Tuesday Kitcommentary – “Just Curious, George…”

by Jon Nadler, Kitco Metals Inc. on May 17, 2011 · 0 comments

Bullion BarsTuesday Kitcommentary from Kitco Metals Inc. – "Just Curious, George…"

Tentative rebounds in precious metals took place during the overnight hours as a bit of dollar softness brought out a few bargain hunters in the physical markets. Talk that a Portuguese bailout had been endorsed by European finance officials and that Greece might be offered some type of "soft" restructuring deal bolstered a few additional bids in gold but the yellow metal was as yet unable to firmly reestablish itself above the $1,500 mark. Following the past two weeks of aggressive selling, questions continue to swirl around in the market regarding where prices might be headed next, and why.

For the moment, this morning anyway, prices headed a tad higher in the complex. Spot gold started the New York trading session with a 50 cent-to-$1 gain and a quote on the bid-side at $1,491.00 per ounce. Silver traded at $33.91 the ounce, showing an 18-cent rise in value. Platinum rose $13 to open at $1,766.00 while palladium showed the morning’s best percentage gain, rising $5 to the $714.00 per ounce mark.

"Playing" conditions appeared less than comfortable for any aggressive betting however, as crude oil continued to manifest on-going weakness (at just above the $97 per barrel level) and the US dollar remained near seven-week highs in and around the 75.6 value peg on the trade-weighted index. Reflecting precisely just such tentative conditions, gold spot slipped into negative territory (losing $15 to $1,475 the ounce) within the first twenty minutes of trading action. Whether or not the poor April US housing starts figure was to blame, or whether it was the shrinking confidence in the global economy by business managers, the net results were the same; risk appetite took a hit, and with it, so did gold and silver as well as crude oil (by the most in percentage terms).

But, wait, there’s more. More, as in: there is a possibility of some sizeable gains to come in gold and silver if certain patterns of historic market behavior still hold true. Elliott Wave analysis disseminated late on Monday indicates a potential short-term "pop" in coming days; one that might carry the yellow metal to somewhere near to the $1,540- $1,545 area. That said, the larger trend that EW sees still points lower and it offers the probability that most "surprises" could be to the downside. This, despite headlines (such as a very recent one in the Wall Street Journal) that conclude that albeit "silver may be "done" gold will continue to gain, so do not worry."

As for silver, the EW team notes that wave analysis offers a realistic chance of the white metal also "popping" to higher ground; perhaps as high a ground as the $39-$43 price channel. This, as prices have already retraced 50% of their entire rally from the $14.63 per ounce low seen in February of 2010. Were silver to break the $32.30 low recently touched, well, it might then show further weakness in coming sessions. The white metal remains a danger-laden minefield for the longs or the shorts as the turbulence that started on May Day pretty much lives up to conditions that often elicit that famous aviation distress call. At any rate, no one is quite clear on where things are headed next in this niche.

There is no absence of hindsight on display these days however. To be fair, the hindsight was on offer from a source that also offered foresight in retrospect. After noting that silver’s "purchasing power" has fallen by 30% or more in two weeks, Minyanville quantitative analyst James Debevec has applied the "bear market" label to the white metal. No "correction" this, concludes Mr. Debevec.

His math adds up as follows: after a 435% rise over 628 trading days — a feat that has occurred 56 time since 1920- silver stands to lose a potential 85.84% in value (which is what happened in all 56 instances since 1920) and might fall to $6.86 per ounce. Then again, the "quant" author also noted that gold (as of March 29) was at its most overvalued annual average price since…1791 to be exact. He called the inflation-adjusted price of gold "a valuation technique that remains one of the more brilliant carnival-barker efforts in the annals of Wall Street."

On April 12, some three weeks prior to the carnage in the silver market, Mr. Debevec observed that silver became the most overpriced it had been since…1712. It had outperformed gold by the most in 299 years. To make matters "worse" a previous Debevec study (April 7) suggested that "prudent value investors should wait eight to thirteen years before making a long-term commitment in silver." Now 2034 is…a long way down the road, you know. Besides, will most folks not load up heavily on the shiny white stuff just before December of 2012 as they did before Y2K? That pesky Mayan calendar still looms large… no?

The one thing that is however becoming a tad clearer with each passing day is that certain fund managers decided at the end of last quarter — well before we were witnesses to the bold headlines of $1,575+ gold and $50+ silver — that booking profits ahead of the rest of the crowd was quite the wise thing to do, even if being early was eventually going to be questioned by others. In other words, when George Soros declared in January that gold was the "ultimate bubble" it turns out that he may well have been saying precisely that; that the yellow metal was already in a bubble, and/or that it had come to represent the last bubble in a long series of same.

Thus, we now learn that the Soros Fund Management LLC "let go" of no less than $648 million of its gold ETF (some 13.5 tonnes) holdings (that would be 99% of Mr. Soros’ gold positions) by the time March 31 rolled around, and that the Touradji Capital Management fund unloaded the entirety of its 173,000 shares of its gold ETF shares within that same timeframe. The other familiar name that also cut its gold ETF holdings (by a not insignificant 48%) during Q1 was Mr. Mindich’s Eton Park Capital Management LP. There has been no change in the gold holdings of Paulson & Co. for that reporting period, albeit everyone is quite curious as to what that fund may or may not have done, or be doing, in the current quarter.

Curiously, the fund-related market and news talk that had heavily extolled the purchases of gold in recent years by the aforementioned financial figureheads as a sure sign that mega-rallies were in the making, have not shifted very much in tone and are now "explaining" the sizeable gold liquidations as mere "logical profit-taking" and even expect some of these firms to reestablish positions at some future time. In no way is there any overt sense that such departures from the gold niche might possibly mean the end of one cycle, or the possible beginning of a… different one. Label to be applied later, but in any case, well before 2034…

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

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