Wheels in Motion – Wednesday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on January 5, 2011 · 1 comment

Bullion Bars

Gold’s worst fall in six months had assorted market pundits rushing to the airwaves overnight, attempting to explain why the "sure thing" – the New Year’s mega-rally that had been all but "in the bag" did not materialize and how this (cave-in) all came about. In effect, ignoring the apparent "sector rotation" that might be underway (from commodities into equities) was still manifest in most the explanations tendered on various media outlets, and the bullish case was being revised in even the slightest terms.

Yes, we did hear a bunch about "profit-taking" following a 29% gain in 2010, and about improving economic conditions, and such. However, when the CRB falls 1.6% (largest decline since November), silver drops 5% (amid improving economic indicators?), and crude oil loses 2.3% (also largest decline since November), one might allow for the possibility that fund players have begun to seize on…something. "Greener" pastures, perhaps.

The midweek session in New York opened and then continued with further spot price losses being recorded in the precious metals complex. Gold bullion dropped some $18 to near $1,363 per ounce and broke a pivotal support point on the technical charts, to trade at six-week lows. Hopefully, the decline might stimulate physical buying from a hitherto basically absent jewellery sector. As regards the prospects for Indian gold imports in 2011, well, it is largely a case of who is being asked about such prospects.

Domestic commodity firm analysts feel that the largest gold-consuming country may absorb as many as 770 to 810 tonnes of the yellow metal (a slight gain over 2009′s levels), while the head of the BBA (Bombay Bullion Assn.) expects traditional Indian price sensitivity (read: value shopping) to result in only 500 to 550 tonnes being imported (which could represent a sizeable decline from last year’s probable final tally of about 700-750 tonnes) if prices remain anywhere near current levels. A topic to be revisited, to be sure.

The International Business Times alluded to the underlying developing patterns in the precious metals market with the following observation: "While USD’s rebound has weighed on gold, decline in retail investment demand in the US may signal that gold’s rally has peaked in the near-term. The US Mint said that sales of American Eagle gold and silver coins fell in December. Gold sales slumped around — 75% to 60K ounces and silver sales plunged — 30% to 1.772M oz in December from the same period last year.
Meanwhile, silver shed another 3.68% ($1.15) this morning, coming quite close to the $28.50 per ounce mark, and the noble metals fell quite heavily as well. Platinum lost $52 after the open, and it was quoted at $1,702.00 while palladium sank as much as $28 per ounce, to just under $750 the ounce. These declines took place despite fresh news that the US automotive sector is contemplating the sales of as many as 12.9 and possibly up to 14.0 million vehicles this year. The bounce-back in car sales is now being labeled a "V"-shaped recovery.

At any rate, the dollar continued to climb on the trade-weighted index this morning, further denting the appetite for many a commodity among spec funds and individual investors. The greenback climbed 1.11% to reach the 80.25 level. Much of the focus of Wednesday’s trading action remained on the US and Chinese economies (and the impact of related news on the US currency).

The US economic recovery school of thought received a fresh shot of statistical adrenaline in the arm as ADP’s employment report revealed the addition of 297,000 (!) positions to the private sector employment rosters. Sure, there were numerous mall Santa assignments among these jobs, but, after it is all said and done, this was the largest such increase on record.

So, is today’s ADP report but a preview of (similar) good things to come (on Friday)? Some economists think so. Most of them were actually "stunned" (Marketwatch’s word) when asked to comment on the mammoth ADP figure this morning. Lending further credence to the trend reflected in the ADP figures, the ISM services index showed a 2.1 point rise in December, up to the 57.1% mark. The figure represents a multi-year (nearly five) high. Polled economists had expected a gain to the 55.6% level. Still think the Fed is applying ineffective economic revival strategies?

The other pivotal economy’s (China’s) leaders gave further indications that "intensive" tightening is in the government’s policy pipeline this quarter. Slated to be hiked are reserve requirements for lenders, the benchmark interest rates, and the yuan itself (which, by being allowed to float higher, could come to also play a role in the process of tightening). For the moment, the yuan dropped for the second consecutive day as the dollar pushed higher in the wake of the ADP report. At any rate, inflation is not a very welcome guest at China’s economic table, and the tightening program remains very much "on track."

Reuters reports that China’s central bank governor Zhou Xiaochuan warned that "inflation was mounting and that more could be done to "guide" [read: curtail] the growth of money," an indication that price pressures still top the list of official concerns. In an interview with a magazine run by the People’s Bank of China, Zhou spoke confidently of the country’s economic growth prospects, but sounded a more cautious note on inflation, which is running at its fastest in over two years.

The same cannot (yet) be said about the Fed and its own…program(s). Body language coming from the US central bank signals that the QE2 asset purchasing campaign will be the status quo through June, unless the job market improves dramatically. Still, it is worth keeping an eye on jobs creation. Should several months go by wherein more than 200K jobs are added to the US economy, the Fed might well truncate either the size of duration of QE2. Also a topic to be revisited, in due course.

Until tomorrow,

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


{ 1 comment… read it below or add one }

Brian V. January 5, 2011 at 12:21 pm

It will be interesting to see the effect of Lunar New Year (LNY) in China and across Asia in general. Industrial buys will need to be placed prior to LNY to lock in sufficient stock levels for when the factories ramp up production upon return from the holiday. The cultural history of the holiday is to pay off all of your debts prior to LNY to protect your prosperity in the forthcoming year. This has kept the Asian economies running for thousands of years. There is also the pay out of Hung Bao (Gift Money) within families and in business structures as well. Lots of monies will change hands, and if the precious metal pricing is inviting enough, there could be an uptick through mid-late Feb.
But look back to last March’s weekly plunge and the relative sleepy summer months to see what may re-occur. I’m not saying silver will drop below $16 on 03/01, but $20 is a possible new low which could play the rollercoaster ride up and down between $22-25 all summer. Then hold on for the 4th qtr ride end of Sept. ’11 – Jan. 2012…Silver easily breaks $40-50, and Gold will surpass $1500 by end of year.
Recent moves over the past 3 years show every time an adjustment happens, it only sets a new low higher than last year’s high point. In my opinion, keep buying during the drop, as it will bottom out and bounce higher than previous year. Make your money in the 4th qtr, and buy, buy, buy.
Gold buyers should note India added 7 more banks to the list of official importers of bullion, bringing the total to 30. These two markets alone have a huge impact on global pricing. Don’t pay attention to the amount of gold China imports as they are hoarding the domestic sources and recycled metal as well. They have so much money tied up in US dollars, they can’t afford a panic to drive down the USD$ levels. So they will show low buys, but keep stashing what they have to build inventory.

Brian V. in NJ

Leave a Comment