Coming Soon: House of the Seven Hawks? – Wednesday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on January 26, 2011 · 0 comments

Bullion Bars

Difficulties continued to confront the gold and silver markets overnight and even more so early this morning, as recent and growing fund liquidations appeared not to be easing up a whole lot (read: at all). Players were caught between digesting President Obama’s references to US budget freezes (and other assorted government size and spending-cutting measures), and the upcoming FOMC statement.

More than a few Fed watchers now expect that the Fed announcement might just contain a baby eyas or two, in terms of verbal references to future interest rates. The recent "landing" of such now still little (but they grow fast) "hawks" (as Plosser, Fisher, Kocherlakota) in the Fed’s cozy nest has certainly caught the attention of advocates of perpetual zero-level interest rates, as it has the "attention" of commodity-oriented spec funds.

As recently as January 13th, Fed Chairman Bernanke stated that "we’re seeing some improvement in the labor market. I think deflation risk has receded considerably. And so we’re moving in the right direction."

That direction being what? The one where the Fed sees a sizeable enough improvement in (primarily) the US labor market in order to feel confident that pulling the interest rate trigger does not run the risk of undoing the string of quite decent economic statistics which have obviously contributed to certain funds leaving the gold market for ‘greener’ pastures, at least partially.

Spot prices traded as low as $1,324.20 in gold, $26.68 in silver but platinum and palladium underwent decent bounces from their lows (near $1,775 and $780 respectively) and appeared better able to stage price recoveries from those levels. Once again, the declines in the yellow and the white metal took place despite a slightly lower US dollar (down 0.11 at 77.81 on the index) and despite a fresh, two-month high (at $1.372) in the European common currency.

The Dow‘s reaching the 12K level for the first time since June of 2008 may have also contributed to the "developing situation" in the precious metals markets this morning as funds become more comfortable with the putative bets they appear to have been making on equities, for a change. Then again, the news that US new home sales jumped 17% in December, could have also added to the Wednesday market brew.

Over in scenic Davos, Switzerland the world’s Who’s Who are cloistered in posh surroundings and mulling over the fact that while the world has obviously stepped back from the bottomless pit it was staring into in 2008, there are still some "agenda items" left to tackle when delegates return to their desks in a few days. While the word "recovery" is on practically everyone’s lips (and is also in part responsible for the recent metals’ selloff), it is a term that has a second edge – one that bears watching closely. To wit, AP reports that a Davos global panel noted that:

"The [the same] recovery is fueling demand that is causing fast gains in commodity prices — oil and metals, for example — and runaway food prices that are blamed for increasing social instability in some places and account in part for the recent revolution in Tunisia. For many countries, panelists noted, this raises the question is whether to raise interest rates to dampen consumption and bring down prices."

Soaring commodity prices are something the glitterati gathered in Davos might just want to keep a sharp eye upon, lest they gather there in, say, 2013, and conclude that "the [next possible] global crisis was unnecessary and could have been avoided IF… (insert your favorite regulatory or self-restraint-exhibiting behavior here)…That (pretty much exact statement) is the current consensus on what took place in, and since 2008, you know…

Curiously, the US dollar did not get much of a lift from Mr. Obama’s Tuesday night call for freezing US federal expenditures. Perhaps the greenback’s traders were more inclined to factor in a "steady-as-she-goes" FOMC announcement, hawkish overtones (if any) notwithstanding. At any rate, the gold market has broken through some previously "not-in-your-wildest-dreams" type of price supports and short-term moving averages.

Yes, we heard those assurances louder than any holiday songs last December, and yet, gold bullion appears poised to possibly test the high $1,200s (as does silver with regard to the $25 mark) even if interim upward corrective bounces materialize (as they perhaps ought to, as RSIs flash "oversold" on a short-term basis). Veteran market technician Merv Burak’s long-term indicators still contain the word "bullish" on the label, but as he says, the metric is "getting weaker each week." Both his short-term and intermediate term diagnoses are labeled "bearish."

Predictably, as the market has no longer been "willing" to support outlandish gold price claims for the near term (who can forget the Buzz Lightyear-like declarations made in the first day or two of 2011 trading?), some crystal ball gazers have now turned to claiming that they had seen the gold bubble long ago, and that no one ought to be surprised by recent market events, ‘cause they had "been told so." Whatever fits the story, of course. If that fails, one can always resort to allegations of the markets being raided by Imperial Storm Troopers.

Had someone indeed been paying attention to the trends underway in certain niches of this gold market, they might have noticed that something might be slightly askance with the fact that while gold soared to new records in 2010 and that while it managed a 29% return on the year, the flow of money into gold ETFs took a 41% "haircut" vis a vis their 2009 levels.

Facts are facts, and 361 tonnes is not in the immediate neighborhood of 617 tonnes (the amount ETFs absorbed in 2009, when the global crisis was still in somewhat of a full swing). A Bloomberg-tracked cumulative tally of (ten different) ETP holdings had already indicated that 2010’s inflows were showing a 17% gain in the year, as compared to a 51% rise in 2009. If only someone had dissected that pattern, too…As for the current situation, well, someone is still glossing over the fact that on Tuesday, assets in gold-backed exchange-traded products fell by 31 tonnes. The decline in balances was the largest in percentage terms since the stomach-churning days of October of 2008.

As early as the summer of 2008 we alluded to the potential accelerative effects of ETP ebb and flow on gold prices. Do bear in mind that the advent and growth of such vehicles took place amid (in fact almost in the middle of) the decade-long ascent in gold values. To say that the "jury" is "agnostic" as to what might happen to prices of the underlying, due to the size and presence of such instruments during a sideways-to-downward market cycle, is to be extremely…modest.’s "Mad Hedge Fund Trader" notes that "the [recent] selling [in gold] has been so aggressive, that it has spread like an out of control virus to the rest of the entire metals complex. To throw the fat on the fire, one large hedge fund was seen yesterday unloading a long term position which took it down to a new three month low at $1,224. Others such hurried liquidations are expected to follow. This is truly the commodity that takes the stairs up and the elevator down."

We leave you today with a picture (literally) of what "peak gold" looks like. Surely, you’ve heard and read by now that gold mining output is headed into oblivion. Okay, then. Simply turn this chart upside down and what you’ve learned might be correct. Hot off the presses; behold mine output (in Ron Burgundy’s favorite shade) for the past five years, as tallied by GFMS. Peak-ish, no? Or, could it have anything to do with…prices/margins?

Mine Production and Recycled Gold Supply Chart

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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