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

by Jon Nadler, Kitco Metals Inc. on June 22, 2010 · 0 comments

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Good Morning,

Monday’s trading tenor changed mid-course and precious metals prices finished with rather significant losses across the board. Instead of playing into the hands of the gold bulls, the Chinese currency news gave rise to increased risk appetite for other assets and gold was sold off as safe-haven hunters gave up on portions of their holdings at least for the day.

Volatility and fake-outs of this type will likely be with us for the remainder of the week, as a slew of US economic data, the Fed meeting, and the upcoming G-20 keep markets on the boil.

New York gold spot prices ended with a $23.90 per ounce loss at $1232.60 as profit-taking took a bite out of prices and as the market revealed that many positions in gold had been established by relatively weak, trend-chasing latecomers to the party. Such adventurers are usually the first ones to bail out when there is a sudden change in sentiment. For the moment, the pitched battle of the longs against the few remaining standing shorts will continue. Much however depends on how skittish the latest arrivals in the open interest camp prove to be when the market wind shifts direction ever so slightly.

What happens next remains to be seen. The only sure thing is that when something appears to be a sure bet, it usually turns out not to be…This morning, as China’s currency slipped just one day after the supposedly momentous announcement that a new era of ‘flexibility’ had dawned, market exhibited more of the doubt we saw yesterday afternoon. To wit, gold’s 2% drop (the largest in a month) was explained as partially the result of a ‘sudden drop in the euro’ (a headline that just days ago would have been good for a move of equal magnitude to the upside).

Market pundits see the Chinese gesture as largely symbolic and designed to placate G-20 inquisition as to when the country would take the yuan to a level at which it is no longer considered as being severely undervalued. For the moment, the pace of such revaluation is rather of the glacial variety and market players are impatient types. Thus, more than just a bit of ‘sell the news’ has now taken place out there in speculation-land. Such doubt and such trading posturing was obviously reflected in gains in the US dollar, further difficulties for gold, and a larger than $1 decline in crude oil this morning.

Meanwhile, other signs could be also interpreted as some kind of capitulation having recently taken place among gold shorts (not a good sign) based on the action in May and early June. To wit, Sizemore Capital Management sent out an internal trade memo that announced the closing of its short gold position in the Proshares Ultrashort Gold Fund (GLL).

More interesting perhaps than the actual unwind of the position, is the underlying rationale for having entered it to begin with. Sizemore noted that "We continue to believe that gold is in an irrational speculative bubble driven by a potent combination of fear, angst, and political ideology. We continue to see gold’s fundamentals deteriorate”.

Sizemore added that: "[Gold] demand is almost entirely in the hands of new portfolio investors and hedge funds and particularly by exchange-traded funds such as the SPDR Gold Trust. Gold is in a speculative bubble, and shorting it is "logical." Logic does not play much of a role when investors’ money is at stake and you are playing against the hedge fund cabal that has piled up on the long side. Trading discipline does.

As for the firm’s observations on the market’s underlying tenor and participant make up? Why, they lifted a page or two from these very columns. Or, perhaps from the notes of UBS analyst Dr. Edel Tully, who, on Friday wrote that: “We’re inclined to believe that gold lacks enough drivers for a sustained residence north of $1,250. Current gold support is quite narrow, with physical safe-haven buying lagging well behind that of May, despite a fleeting increase in coin demand yesterday. … A positive for gold right now is that scrap supply is scant, but we think this will increase at current prices, becoming more apparent next week as it feeds into the system.”

Speaking of scrap supplies, The Bombay Bullion Association confirmed overnight that May’s Indian gold imports stood at 17 tonnes, or 50% lower than the tonnage taken in during April, ahead of festival/wedding season. The much lower level of imports is probably being offset by rising sales of second-hand gold. Citing high prices as the principal culprit for the decline in imports, the trade body’s Director, Mr. Suresh Hundia said that rising prices will have an ‘immediate impact on future imports’ in this, the world’s largest gold consuming country. And the most price-conscious one, we might add. Perhaps Mr. Hundia already has a good grasp on June’s inflows…

New York spot bullion trading opened with gold and silver struggling to repair some of Monday’s damage, but with the white and noble metals continuing to slide following yesterday’s overreaction to the upside that was followed by a hefty slide. Spot gold was ahead by $2 at the open, quoted at $1234.60 the ounce. The yellow metal gave those gains up within the first ten minutes of trading and slipped into the red zone nearer $1231.00 the ounce.

Silver gained one penny, starting the session at $18.73 per ounce. It too, reversed direction shortly after the open. Platinum fell $10 to $1578.00 per ounce, while palladium lost $12 to start at the $479.00 mark. In the background, oil was still off by more than $1 at $76.75 pbbl, while the greenback advanced to 86.19 on the index and the euro traded at 1.227 against it.

Rhodium stagnated at the $2380.00 figure per ounce. Up to this point, the threatened power problems in South Africa have affected neither the footie matches nor the country’s mines It might turn out that the apprehensions surrounding the matter were great material for excuses for going long a few weeks ago, but not much more.

More substantive (for noble metals players) at this juncture, would be VW’s projection that it will sell more than one million vehicles in China this year. Now of only some teams can offer their own excuses for how they have been playing (no names will be offered here, we are not that crazy, but they hail from Europe and Africa…).

In ‘you just can’t count on the obvious to happen’ news of the morning, Reuters reports that Chinese state-owned banks were ‘aggressively’ buying…dollars (!) for the yuan today…go figure. Then again, Federer almost lost his opening match at Wimbledon…

Look for continuing dips and pops, look for assorted economic data, look for more yuan talk, and look for France to do what (?) when it meets South Africa…

Happy (Careful)Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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