Gold, Silver, Metal Prices Commentary – September 30, 2010

by Jon Nadler, Kitco Metals Inc. on September 30, 2010 · 2 comments

Gold BarsGood Morning,

Thursday precious metals markets’ opening tallied offered more of the same fare as has been on tap since at least the middle of the about-to-conclude month; relentless fund sorties based on perceptions of what might be.

Gold notched a $3.40 gain out of the starting gate this morning, quoted at $1,313.30 on the bid-side as the certainty over another round of Fed easing continued to be the principal sentiment on display among speculators.

Such bets were manifest despite the apparent rise in contradictory rhetoric on offer by the Fed’s own officials, and perhaps nowhere more than in the still-sinking dollar (last seen at 78.56 on the index). "Internecine warfare of words" would be a better way to characterize the situation, inside the Fed, actually.

By now, we have heard from pretty much every Fed voting member on the subject of the efficacy of further Fed accommodation. One thing that is fairly clear is that aside from a very vocal Eric Rosengren (Boston Fed) there is a rising chorus of Fed membership that is either opposed to easing or believes it would be wasted on the still-anemic (and likely to remain so) US economic recovery. The Philly Fed’s Mr. Plosser is flat-out opposed to such additional asset purchases and argues that it would take manifest deflation of a much more serious nature to convince him otherwise.

Whether or not this is about allowing for more time for the first round of easing to take hold, or the political expediency of stimulating around upcoming election time, the Fed’s members are now at odds with each other in a manner not seen for quite some time within the walls of the marble building.

Yet, consensus among Fed watchers appears to be that Mr. Bernanke has a sufficient number of votes which might give him the green light to buy bonds with, if that is what is required. The Fed’s apparent  ‘whatever it takes’ mentality aimed at thwarting deflation has been stoking the appetite for shiny metals among spec funds for the better part of September.

As the last day of the month draws to a close, a couple of other potentially pro-easing background items made their way to the headlines. Chief among these was the number 1.7%. That is the level of US economic growth to which the slowdown in the recovery has extended in Q2 following its 3.7% pace recorded in the first quarter. Albeit the number entailed a slight upward revision from the previous 1.6% estimate, the net loss of 2% off the pace of growth presents perhaps the final domino to tilt the Fed into the direction of giving something to the economy that it believes might heat things up.

Things were heating up in the gold market this Thursday morning on account of a couple of other factors as well; both fear-based but good enough to elicit a few additional buys among funds nevertheless. The finding that one in four US homes sold in Q2 was a foreclosure fire sale one and the removal of one letter "a" (morphed into a number one) from Spain’s former Aaa credit rating emboldened the specs somewhat further despite seriously overbought conditions and bullishness levels not seen since June’s price peaks (one more perfect example of fear morphing into greed).

Bullishness levels close to the mid-90%’s are saturating both the gold and the silver markets at the moment. On a technical basis, Commerzbank sees $1,350 within [3] weeks (well, why not three days, since we touched $1,317 earlier this morning?) while EW analysts note that although the $1,370-$1,385 zone remains a viable target for this wave, the succumbing-to-the-trend by Mr. Retail Trader is (as is also the case for ‘poor man’s gold’) a sign of "the terminal stage of the rally.’

However, while the buying is totally fear-based, the total absence of…fear (of corrections or worse) is equally manifest. If you need additional proof that the latest in peak-scaling exhibited by funds is a fear-based (rather than inflation-based) you might want to navigate over to TheStreet.com and watch this little clip with a very sharp author by the name of Greg Ip.

Almost completely lost on this market frenzy is the fact that global gold hedges (yes, not a misprint missing the prefix "De") rose by the most in four years during Q2. This, according to London-based GFMS, comes at a time when mining company execs proclaim that they want to boldly go where no man has gone before; a strange new world without hedging.

We have noted here in the past that the gold market stands to lose one of its hitherto pivotal pillars additional demand after the last couple of hundred of tonnes left on the global book dissipate. GFMS opines that producers might de-hedge only about 4.2 million ounces (over 130 tonnes) in the current year. Surveyed LBMA membership at this week’s Berlin conference concurred that the mining community will return to hedging. One would be well-advised to keep that battleship turn on their uber-bullish gold market perceptual radar.

Silver popped 14 cents higher on the open, starting the session off at $22.04 as momentum traders made their presence felt in that market as well. No respite for platinum or palladium either, as both noble metals continued their fund-induced advances. The former gained $12 to open at the $1,658.00 level while the latter added $2 to start at $569.00 per ounce. Rhodium was flat at $2,250.00 on the bid. Automakers might report a September sales pace that could turn out to be the best since at least March.

The to-be-reported figures could imply that auto sales are running at an annualized rate of near 12 million at this point. Compare that to last September’s 9.4 million annualized rate of car sales and the word ‘recovery’ does indeed apply. Trouble is, the sector needs to get back to a pace of more like 14 to 16 million units sold in order to really return to quasi-full health.

Something that has not yet been showing signs of improving health is the US labour market. Job creation at a rate better than that which has been on tap for the better part of the current year continues to be a topic that is preoccupying the White House and to some extent the Fed as well. This morning’s drop of 16,000 initial unemployment claim filings offered some signs of hope however. So did the more meaningful four-week average of new claims for benefits, which fell to the lowest level since early August (458,000).

The better joblessness numbers helped temper the initial rise in gold which — at the time –got a further boost from the decline in US growth figures. One further (and also somewhat contradictory to the GDP) number with which to add to the on-going uncertainty; the Chicago PMI numbers showing an improvement in September. That final figure of the day managed to tilt the gold spot market into negative territory as the greenback recovered sharply following the news release. Profit-takers took notice. Question is; will their skimming amount to anything more than the ‘flesh-wound’ we witnessed a couple of days ago?

Meanwhile, investors are basically taking a ‘barbell’ approach to chasing returns. While much of their current investment strategy (perhaps too much) is based on the expectation of a continuing near-zero interest rate environment, the fact that equities and gold are presently rising basically in tandem is also a reflection of the fact that hedge funds and similar specs have infiltrated the market and are stripping away one of gold’s historically reliable attributes; that of being a shelter from falling stocks.

Confused? Uncertain?

Welcome to the ‘new normal’

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: Is Hedge-Trimming a Vanishing Art?

{ 1 comment… read it below or add one }

paresh October 1, 2010 at 10:56 pm

will silver prices come back to $19????????

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