In The Lead – Sold In May…and Ran Away

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That old adage took on a whole new meaning this time around. Last month was quite unkind to gold and to the other precious metals as well as to commodities overall. The headlines however are heavily tilting towards singling out just how bad gold’s price performance turned out to be this May. One computation found the 6%+ decline in prices to be the worst one since 1982; i.e., in 30 years’ time.

Another metric shows that the yellow metal has not fallen for four straight months since the start of the bull cycle back at the turn of the millennium. Still another calculation showed that gold futures experienced their longest slump since the year 2000. The latest EW midweek analysis indicates that albeit gold bounced on Wednesday and on Thursday the breach of the support shelf at $1,527 is "a matter of time," and that the figure has become the focal point for many an investor.

A "meaningful market close" under that pivot point would "eliminate the possibility that a bullish triangle has formed" and that the initial downside price target of $1,300 could then be aimed for. EW believes that a five-wave rally from August of 1999 to last September’s high of $1,921.50 has ended and that gold could be in the process of correcting that entire advance in upcoming periods. There is still not much to cheer about on the physical offtake front as the latest calculations reveal a 33% slide in Indian gold and silver imports on the month of April. So much for festival season coming to the market’s rescue thus far this year.

For the time being, the US jobs data (which — at 69,000 jobs added — was not at all what the markets had hoped for) could provide the fuel for a short-term bounce towards the $1,600 area and once again reignite hopes for the Fed to offer some form of QE. More about that contentious topic will follow below.

Doing the math is a pretty precise… exercise and it leaves no room for positive spin. The negative performance math stacks up as follows for the month of May: Gold (based on the PM Fix): is down 6.8% an ounce. Silver (as based on the London Fix) has lost 9.5% per ounce. Platinum has declined by 11.5% an ounce. Palladium also fell by 11.5% per ounce. Rhodium has dropped 6.9% the ounce. US stock indices lost about 6% on the month as well. Talk about "sell in May and walk away" it was more like "sold all in May and ran away."

Black gold, on the other hand, might just walk away with the "L" prize for the past 30-day period with a 25% decline from $105 to $84 a barrel. The commodity is now in a bear market. On the other hand, the US dollar started last month at 78.88 on the trade-weighted index and is currently above 83.30 on the same. The gain on the month is 5.6 percent.

The euro was at $1.32 and is presently at $1.23 tallying about a 7% loss on the period. The common currency touched an 11-year low against the Japanese yen overnight. The manufacturing PMI in the eurozone fell to 45.1 according to the latest of tallies and it shows a region in economic contraction. When and if "contraction" morphs into "contagion" is the key item to watch for.

Overnight, spot prices once again dipped under the $1,550 level, touching lows near $1,543 per ounce. The US dollar continued climbing and reached highs above 83.30 on the index. This morning’s opening quotes in New York had gold trading at $1,550 with a loss of $10 per ounce. Silver was down 44 cents at $27.32 at the start of the final session of this week. Platinum fell $21 to $1,390 and palladium dropped $13 to $597 per ounce. Crude oil suffered additional heavy losses and fell to just under $84 per barrel.

Numbers do not lie despite the numerous attempts at "damage control" coming from the perma-bull camp. It remains the order of the day to still associate bearish analyses with authors who are not of the Homo genus but belong to some reptilian order. On the other hand, a number of statements of a different type than what we have been habituated to since late 2008 have also slowly started to make their way into the financial market news flows. Whether or not these market characterizations are contributing some balance to a hitherto hugely bullishly-tilted paradigm remains to be seen, but do consider what some respected gold trade observers have been saying of late:

• “If we had momentum upwards, there are still plenty of people who are bullish and who would buy into that, but at the moment, you have pressure from a strong dollar, or perhaps more accurately a weak euro, and people are just a little bit wary,” Mitsui Precious Metals analyst David Jollie said. "If you are looking to make a profit, and you think it will be $20 lower tomorrow, there’s just no reason to buy it today.”
• "Gold is behaving like a classic commodity and declining along with the pack," Adam Klopfenstein, a market strategist at Archer Financial Services Inc. in Chicago, said in a telephone interview. "It’s like the dead man walking."
• "Though our long-term expectations for the gold price remain very positive, we believe there may still be downside risks if the U.S. dollar continues to remain strong," said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt.
• "Investors don’t have the same strategic approach to gold as before," Edel Tully, an analyst at UBS AG, said in a report today. "Much of the exposure to gold has been on an intra-day bias of late. The market is too highly correlated with risk for many participants’ liking."

