In The Lead – Go Tell The Spartans: We Don’t Buy in Dubai

by Jon Nadler, Kitco Metals Inc. on October 3, 2011 · 0 comments

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Precious Metals CommentaryFollowing its worst monthly performance in three years, gold enjoyed a successful attempt at starting the new one off on the right foot this morning. In various gold-oriented forums the "all-clear" signal has already been sounded and the declaration that the bottom (and a "V" shaped one, at that) has been put into place is plainly visible and audible.

However, reflecting the recent, four-week-long meltdown in prices, UBS analysts reduced their spot gold projected prices for the 3 and the 1-month average by 7.1 and by 9 percent respectively.

The UBS-projected one-month gold price average is now expected to remain near $1,775 the ounce. For silver, the reduction in expected prices is much larger; 30.4% off the previous estimate and a $32 average price. Managed money slashed its net-long positions in gold futures and options by 19% in the CFTC reporting week that concluded on the 27th of September.

Friday evening EW analysis tendered the opinion that "The trip back to the bottom of the trend channel and the target line at $1,038 will probably be a fast one. The wave 4 of (5) low near $1,300 may be a first stop. A rise above the $1669.70 high may constitute some further jockeying with the upper trend channel line before the sell-off commences full force. It’s not uncommon for these lines to be re-examined [revisited] before prices reverse full bore. But $1688-$1743 should serve as resistance to any further upside."

Spot metals dealings opened October’s first trading session with gains in gold and in silver but with declines in platinum and palladium. The yellow metal picked up $36.50 on the open and it traded at the $1,661 mark per ounce on the bid-side. Opening gains turned more moderate in the first hour of action and bullion traded nearer the $1,650 area while silver halved its $1.30 starting advance.

Despite fervent PR attempts to minimize the overall situation in metals, the reality is that both gold and PGM oriented ETFs did witness net outflows in the month that just passed. And, despite equally fervent efforts to spin certain regional gold sales trends, the reality is that –Indian festival season coming up notwithstanding- at least the UAE region has some problems with selling gold like it once used to.

The World Gold Council shuttered its UAE office earlier this year, in a ‘review of operations.’ Local and London traders on the other hand, have attributed the closure to the difficulties gold producers have encountered in selling baubles to folks in an area that normally comprises as much as 17% of the world’s bullion trade and as much as 5% of its global demand.

The culprit appears to be… $1900 gold, and not much else. The region’s jewelers have been advised to "catch up with changes in the market." One might as well read that as turning to lower carat offerings, hollowing out decorative pieces, using cheaper alloys in their designs, and so on. Would-be gold customers in Abu Dhabi and in Dubai have been seen switching to ‘poor man’s gold’ in the wake of stratospheric gold price tags.

The white metal had opened $1.30 per ounce higher this morning, quoted at $31.27 the ounce. At 9:10 New York time the gain was 53 cents and the quoted bid was $30.50 per ounce. Silver suffered its worst cave-in since 1980 by shedding 28% in value on the Comex. Copper got clobbered to the tune of 14% and finished the month with a ‘performance’ not seen since October of 2008. Let’s not mention crude oil.

Platinum dropped $7 on the open and later fell harder, losing as much as $26 to trade under the $1,500 bid level per ounce. Palladium also declined; it lost $6 initially and $16 subsequently, trading at $595 the ounce. Robust and better than forecasted GM and Chrysler US car sales (Chrysler reported a 27% gain in September sales) did little to bolster sentiment among traders of the noble metals. CFTC-reported speculative positioning in the platinum and palladium space points to continued short-term bearishness and expectations of price weakness in the near-term; both based on developments such as the one reported in the following paragraph:

Signs that Europe’s economy is contracting rocked the commodities’ sector this morning and such signs translated into apprehensions that led to selling in copper, oil, and certain other metals. The S&P’s GCSI Spot Index tumbled to its lowest levels since last December and the materials’ complex extended its worst drop since 2008 as traders warily eyed the eurozone purchasing managers’ gauge dropping to 48.5 (from 49 in August) and indicating shrinkage in activity.

That kind of signal was not on offer in the September metrics of similar activity in the US however. A surprise rise in the ISM (to 51.6) last month was in large part due to the on-going recovery in auto production and sales and it makes some economists a bit less concerned about the imminence of a full-on stall in the US economy as of this juncture.

Gold and silver received an overdue lift on Monday primarily on the back of perceptions that Greece was headed for budgetary trouble despite austerity measures that would make Spartans envious, were they around to witness them today. Demonstrating once again that the Greek crisis has more layers than a freshly-baked batch of filo dough, the situation took a turn for the worse with the announcement by the country’s government that it most likely will not meet its 2011 deficit target. In order to try to appease its trio of creditors (the EU, ECB, and IMF) the Greek cabinet approved the implementation of another $8.8 billion in belt-tightening.

However, as we recently ascertained, that which this morning compelled global investors to seek safe-haven refuge in gold or silver is also the factor that has of late tended to boost the US dollar and wreak havoc in the equity markets. Such developments have a way of catching up with precious metals and the outcome is familiar to anyone who took a close look at September’s market gyrations in gold and silver. The dollar, for one, advanced to above the 79-mark this morning on the trade-weighted index, while the euro slid to an eight-month low against it on the aforementioned Greek gloom.

Don’t look now, but "dollar days" in September were not just being held at your nearest big-box store at the mall. The "soon-dead-and-gone" greenback beat stocks, commodities and bonds last month, for the first time since May. Its six percent gain on the month stood in stark contrast to the near-or-larger-than double-digit declines that stock and commodity indices suffered.

Rubbing salt into various dollar-morticians’ gaping wounds, the dollar’s climb came shortly on the heels of a much-talked-about (and putatively lethal) downgrade of US ratings by S&P. One currency strategist at Barclays Capital summed the September dollar rally up as follows:

In a time of crisis you want to be holding the most liquid currency out there. It waters down the argument for "the end of the dollar as a reserve currency."

Some, such as Toronto-based First Asset Management’s John Stephenson went one step further and opined that the "dollar is safer than gold at the moment."

Meanwhile, over in Washington, the bipartisan debt committee that is being tasked with finding ways to cut the USA’s deficit has plenty of plans to choose from as they meet to tackle the problem. No fewer than 32 plans, to be precise. They range from suggestions coming from the far, far left, to the extreme right. Some recurring themes: increasing the age of retirement, comprehensive tax reform (yes, including higher taxes on the rich), reductions in defense outlays, and shared burdens when it comes to Medicare.

The trouble, for the moment, appears to be the fact that there is too little in the way of middle-ground proposals to make for a majority decision for such a committee. Polarization in views and in approaches has been the hallmark of American politics since, circa the post-Katrina days and it seem to be rolling on unabated. A recent comment from a concerned citizen underscores the essence of where the Democratic and GOP factions stand as America approaches the time it must reckon with its yawning budget gap:

"When compromise and goodwill is [sic] readily dismissed, when hardened ideologies give life to conspiracy theories and unsubstantiated accusations, when debate and conversation is [sic] riddled with personal attacks instead of genuine rebuttal, we are no longer working toward a better future."

Now if only those words could possibly resonate with those in charge of finding solutions…

PS- Speaking of budget problems, IMF head Ms. Lagarde said last week that her organization will need to ‘extend’ its $400 billion ‘war chest’ in the wake of the global debt crisis, after its funding tripled. Whether or not the quest for more money brings any part of the IMF’s stash of gold into possible play, remains to be seen…

Until tomorrow,

Jon Nadler
Senior Metals Analyst — Kitco Metals

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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