Thursday Kitcommentary … Sell in May and Go Away

by Jon Nadler, Kitco Metals Inc. on May 5, 2011 · 0 comments

Bullion BarsThe losses in the precious metals space aggravated overnight and into this morning as, despite a still-weak US dollar, the further hiking of the CME’s margin requirements, a plethora of news about big names exiting the complex, and the prospect of one-off central bank gold sales spooked weak latecomers and had them throw in the proverbial towel while forcing them to exit the market.

However, some not-so-late-comers (George Soros for one) were also seen taking what was deemed as "good enough" off the table and reducing the size of their previous metals allocations in the face of a possible turn in the market’s cycle at this juncture. As it turns out, certain major European banks already took less risk in trading commodities during the first quarter of this year- a situation in stark contrast to their US counterparts who continued to bet on the unfolding commodity price rally at the same point in time.

Gold prices broke under the psychologically pivotal $1,500 mark in the early hours whilst silver shed yet another near-5% to trade as low as the $37.28 level and it recorded a 35% haircut since last Friday’s high at the spot offer of $50.35 the ounce. Platinum and palladium also sustained relatively sizeable losses overnight as the headline-making turn in silver prompted profit-takers to partially exit that sector as well.

Spot metals dealings opened with losses of various magnitudes in New York this morning as the complex was once again buffeted by the winds of selling among institutional as well as retail players. Gold was bid at $1,505.50 per ounce (a loss of $11.00 per ounce) in the wake of a "no-change" decision on interest rates over at the ECB and players were opting to wait for the press conference of Jean-Claude Trichet before concluding that the euro-dollar trade ought to go one or another way this morning, and, with it, the gold-dollar equation.

The upshot of the Trichet session before the media microphones was that the ECB is now taking a "wait and see" attitude in the wake of its April rate hike and that it might only resume such upward adjustments after its June meeting. That bit of back-pedaling sent the euro reeling and the US dollar rallying (near the 73.43 level on the trade-weighted index at last check). Mr. Trichet –for all the hawkish tone he had exhibited all through the late winter-now let it be known that his institution in "never precommitted" and that it "can increase rates whenever we judge appropriate to do that." He also said that the ECB will now "monitor" all developments [presumably on the inflation and economic fronts].

The same, "we’re ready to fight inflation, but not just yet" approach has been manifest at the US Fed in the wake of the Bernanke press conference last week. While Fed hawks such as Mr. Hoenig and Mr. Fisher have uttered warnings such as:

"Should it prove necessary to counter inflationary pressures, I will be among the first to advocate the unwinding of some of the stimulus we have provided."

On the other hand, other Fed officials, such as Messrs. Lockhart and Rosengren have taken the other road and argue that weak employment data in the US does not yet warrant a radical departure from the current rate environment. This morning’s jump in initial jobless claims (up to the highest level in nine months-474,000) might give some ammo to the doves. However, the US dollar (and gold and silver) were not reflecting such developments as yet. To be fair, much of the unwelcome jobs claims filings data was a result of unusual events (auto plant shutdowns in the wake of the Japanese quake) and due to seasonality factors. Tomorrow’s nonfarm payrolls remain the target of intense anticipation at this point.

Potentially gold-bullish stories such as those related to the recent 100 tonne or so acquisition of gold by the central bank of Mexico also did not manage to lift the precious metals complex. Amid souring sentiment sparked by the price debacle in silver, the gold-related central bank story that appeared to have a bit more…traction at this moment was the one coming from Europe.

Bloomberg reports that "A budget expert from Germany’s governing coalition and his counterpart from the biggest opposition party urged Portugal to consider selling some of its gold reserves to ease its debt problems. Norbert Barthle, the Christian Democrats’ budget spokesman and Carsten Schneider from the opposition Social Democrats want a review of Portugal’s request for aid to include gold and other potential asset sales."

