Friday Kitcommentary – A Little Off the TOP, But …

by Jon Nadler, Kitco Metals Inc. on May 6, 2011 · 0 comments

Bullion BarsFriday 05.06.11 Kitcommentary From Kitco Metals Inc. — " A Little Off the TOP, But Don’t Touch the Sideburns, Please !"

The grimmest commodity market closing tally in almost two years was recorded yesterday afternoon in New York. Awash in a sea of red, the price boards showed a $43.40 drop in gold, a $4.74 (12%) collapse in silver, a $54 implosion in platinum, and a $34 cave-in in palladium.

However, the precious metals were not the only ones to reflect the massive selling wave that swept through the sector in the wake of apprehensions that central banks will continue to hike interest rates in order to stave of higher levels of inflation and thus dampen global economic growth; crude oil suffered a near-$10 wipe-out, copper dove nearly 4% and the entire S&P GSCI Index experienced its largest (6.9%) free-fall since June of 2009. The Dow Jones Index shed 139 points on account of the bloodbath in commodities-related equities.

How many margined positions and players in which commodity fell victim to the brutal unwind on Thursday remains unclear as yet. However, the event places into context (a financially devastating one, to be sure) the fact that just when skies appear to be at their bluest (last Friday) a small, seemingly unimportant event can trigger a landslide of epic proportions. Let’s not mince words here: anyone who fell prey to the "temptations" or sense of investing urgency on display one week ago in say, silver, has a nearly 33% loss to explain to themselves or to their neighbor as of this morning. The triple-digit loss that has come about in gold, although quite large itself, pales by comparison.

The selling storm took many by surprise as it appears that the principal catalyst was actually something that would have emboldened players just one week ago; the fact that ECB President Jean-Claude Trichet postponed a rate hike announcement until possibly after June and noted that his institution will "monitor" inflation levels until such time. "No big deal" would have been the take by commodity-oriented gamblers had such a strategy been on offer last Thursday. In fact, the fact that central banks have not raised rates just yet has been the prime mover of the massive balloon that was inflated in the commodities’ space by spec funds since around the time Mr. Gaddafi apparently lost control of his faculties early this year.

Mr. Trichet’s news conference became the proverbial straw on Thursday morning and the commodity camel sank belly-deep in its aftermath, as the dollar-shorts took it…in the shorts in a big way. Make no mistake; anyone who "dared" call silver a "bubble" or commodities "toppish" was labeled as "nuts" by so-called market gurus as late as Tuesday of this week, and even after silver had clearly shown signs of having been pricked and was fast-deflating. Well, there’s some ‘splaining to do by such armchair psychologists in that regard, now that we have come to this juncture. One Swiss-based commodities’ analyst feels that if the patterns continue, the sector might well give up half of the gains it has achieved in recent months. Don’t know what you might call that kind of "haircut," but, in conventional circles it is generally a take that factors in a top having been put into place, indeed.

Thus it is that we come to this morning’s market opening tally. Gold started the final session of what has been the wildest of weeks in recent memory with a half-hearted $5.10 gain per ounce, and it was quoted at $1,478.20 as attempts to right the listing ship were being made but with not much success. Apparently, what is worse still, according to Marketwatch’s Mark Hulbert, is that gold timers are evidently in denial about the collapse of the yellow metal, even as its three month-long chart uptrend has been violated by now. One might care to revisit gold’s fundamentals at this juncture. What better place to start then the Annual Gold Yearbook produced by our friends over at CPM Group NY?

Historically speaking, drops of $100 within a week have resulted in at least a portion of bullish market timers calling it a day and switching to the "Dark Side" but such has not been the case this week. Mr. Hulbert notes that the "conversion" process "begins with denial, evolves into anger [we see the first signs of it emerging now], and eventually ends with resignation [we are far from that as calls are still visible for the bears to throw in their respective towels].

