Let’s Get Physical. Just not Yet. – Tuesday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on March 8, 2011 · 0 comments

The action in Tuesday morning’s markets was still largely defined by the gyrations in crude oil and attentive to Libyan developments.

Bullion BarsGold prices fell in Asia during the overnight hours as yesterday’s rally to new peaks prompted some profit-taking selling by regional players. Meanwhile, OPEC was thought to be considering ratcheting up its output of black gold not only in an effort to fill the small gap that has been created by the disruption in Libyan flows, but mainly to cool prices which have gotten clearly ahead of themselves on the back of intense speculation lately.

Spot precious metals dealings opened on a weak-to-lower note this morning, as recurring rumors of a deal between Mr. Gaddafi and Libyan rebels continued to pressure oil prices and bolstered the US dollar. Gold opened at $1,432.90 with a gain of $1.80 per ounce, while silver advanced 30 cents to start the session off at the $36.27 mark per ounce. Spot gold went into negative price tick territory within 90 minutes of the open, as a 0.40 gain in the US dollar index (to 76.92) and steadiness (but not gains on the horizon unless Tripoli trips up the market) in crude oil prompted some light selling in a market that RBC metals analysts have labeled as "crowded" and having difficulty "enticing new longs" this morning.

The noble metals however declined some more, with platinum showing a $24 loss out of the starting gate (quoted at $1,795.00 the ounce) and with palladium recording a $12 per ounce decline, easing to the $774.00 level per troy ounce. Profit-taking and some automotive sales-related fears (on the back of surging crude prices) have been manifest in the complex in recent days.

Contrary to recent, highly optimistic quotes seen the media and also contrary to popular perception, the recent rallies in gold prices have been largely built on speculative investment demand by hedge funds, rather than any significant physical offtake by average individual investors. The most recently published physical market flow analysis by Standard Bank (S.A.) corroborates this assertion. 

SB analysts point out that "while the political turmoil in the MENA region is inflating investment demand for gold, physical demand for the metal has been lacklustre."

As mentioned in yesterday’s article, the main focus of funds (speculation) has been reflected by the rise   the net long non-commercial gold position in the market over the past 4 weeks. On the other hand, the physical market is still in a seasonally weak time period, and with gold prices having approached $1,440 per ounce, dealers have begun to see physical selling on a consistent basis, and such selling has been outpacing physical buying, even as Mr. Gaddafi continued with his antics.

Standard Bank’s analytical team observes that "the move in the physical market, from providing support in January and early February, to providing resistance, is evident in our Standard Bank Gold Physical Flow Index (GPFI) which has recently declined from close to all-time high levels during the middle of February to negative territory last week. A negative value indicates we observe a physical market that is on net a seller of gold, while a positive value indicates we observe a physical gold market which is on net a buyer."

The SB research team also notes that current physical gold demand is on the weak side as the market is now entering a phase wherein further rallies in gold are more likely to attract more scrap gold tonnage. While SB maintains its projections for gold to possibly reach $1,500 sometime in Q3 of this year, (or sooner, if MENA developments warrant), the seasonal weakness in physical demand is seen as assisting the capping of any gold rallies (as it has in the past two weeks) for "a few more weeks."

MENA news will, of course, continue to impact oil (and gold) prices and keep central bankers, politicians, and military folk plenty busy over those coming weeks.
Fed officials (and probably other central bankers as well) have basically affirmed that $150 oil would represent a significant enough pivotal level; one at or near which, monetary authorities would be prompted to take some kind of action. No one, anywhere, at this juncture, wants to place the emergent global economic recovery at risk. The risk, however, may be transitory, as a CNN Money survey reveals that most market experts think oil and gold prices will settle down after Mr. Gaddafi suffers Charlie Sheen’s "employment fate."

Still under consideration by the White House, is the plan to release some supplies of crude from the US Strategic Petroleum Reserve; this, as $3.50 per gallon US gasoline prices have angered the consuming public and are threatening to send it back into a state of "hibernation" in terms of overall consumption, not just that of gas. As well, still under review, is a NATO plan to impose a no-fly zone in Libya that is intended to avert Mr. Gaddafi from carrying out air strikes on the rebels.

At any rate, whether or not the Libyan situation does not come to a quick resolution, the attitude on display by the US Fed is that it (or at least four of its member presidents) is in no hurry to extend or expand the QE2 program. Messrs. Fisher, Plosser, Lockhart, and Evans are all of the opinion that every good thing eventually does come to an end, especially if the risk it entails outweighs its benefits. The FOMC meets one week from today to discuss all of this, and more. The post-meeting language is likely to be parsed with at least as equal a degree of intensity as was the one that was issued in early November of last year, when the good ship QE2 was set sailing on the US economy’s rough (at the time) seas.

The trend towards hiking interest rates is hard to miss, (but by a few holdout commentators who envision "easy money" as basically an everlasting proposition, and one which will perpetually fuel "To Da Moon!" spikes in commodities). Bloomberg reports that The Bank of Thailand and Bank of Korea will each raise key interest rates this week by a quarter percentage point. As well, Malaysia may also be approaching the end of its pause in boosting borrowing costs.

Such moves will come on the heels of seven already-in-place hikes by India‘s central bank and by a recent string of similar tightening actions by China‘s PBOC. This coming weekend may also bear watching as China announces inflation levels and possibly what it might do about them. Of course, the 900-lb gorillas at the moment remain the ECB and the Fed. When they too commence this campaign, well…let’s let someone with long-standing market experience frame that concept at this time: Value View Gold Report’s Ned Schmidt.

Says Mr. Schmidt in his latest "Gold Thoughts" issued on Monday: "Gold is today the preferred precious metal when compared to Silver. That might not, and likely will not, prevent it from going down when the Federal Reserve folds in June. That June time period is becoming of increasing importance. The current era of free money, quantitative easing, by the Federal Reserve is scheduled to end in June. Should the ECB raise rates in April, Federal Reserve will come under increasing pressure to abandon free money policy.

Mr. Schmidt, a 30+ year veteran observer of precious metals markets (and one whose ultimate price targets for gold are actually quite lofty, BTW) also correctly notes that:

"Free money has been driving financial markets. Should that era of free money begin to end in June, considerable realignment of investment market values seems likely. Silver is simply the most obvious one. Deferring the investment of idle funds, and perhaps taking some profits, might be wise until the June poker hand has been played."

Such level-headed caution is closely related to the observations tendered to the UK’s Telegraph this morning by at least a couple of UK financial advisers; Messrs. Patrick Connolly, of AWD Chase de Vere, and Martin Bramford of Informed Choice.

Mr. Connolly notes that "there continue to be bullish statements and bold predictions about gold and the assumption that the returns seen over the past decade are now the norm. There were similar sentiments in 1999 about technology stocks, and the belief that the only way was up. It’s easy to forget that gold prices can go through prolonged downturns. During the Eighties and Nineties, the price of gold fell by 70 percent" while Mr. Bramford opines that "investors are understandably concerned about inflation at present. But there is a real risk that those now buying gold are doing so at the top of the market and will end up making losses when prices fall."

So much for the "this time it’s different" propositions in (over)abundant supply out there. The only difference is that the Internet has now made it possible for practically everyone to be heard, whether or not they have something of value to offer, or are just possibly hiding a self-serving commercial agenda behind putatively erudite "opinion." One might do well to filter out some of that type of "noise" and stick with the prudent, time-tested, core, ten percent gold "just-in-case" insurance position we continue to advocate, price explosions or implosions of the future notwithstanding.

Until tomorrow, remain calm.

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

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