As we previously mentioned, central bank policies on gold are not easy to second-guess and are historically full of inconsistency. However, the facts are the facts. Countries such as Portugal (and Greece and Spain) have large percentages of gold in their reserves. Portugal is a stand-out among them, with gold representing some 88% of the nation’s reserves, and probably higher in the wake of recent price spikes.

The gold that is normally placed in the "basement" of a central for a rainy day could now come into play especially as it has been raining at a torrential clip in certain parts of Europe of late. The question is when, how much, and how this might happen. To ignore this potential source of metal supply without the assurance that another similar official institution would be ready to absorb the tonnage is to take a relatively large leap of faith.

In the Elliott Wave short-term market update that was disseminated late on Wednesday the assertion that gold has now completed a five-wave move from its 1999 lows at $252 was made. Last week, the EW team notes, gold ascended above its upper channel in a "throw over" pattern but that it did so while exhibiting a non-confirmation with gold stocks. The completion of the five-wave trace on the monthly charts now might indicate that notwithstanding some support that is thought to reside near the $1,400 area, the yellow metal’s players might have to contend with a possible test of the $1,300-$1,043 range eventually.

Silver started off with a $1.80 per ounce drop (nearly 4.5%) at $37.59 the ounce, as the massive exodus of a bunch more of hot-but-cooling-fast money took its toll on prices. The EW overnight analysis minced no words about silver and labeled its behavior as "crash-like." The team noted that the sharp drop in the white metal may not as much be due to the dance of the bears but to the bulls and pigs that are trapped and are being forced to unwind their leveraged bets. More on silver, below.

Meanwhile, platinum and palladium fell by $18 and by $14 this morning and were quoted at $1,801.00 and at $731.00 the troy ounce respectively as the market opened for action. No change was visible in rhodium, at $2,130.00/oz. The latest in GFMS-sourced data indicates that the PGM niche is setting up for some interesting times ahead. In a nutshell, here are the relevant statistical and fundamentals-oriented GMFS finding for platinum:

  • Platinum registered a gross surplus of almost one million ounces in 2010, which represents an increase of 10% to the highest level in GFMS’ 12-year data series and it was the sixth consecutive year of a gross surplus being recorded.

  • There was a 16% rise in demand for platinum auto catalyst-related fabrication in 2010, but that offtake was well below pre economic crisis levels as sluggish recovery in Europe’s diesel sales was noted.

  • Chinese jewellery demand fell and it contributed to an overall 17% decline in platinum offtake for that sector.

  • Supplies of scrapped jewellery and scrapped auto catalysts grew by 30 and by 15 percent, respectively, as higher prices drew metal from such sources into the marketplace.

  • Platinum did benefit from lavish attention coming from ETFs and the trend made for a gain in prices last year, despite the growing surplus in the market.

  • GMFS projects a further sizeable gross surplus for 2011 in platinum, on account of rising mine supply.

  • Price projections made by GFMS see platinum possibly touching a high north of $1,900 before year-end.

We will have palladium statistics on offer for you in tomorrow’s commentary. In the meantime, back to silver.

The CME‘s 84% hike in the cost required to play with "metallic nitroglycerine" i.e. silver, has resulted in the metal’s largest collapse on record since 1983 and there are schools of market analytical thought that envision that the cave-in is not yet over, despite the inevitable upward bounces that might also come into the picture in the days ahead. At this juncture, as is always the case, the "other" schools of thought – the ones that offered visions of non-stop silver price explosions to the upside just last week- have gone on record to note that, they too, had thought that the white metal had gotten ahead of itself in the run-up to the half-century mark.

One can hardly recall such caution however, as most of what was being offered last week was of the "this time it’s different" flavor. As one of the commentators on Kitco remarked in a recent video clip, those four words are "the most expensive ones in the English language." While that writer took major "incoming" when he raised the caution flag on silver, he is now on the receiving end of major kudos. The more things change…

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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