Gold, Silver, Metal Prices Commentary – September 27, 2010

by Jon Nadler, Kitco Metals Inc. on September 27, 2010 · 0 comments

Gold, Silver, Metal Prices Commentary - July 28, 2010Good Morning,

The final week of September started off on a relatively firm footing for gold and silver, and with only minor losses in noble metals.

A bit of stabilization in the US dollar — albeit still at levels near the 79.25 mark on the trade-weighted index-made progress in gold to levels much beyond the round figure a tad difficult for the moment. No matter, bullish posturing appears to be gaining fresh converts each day.

Yet another mining firm exec threw his uber-bullish prediction (to above $1,500) into a ring that now sports a plethora of taurean-horn-adorned hats thrown in by…(surprise!) gold producers. As well, weekend price conditions in gold gave rise to another, equally obvious headline: "Increase in Gold Prices Affects Jewellery Consumption Negatively."

Spot bullion trading opened with a $2.40 gain in gold on Monday. The bid-side quote for the yellow metals showed a $1,299.40 indication. Participants are gearing up for at least three pivotal numbers slated to be on offer this week: US consumer confidence (tomorrow), jobless claims, and GDP (Thursday). Then, on Friday, the markets will digest US consumer and construction spending, ISM data, and automotive sales figures. Plenty there to choose from, and enough categories to eventually show gains as well as declines. In other words, more uncertainty about the immediate direction of the world’s largest economy.

Silver showed a 12-cent gain on the open, trading at $21.58 per ounce. Meanwhile, platinum fell $3 to start at $1,636.00 the ounce, and palladium rose $2 to $559.00 initially. No change reported in rhodium values, last quoted at $2,240.00 per troy ounce. Carmaker Ford envisions whittling down its nameplates and models on offer further, as the industry concentrates on what sells best and it continues to discard ‘has-beens’ (like the iconic-of-the-pre-crisis-euphoria-era Hummer; a ‘vehicle’ that had no reason to pound pavements aside from certain male inadequacy issues…).

Kitco News’ Allen Sykora consulted one major institutional market player and offers the following take on gold’s near-term conditions:

"Commerzbank offers some caution now that gold touched $1,300 an ounce Friday. "While gold is likely to make more attempts at overcoming this mark on a lasting basis, the air appears to get thinner at this level. In our view, gold’s latest price rally was more down to dollar weakness than gold strength, so the rally has a shaky footing. This is also reflected in outflows from the SPDR Gold Trust." SPDR holdings on Friday declined by 0.9 metric ton, according to its website. "Further profit-taking is possible at any time."

As for where the future projections currently stand regarding gold, the two numbers wearing the latest ‘made-on’ date allude to either $1,315 by end-2010 (as offered in a Bloomberg market analysts’ survey) and/or $1,406 in one year (the apparent consensus of an LBMA conference participants’ poll). In other words, polled participants offered a potential range of from 1 to 8 percent in additional gains for 3 to 12 months out in gold, from current levels.

That is, if investment demand remains at its present pitch (a rather large unknown, that one). In any event, the overriding theme apparently emerging from the Berlin gathering is one that has gold acting in a stable manner over the coming year, after a decade’s worth of gains. No price estimates of corrective event results were offered by either survey. The current investment environment –according to bond giant PIMCO- offers a situation where even investors with well-diversified portfolios and appropriate risk-management techniques can expect greater volatility, with returns shrinking to between 3 percent and 5 percent in the current economic cycle compared with 6 percent to 8 percent historically.

The gold market’s overdependence on investment demand is a feature we have long warned about in these posts. Whether the ebbing of such inflows comes next week, next month, or next year is really not the issue; it is the fact that it will invariably arrive; as it always has. When interviewed at the LBMA Gold Conference in Berlin over the weekend, one direct participant in this market opined

"that investment [as a demand category] has fueled much of the gold rally to above $1,300 an ounce and reliance on one element for so much of the increase could have some risks."

This, according to Hans-Guenter Ritter, managing director of German precious metals firm Heraeus. Kitco News’ Daniela Cambone writes that Mr. Ritter’s firm

"watches prices closely because the company is in a manufacturing business in which precious metals are used. He said at this time industry consumption does not reflect the higher prices of gold." On the other hand, investment has become the major theme around the precious metals for the past couple of years," said Ritter, noting that is a different environment. "It is always a risk when the interest is coming too much from one side of the market."

Another side of the market (along with a substantial amount of mine de-hedging over the past half a decade) that has helped shape the current value structure of the gold market is the slowdown in central bank disposals. The annual sales period that ended last night witnessed just under 100 tonnes of official sector gold coming to market. However, a slowing in sales is not tantamount to a shopping spree for fresh, major gold additions to said institutions’ balance sheets (even if certain newsletters and even some trade groups would like us to believe that such is the case).

Perhaps it was an honest error, perhaps a bit of over-optimism amid the bullishness of June; nonetheless, the World Gold Council’s assertion that Saudi Arabia doubled its reserves this summer drew a statement of…’correction’ from…Saudi Arabia itself.

"We did not buy new gold, this was just a merge and reclassifying assets, this gold was under different accounts and was brought under one account,’ Muhammad al-Jasser, the Saudi Central Bank Governor, told Reuters declining to give more details."

"In June, the WGC data indicated that Saudi Arabia lifted its reported reserves to 322.9 tonnes from 143 tonnes, making it the world’s sixteenth-largest holder of gold."

As previously mentioned, the official sector will continue to buy and sell gold as internal policies dictate. Sometimes, a shift or reclassification such as the Saudi one can be misinterpreted as a de facto purchase. Hopefully, that was the case here. Hopefully.

The only consistency in this niche has been the inconsistency of policies; this, as there is no ‘ideal’ level of gold holdings that is appropriate for everyone across the official board. Certainly, official sector policies will not suddenly take the advice of hard money newsletters or mining company heads, or that of trade organizations created to stimulate gold demand.

Take China, for example. Please. One adviser to the country’s central bank said this morning that China will, indeed, "continue to shift" its huge foreign reserves into non-dollar assets. However, the core of its holdings, and the largest slice of the Chinese reserve pie, will remain…the US dollar and related instruments. No mention of gobbling up hundreds of tonnes of bullion.

Emphasis is to be added to the word "continue" in the above, as official sector asset reallocation plays are a process, not a sudden rash decision-based exit or entry out of, or into a particular asset. As regards gold, the Chinese have made it eminently clear that — for the time being- a 2% earmark in the metal is sufficient, and that no large-scale purchases are on the drawing board, for reasons that have to do with price distortion and impaired liquidity. Mind you, as reserves continue to grow, the simple maintenance of the 1.6 to 2.0 percent level in gold implies modest, but on-going (and likely domestically-sourced) gold acquisitions. It’s all well.

For the moment, China has some bigger fish to fry — make that some bigger crabs to boil — as in the excellent Andy Xie Bloomberg piece on the current (and future) real estate market conditions over there. So, for the moment, does the US, as regards the dreaded double-dip probability game. Veteran economist Henry Kaufman’s double-dip-oriented words are worth a double, double-take.

Have a nice (data-laden) week ahead.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler

Original article link: Saudi They Buy or Not?

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