We could go on, but, you get the point. That type of shift in the number of diagnoses of a situation that has been developing since February is, indeed, notable. It does not yet however alter the intensity and the number of guarantees of absolute records in gold yet to come, even if the timeframe has been pushed back to an indefinite future by current "events." Well, it would not be a market — especially a gold market — if such emotionalism were to be lacking. So, we have to conclude, stay tuned for more of the same — from both camps.

There is not much in the way of cheer coming from the commodities’ space in general, at this juncture. The S&P GSCI Spot Index of 24 raw materials posted its largest monthly decline since the economic contraction of 2008 last month. The 1.1% drop in the Index seen yesterday rounded out the 13% loss that the sector suffered in May. Among other notable declines, copper lost 12% on the month.

The development prompted similar statements to the ones we cited above for gold;

"Certainly we are seeing a risk-off mentality," said Natalie Robertson, a commodities analyst at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. "More pressure may be coming from Europe and the other negative factor is the dollar/euro, which is going to weigh on commodity prices."

The slump is being attributed to the May flight of speculators from the niche in the wake of the dollar’s spectacular vault. However, a good portion of that robust ascent by the greenback is attributable to the emergent situation in Europe, China, and now, in India as well. Greece, Spain, Italy, China, and India continue to weigh heavily on the minds of those who expected yet another year of stellar performance in commodities. The Fed’s reluctance to buckle to market pressure and pull yet another QE from its top-hat has also frustrated commodities’ players so heavily addicted to "free money" from Mr. Bernanke and his team.

The "ChIndia will save the world with their insatiable appetites" (for commodities) bull camp has been dealt yet another factual blow this week with the recording of certain economic metrics from India. China has already become a larger-than-large question mark for the markets this year as experts ponder that country’s ability to avoid a hard landing in coming quarters. But now we have India to add to the "to worry about" (if you are dabbling in commodities) list. To wit:

"India is an Asian powerhouse that is rapidly running out of steam" warns the Wall Street Journal. "Gross domestic product growth of 5.3% in the first quarter was the slowest rate in nine years. But India’s problems don’t end there. Inflation is at 7% and the rupee is Asia’s worst performing currency this year."

It turns out that, unlike China, whose problems are the result of a combination of internal blunders and bubbles and the effect that the EU’s crisis could have on its exports, India’s woes are fully "home-grown."

The Journal notes that "while other emerging economies might look to blame their woes on the crisis in Europe, India’s problems are largely of its own making. The central bank has held rates high for the past two years to help keep a lid on rising prices. The policy has had little positive effect–India’s prices are driven by supply constraints in food and energy, not demand."

Speaking of demand — as in the US variety of same — here is an interesting summary-cum-myth-busting on a quite familiar topic, courtesy of Index Universe and its interview with Bill Bernstein. The conventional thinking among gold bugs who overloaded on bullion in the wake of the Fed’s QE programs was that hyperinflation was going to be the natural, inevitable outcome. Not so fast, says Mr. Bernstein. Time for a brief Q&A session:

Bernstein: "Helicopter Ben has flooded the world with money, and we haven’t had inflation. Isn’t that amazing? Both he and his Princeton colleague Paul Krugman predicted that, and they were both right.

IU: And what is it that has made Bernanke right?

Bernstein: PQ = MV: price x quantity = money supply x the velocity of money. So you can double the money supply as long as the velocity has been cut in half, which is approximately what happened.

IU: Which is telling us what — that the financial sector is still wounded, and it’s not really moving that money around?

Bernstein: Well, that’s one way of looking at it, but I’m more convinced by the opposite case, which is that the reason rates are so low is simply because business demand is so low. It’s not so much what the Fed is doing, although the Fed is doing its part. But it’s more important that businesses aren’t demanding capital."

