Gold, Silver, Metal Prices Commentary – October 15, 2010

by Jon Nadler, Kitco Metals Inc. on October 15, 2010 · 0 comments

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Good Morning,

Without giving details as to just how, how much or how little, and –most importantly — when, Fed Chairman Bernanke this morning pitched "a case" for further action by the US central bank at a Boston Fed conference. However, the tone being used by the Fed’s head was a bit on the ‘fuzzy’ side — at least as markets were concerned.

We have often pointed out that market expectations (read: demands) have gone into totally ‘extreme’ mode and that any — even slightest- disappointment with the Fed could spell disaster.

The one-way betting street funds cannot stomach anything but that which has already been baked into the fruitcake; unconditional surrender by the Fed to their coercion.

That vagueness in language (as previously stated, even the slightest change from ‘aggressive’ towards ‘cautious’ in Fed-speak could pull the speculative rug out from under this smug, one-way betting) and a couple of improved sets of economic statistics (consumer prices up 0.1% and Empire State manufacturing showing a notable 15.7% amelioration in October) were enough to ignite a small round of profit-taking in precious metals soon after the markets opened.

A separate news item underscored the lack of inflation present in the US system at the moment; the announcement that Social Security benefits will not be lifted next year in order to adjust for ‘cost-of-living’ gains. The last time such hikes were tendered was in 2009 when a 5.8% bump was factored into annual retirement benefits for Americans. One more small step towards lower government spending? Don’t look now; no one will notice, anyway.

As things stood at the opening bell, gold was still running on the fumes of bullish momentum and started the final session of the week with a $1.70 advance to the $1,382.90 spot bid level. Silver took a cue from the yellow metal and rose by 6 cents to open at the $24.69 level. However, platinum and palladium showed early signs of weakness due to the emergent profit-skimming, pre-weekend book-squaring tilt and headed in the opposite direction, out of the starting gate.

The former declined $6 to the $1705.00 figure and the latter fell $8 to open at $594.00 the ounce. On the other hand, rhodium values showed a marginal gain of $10 and started off with a quote at $2,250.00 per troy ounce. All of this was unfolding against a background showing a bit more of a loss in the US dollar (down 0.13 on the index at 76.64) and a slight drop in crude oil (off 20 cents at $82.49).

This, despite earlier ‘calls’ by OPEC members for $100 per-barrel-black gold to ‘reflect’ the decline in the greenback. By the end of the first hour of trading, gold was quoted at near $1,369.40 the ounce while platinum was down $22 near $1,689.00 as the thus far mild selling intensified. Goldman Sachs analysts note that the low interest rate environment (for as long as it lasts anyway) could lend further support to platinum. One would assume that infers a similar situation for palladium; the stand-out performer in the complex last year, as well as year-to-date.

As has frequently been pointed out in these columns, the recent (two-year) over-dependence on investment demand in gold comes at a time when underlying fundamentals are anything but encouraging. Rising mine and scrap supply, caving primary fabrication demand and the absence of the much-hyped central banking buying-to-come has left the market in a position where it is now solely defined by momentum players, hedge funds, and continuing ETF demand.

The gold market effectively needs to ‘run hard’ just to ‘stand still’ at these levels and must absorb perhaps as many as 1,700 tonnes in the ‘investment’ category in the coming year, in order not to ‘adjust’ to lower levels. Well, there are those who remain in accord with this observation (and no, GFMS is not the only entity to warn about such conditions, at this point).

‘Our main concern for the gold market is that investment demand will be insufficient to bridge the widening gap between fundamental sources of demand and supply.’

These words of caution were contained in the Fourth Quarter Metals Review issued by London-based Natixis Commodity Markets overnight. The Marketwatch news item promptly…prompted more than 40 catcalls in the reader feedback section likely coming from bullion dealers and spec longs in disguise (panicked that the good times might turn sour). Remember: there is NO room for dissent, there shalt NOT be talking in Church! Heretics will be burnt!

Okay, while talking in Church, we might as well point out the other cautionary tale that has made its way into the news flows overnight: the one concerning "poor man’s gold." Reuters’ Jan Harvey (she, in London and a heckuva bundle of energetic reporting) warns that latecomers to the silver party "would be well advised to be wary of seeing the precious metal purely as a cheaper proxy for its yellow cousin." In other words: ‘poor man’s gold?’ Not quite.

With the silver-to-gold ratio (yes, some do follow that metric) shrinking to 57-to-one many see a new paradigm for the former. However, while industrial demand for gold is perhaps around the 15-17 percent level, the offtake by that sector is more than 40 percent for the silver.

As is certainly the case with gold, the latest incremental increase in silver’s value has come from the category labeled as ‘investment,’ and not from basic, underlying, fabrication-type demand. ETF holdings in the metal are near 14,200 tonnes — in a market that normally sees 19,500 tonnes of total fabrication demand and is running an estimated 6,600 tonne surplus in the current year.

Our good friend, HSBC analyst James Steel, argues that, while industrial demand might warrant sustainable $15 or so silver, it cannot account for the push to 20 or 25 dollars. It is a smaller and less liquid market than that for gold, and is historically more susceptible to ‘overshoots’ (in either direction) than the yellow metal. Thus, a serious ‘correction’ in gold could spell ‘grave’ declines in silver. Meanwhile, another long-time friend, Philip Klapwijk (he, the Chairman of GFMS) warns that:

“We could see a fairly important correction across all the metals, and, with silver, it could be a bigger correction than most.”

Meanwhile, over in the Church of currencies — the FX market — where another pitched battle is unfolding, the war of words continued equally loud. The Chinese Commerce Minister basically told the rest of the world to mind its own business as "other countries have no right to comment on what is a reasonable level for a[nother] country’s trade surplus."

This, while ECB policymaker Juergen Stark tried to offer a peace dove with the suggestion that countries must avert a ‘fatal’ so-called ‘race to the bottom’ and try talking as an alternative. All of this noise, coming ahead of next week’s ‘rehearsal’ being held by the G-20 in advance of the November 11th tete-a-tete scheduled for Seoul. There will have to be a lot of…soul-searching going on in Seoul in order not to leave the summit with the resolve to go ‘nuclear’ and/or a sense of "come-what-may."

Well, there is one thing we can count on to come — as early as next week. Starting on Thursday, and running through Friday, the eighth Annual Silver Summit will be held in Spokane, Washington. Expect throngs of silver bugs and many a miner to make the event as lively and as informative as ever. Extra lively, given the recent climb to near $25 for their favorite metal. By now, "only somewhat less poor man’s gold."

Happy weekend.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

Original article: Silver Streak

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