Overnight, the metal traded as high as $1,490.00 the ounce, and now, the task at hand is to try to recapture the $1,500.00 flag and break that overhead wall of resistance. That order might be tall just yet, so long as silver continues to draw the "attention" of the CME and players fall to the "ground" practically every trading minute of the day. Note that a break under the $34.43 100-day MA could usher in a quick slide towards the $30 or lower value zone in the white metal. More on that, next.

Silver continued to slide, losing $1.47 per ounce in the early minutes of trading, and it was quoted at (not a misprint) $33.19 per ounce on the bid-side. The lows came in at $33.05 earlier. Undeniably serious technical wounds have been inflicted upon the white metal this week; the bears are now in control of the metal, of that there appears little doubt. At this juncture, there are cottage industries being set up whereby market commentaries ask questions such as "How low can you go?" and whereby "newfangled" (but really not; it is just that they have been almost forgotten) strategies to play "the other side" of the cycle are on offer.

Platinum gained $4 to start at $1,769.00 per ounce, while palladium dropped by the same amount to open at the $707.00 mark in New York. Rhodium was spared of any change in either direction and was indicated at $2,130.00 — the same as yesterday. In the background, the price of a barrel of crude was hovering near the $98 mark; a figure that, itself, appears difficult to fathom judging by where black gold recently traded. Can you spell $3.50/gallon gasoline by the start of the summer driving season? The US dollar was trading at $74.20 on the trade-weighted index, showing not that much of a gain, but a sufficient one to keep the pressure up on the commodities’ complex.

As promised on Thursday, we now bring you the latest in palladium market fundamentals courtesy of the just-released analytical data from London-based firm GFMS. The corollary to the developments in the palladium niche last year was the market’s return to a deficit situation. GFMS labels the 550,000 ounce shortfall in the noble metal as a "substantial gross deficit." The turning into a deficit in palladium is the first such tilt since the year 2000. The rest of the supply and demand bullet-points shape up as follows:

  • Mine production of palladium climbed by 5% as South African output recovered its lost footing.

  • Scrap supplies of the metal grew by 20% on rising prices (the metal doubled in value in 2010).

  • Autocatalyst demand surged by 30% to 1.2 million ounces; a ten-year high.

  • Electronics-related demand for palladium witnessed a "notable" recovery, rising to a 10-yr high.

  • Jewellery demand fell sharply, declining by 300K ounces, primarily on lower Chinese demand.

  • Projections call for a once-again (albeit perhaps smaller than 2010) large gross deficit for 2011.

  • Palladium might achieve a $975/ ounce price in 2011.

  • ETF will likely continue to show "interest" in the noble metal

  • Russian palladium sales from government stockpiles might be trending towards a "winding down."

  • Russia may have sold as much as 800,000 ounces of palladium to the market last year.

In a nutshell, here is a precious metal that, unlike gold and silver, and unlike its cousin — platinum — is in a position of fundamentals-related strength, has two notoriously unreliable sources of supply (Russia and South Africa), and has a demand base of users (the world’s carmakers) who cannot afford to postpone buying it, cannot resort to convenient substitutions, and must incorporate it into every conveyance they build. Now that kind of amalgamation of market metrics is one that inspires investment confidence.

Labor Department data indicated that the US economy added 244,000 jobs last month; a figure that was much better than economists had anticipated, especially in the wake of the initial jobless claims filings released the other day. However, the general unemployment rate ticked back up to 9% last month. That bump was unexpected. The US dollar remained above 74.25 in the wake of the jobs data. Do remain on watch for continued volatility and for the inevitable "the worst is behind us" proclamations that are sure to come. If only one could be sure of anything, at any given time. Postcards from Fiji might follow.

Have a nice weekend and hope to see you at the Hard Assets Show in NYC, even if certain assets are somewhat less "hard" than one week ago. Bring a friend, or two. Our team of Kitconians will be there to greet you.

PS- Due to travel and to the show commitments, a commentary or two might not appear in the usual place during the early part of the week. For that, we apologize in advance. Thus we say: "Until next time,"

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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