When it comes to the Fed, the upcoming June 20 meeting of the FOMC is seen as perhaps the last nonpolitically-tinted opportunity to either do something that smacks of a QE of some type, or to simply leave current policies in place and let things play out in the economy at large the way they have been. One possible item under consideration is an extension of the OT (Operation Twist) program which is set to expire on the 30th of the month.

For the time being, an outright QE by virtue of which the Fed expands its balance sheet and creates reserves is in doubt. Fed Governors Plosser, Lockhart, and Williams have all said "No, thanks" to the idea while Mr. Lockhart has also… locked out the need for extending OT. At any rate, and also for the time being, you may confidently dismiss hard money newsletter assertions that the EU crisis will motivate the US Fed to cave in an offer up another dose of QE.

It would take a lot more than what is happening in Europe for the Fed to pull that trigger. Specifically, the US economic conditions would have to deteriorate to a sufficient degree to convince the Fed that the time to do something stimulative has come. That kind of worsening, despite some fits and starts and hot/cold statistical readings from week to week, has not happened in the States. Praying for it and the related personal pain to come about just so certain commodities can make progress to the upside seems a bit perverse, to say the least. Yet many still count on it. How did we get here?

Consider Dow Jones’ FX Trader Managing Editor Michael Casey’s penetrating look at what the crisis, the Fed, and the gold players have wrought. In his new book titled "The Unfair Trade: How Our Broken Global Financial System Destroys the Middle Class" Mr. Casey looks back at the busy sidewalks of New York’s 47th Street Diamond District and at the sidewalks of Main Street America and finds that, by 2010, both of those streets were "caught up in a nationwide bout of gold mania."

Mr. Casey paints a picture wherein "Americans were being barraged with TV commercials and online ads touting investments in gold coins, gold bars and gold-only investment funds, while others offered new ways for people to sell their gold jewelry for cash, all with the aid of celebrity endorsements. Bullion marketer Goldline International put former Senator, presidential candidate and actor Fred Thompson in its camp. Rosland Capital, which also sells gold coins and bars, hired convicted Watergate operative and conservative radio host G. Gordon Liddy for a series of ads. Glenn Beck’s and Bill O’Reilly’s shows on the Fox Network were heavily sponsored by gold sellers."

However, the Fed’s QE response to the crisis resulted in certain side-effects that were not only unintended but would eventually prove to be quite damaging. Mr. Casey finds that

"Growth stayed in an anemic state, and yet even the hint of a second round of "QE" from Fed Chairman Ben Bernanke sent commodity and foreign asset prices soaring. Hedge funds and other speculators saw it as a signal that the dollar would depreciate and so exchanged cash for hard assets. These investors sent their dollars almost anywhere but to the sectors of the U.S. economy that needed them, pushing the prices for oil, agricultural commodities, Asian real estate and precious metals ever higher. Gold captured this speculative energy more than any other market."

Ultimately, Mr. Casey concludes,

"The gold rally had far-reaching global implications. It meant that families of Indian brides had to save three times as much for their dowries, for example. It turned the South African rand, the currency of one of the world’s biggest gold producers, into the top or second-top performing currency for four years running, much to the chagrin of the country’s winemakers. And it inspired tens of thousands of young men to risk their lives in precarious, 200-foot-deep makeshift mines dug into the red clay of northern Peru."

Thus we come to the Mineweb commentary by Lawrence Williams posted yesterday. Mr. Williams sincerely hopes that — contrary to the title of his article "What if the gold megabulls are right?" — $10,000 gold does not materialize. Obviously, Mr. Williams is neither in the business of selling bullion nor frightening newsletter content. He is in the business of being a rational human being who understands the consequences that accompany $10K gold (or even $2.5K gold for that matter).

Mr. Williams notes that "If this [$10K gold] does come about those who invest directly in the precious metal — and indeed in gold stocks — will see huge financial returns, but at the expense of the global economy collapsing around them. Hyperinflation would most likely come to the fore in many nations and the potential for enormous unrest and anarchy among the 99.9% or more of the global population who are not invested in precious metals. I remember Ian McAvity in a presentation in New York spelling this out to a gold-friendly audience in spelling and then saying:

“Be careful what you wish for.“

Wishing you a pleasant weekend,

Jon Nadler

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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