant to cut their long positions, the ranks of those seeking to join the party are thinning. August is traditionally a month when a lot of decisions get put on hold and that’s especially true this year, when the background drivers of the rally — signs of economic recovery v. those of a double-dip recession — are fighting for dominance."

Platinum rose a fairly hefty $10.00 on the open, with a quote on the bid side at $1540.00 per troy ounce. Palladium did not waste time either, rising $9.00 per ounce to start at the $490.00 level. This, despite findings by Kitco News’ own team that speculators have unloaded long positions in palladium futures and options recently, and that such unwinding has contributed to recent price weakness in the metal. In anyc case, with an $11 gain on the day, at least today, the noble metal is shining quite nicely. GM’s flexing of its production muscles is undoubtedly helping.

Well, yesterday’s news was still playing the lead billing in today’s markets, judging by specific asset values and certain statements coming from China as well as Japan. As you recall, the story of the day was China’s overtaking Japan for the second spot on the list of global economic powerhouses.

It turns out that the problems we identified in connection with such a flip in status are very much on the radar of those two countries’ governments. Epic shifts such as this one happen for a reason — in fact, for many, and often less than obvious reasons — and the underlying conditions appear to certainly be preoccupying Japanese and Chinese officials.

To wit, the Japanese government indicated today that it will now consider additional stimuli with which to regain some of its lost economic footing. This is not just an effort to recapture the number two position in the coming quarter (Japan still leads China on an annualized GDP raw numbers basis); it is more of an acknowledgment that the too-strong yen is hampering the country’s economic recovery.

However, Japan is also saddled with the highest debt/GDP ratio among developed nations. Whether next week’s BoJ meeting results in yen intervention or some other stimulus-like measures, remains to be seen. Fact is, something is likely to come out of Tokyo in the way of policy announcements. Time is not on Japan’s side.

Next up, Chinese reaction to its ascent in the world’s economic rankings. Far from simply boasting about the feat (albeit, quite a feat it is), Beijing officials said this morning that — as we warned on Monday — China undoubtedly remains a developing nation and that its government must improve the life of millions of still-poor Chinese individuals.

Such an assertion came from none other than a Chinese Commerce Ministry spokesman. When you’ve got more than 40 million of your denizens (at least that is what official estimates are) living under the critical ‘make-it-or-break-it’ line (which is another officially set figure), you clearly have other priorities than to extol the virtues of having surpassed your neighbor on a list of the world’s ‘who’s who.’

Okay, the awareness of current conditions is manifest in both Tokyo and Beijing. The remaining questions mainly revolve around what will actually be done to address such circumstances and make adjustments where necessary.

In the interim, we propose that the worrisome issues relating to China for example are the less than obvious ones; such as China’s military budget — also the world’s second largest. Or, the fact that the country is now at the top of the list of energy consumers in the world and that it will absolutely need to secure future supplies of same. Or, the fact that we could write tomes about the environmental impacts of its growth-both domestically as well as on the planet. A recent Frontline expose Western e-waste and where it ends up, should serve as an introductory course. But, topics for another day, those are.

Until at least tomorrow,

Happy Trading.

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.