In The Lead – A New (G)old Standard? It’s…Academic

by Jon Nadler, Kitco Metals Inc. on August 24, 2011 · 0 comments

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Bullion BarsGold prices fell by the most in a year-and-a-half on Tuesday as the quest for safe-haven turned into a quest for securing profits and being the first one out from an apparently extremely overbought market. RSI metrics had been above the 70-mark for more than two weeks while gold vaulted 14% during the very month that is normally price-unfriendly.

However, yesterday, the yellow metal at one point came within just $5 of recording a full $100 drop from the most recent high water mark it achieved just hours prior to yesterday’s rout (1,917 versus 1,822).

This morning’s market action showed that some initial attempts were in progress to stabilize the situation somewhat. Spot gold dealings opened with a gain of 1.04% in New York and the yellow metal was quoted at $1,848 per ounce on the bid-side. Overnight, the Shanghai Gold Exchange raised its own gold trading margin requirements for the second time this year, in the wake of recent wild and woolly price action in the metal. The CME already enacted a similar hike just recently.

Silver, on the other hand largely refused to rise with the Wednesday tide in gold, adding only 16 cents at the open and hovering right around the $42 pivot point. A very large unwind battered the white metal on Tuesday, also just hours after panic gripped retail buyers and they piled into $44+ silver. Today, the poor man’s gold threatens to head towards $40… In the background, the US dollar continued flat at just under the 74.00 mark on the trade-weighted index. Jackson Hole "momentary paralysis" is alive and well.

This morning’s feeble gains did not show much longevity however; silver headed into the red (by almost 85 cents) shortly after the market’s opening bell and led the apparently re-emerging selling patterns in the complex. Gold fell to fresh lows at under the $1,805.00 area, bringing the holding of the psychological support thought to reside at the $1,800.00 mark onto trading radars. Futures prices actually did dip beneath that figure at last check. News on the US economic front showed a surprise 4% jump in July durable goods orders and an also surprising gain of 0.9% in housing values. The Dow reacted with… a non-reaction of a 38-point climb. Jackson Hole… etc.

Platinum and palladium showed a similarly more muted recovery in values as the midweek session got underway; their gains were ranging from $2 in palladium (to $760.00 the ounce) up to $5 in platinum (to the $1,868.00 level). Rhodium remained unchanged at the offered quote of $1,975.00 per ounce. Carmaker Toyota is rebounding from the devastating Sendai quake in March with a virtual blitz of new models aimed at the US market. The redesigned Camry (on and off, the best-selling car in the USA) is slated to kick the automakers revitalized assault on the American car shopper’s list of priorities.

Some of the current questions being posed among bullion traders center not on whether gold will find some more solid floor of support, but at what value marker down the road they might do so. Estimates range from yesterday’s lows near $1,825, to $1,725 and down to $1,680.00 an ounce. Expectations of an average quarterly price of $1,600 as at the end of this year were made public by National Australia Bank yesterday.

The institution noted that "recent economic events should help to maintain the price of gold at an elevated level until uncertainty begins to dissipate and investor demand for gold unwinds.”

Looking further down the road, Citi analysts envision gold prices averaging $1,650 next year and $1,500 the year after that.

None of these other projections stopped Darrell Cronk, SVP at Wells Fargo from restating the investment bank’s position whereby it can "confidently state that interest in gold investing has reached the level of a speculative bubble." To wit, the level of demand that investment has come to account for in the gold market has recently risen to 39% from the mere 4% it amounted to, in the year 2000, according to Citigroup-sourced statistics.

The bank’s analysts recently noted that "this very aspect that provided support for gold over this time [period] may result in its downfall going forward. Even a slowdown-let alone a decline- in net investment can have a materially negative impact on the gold price from current levels."

We have repeatedly noted here that the market has become a complete addict to but one category of offtake; that of investment.

Just a couple of days ago, the SPDR Gold Trust’s (GLD) asset values overtook those of the S&P 500 SPDR — a development characterized as "senseless" and one that can happen only after "periods of euphoric rises" by economist Dennis Gartman. WFC’s Mr. Cronk also observes (with growing) wariness that some investors are over-allocating assets to gold at rates some 2 to 4 times higher than the conventionally advisable 10 percent.

Meanwhile, the traditional pillar of gold’s demand — that which comes from jewellery fabrication- is still relatively flat on its back after having scraped along at 23+ year lows for some time now. Without once again delving into the foggy statistics related to actual tonnage demand that we brought you in recent days on the subject of India, it is worth noting that Reuters has found some fresh news on this front.

Reporters who polled the head of that country’s leading gold trade body (the BBA) envisages dampened festival-related gold demand in 2011 (just weeks ahead, literally) if prices remain at or near present levels, but still expects imports to surpass the 1K tonne level. A separate Reuters poll on the estimates for 2011 imports conducted with the largest firms in the business of gold in India yielded to following results:

India Large Firm Gold Imports

The median of 825 tonnes projected is not only not more than 1K tonnes; it is 133 tonnes under what the 2010 import tally was reported as having been- again, if figures ever obtained from India are reliable to a close enough extent to mirror actual, on-the-ground market reality.

Meanwhile, ETF gold holdings in the GLD lost 2% on Tuesday and finished the day with 1,259+ tonnes in balances. On the other hand, the (brave) buyers that made a foray into the turbulent waters of this gold market did so largely on a knee-jerk reaction basis to Japan’s overnight downgrade by Moody’s (still in the… mood to cut, cut, cut) and in anticipation of some display of largesse on the part of the Fed following its Jackson Hole hole-up.

In a video segment recorded with TheStreet.com last week we alluded to the possibility that given current gold values and given the unraveling situation in the Old World, some of the region’s hard-pressed-for-cash central banks might need to "bring" some of their gold to the market, in one form or another. Well, it appears that — at least for one German minister-that scenario is not only not far-fetched, it is possibly called for. The Saudi Press Agency reported last night that German Labour Minister Ursula von der Leyen has called on cash-strapped eurozone member countries to use their gold reserves as collateral for any future bailouts.

Ms. Ursula is the second German lawmaker to call for such measures in recent weeks, reflecting the souring mood of the German electorate as regards the bailing out of the PIIGS. The idea was rejected by Chancellor Merkel at this point. However, Italy, Portugal, and Spain are all among the top 20 central bank-based holders of bullion globally and their funding needs are, shall we say,… dire at the moment.

Some of the above conditions and the recent market developments in gold have also promptly reignited the ever-popular topic of the resumption of some kind of gold standard. Lord Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University notes that bringing back the gold standard is not in the cards (sorry, Mr. Paul). His reasons? Well, A) there isn’t enough gold to do so with B) going back to a pure gold standard would be so deflationary and cause a depression of severe magnitude C) the "anchor" for the world, at the moment, remains the much-maligned US dollar as alternatives to it are invisible. Professor Skidelsky does allow that the possibility of pegging the value of currencies to a basketof commodities could have some merit but that such does not imply a de facto return to the "golden days" after all.

In the interim, please make sure you have a nice day — free of quakes and/or hurricanes, at least in the markets, hopefully…

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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