In The Lead – Another Bubble; That of Egos

by Jon Nadler, Kitco Metals Inc. on October 21, 2011 · 0 comments

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Precious Metals CommentaryFollowing a string of losses that has extended over four trading sessions, gold prices tried to stabilize in the $1,630s overnight as a modicum of optimism over Europe’s debt crisis resolution emboldened a few buyers to pick up some bullion. Still, the week that was will likely be tallied as gold’s worst in one month as the yellow metal’s value eroded by over 3%.

Most trading surveys taken a week ago envisioned a higher gold price for this past week and traders were noted to be at their most bullish since the big price rout took place in September. However, hectic conditions in Europe, equity market turbulence, and fund redemptions kept gold in check despite the calendar showing only one week to go prior to Indian festival time.

Meanwhile, highly elevated gold prices are still making life quite difficult for the largest traditional demand sector for gold; that of jewellery fabrication. The trade has had to resort to alloys employing cheaper metals in order to keep buyers remotely interested in acquiring baubles. Bronze, titanium, palladium, silver, and other less costly metals are being blended into current designs and artists as well as retailers have had to get quite "creative" in order to lure the public into showrooms in recent years.

Once again, palladium appears to be benefiting the most from the above-mentioned market trends. The noble metal is becoming a good substitution candidate for both gold and platinum.

As the San Francisco Chronicle reports, "While gold is being displaced by bronze, platinum may be replaced by palladium, a white-colored metal in the same family that sells for about 40 percent of the price. The metal, which also is used in automobiles’ catalytic converters, has seen its price drop by more than a third since 2000.

"Palladium is appealing because aside from being cheaper than gold or platinum, it doesn’t tarnish like bronze or silver, said Brooke Brinkman, spokeswoman for Palladium Alliance International. The group is funding an ad campaign for the metal that features former “Baywatch” star Pamela Anderson and fashion designer Kelly Osbourne touting palladium."

Spot gold dealings opened the Friday session with a gain of $18 at $1,639 on the bid-side as sizeable, optimism-driven rallies lifted copper and oil in neighboring trading pits. Gold’s 1.1% gain was hardly a match for the near-5% pop in copper and was quite some distance from the 4.4% lift that palladium benefited from this morning. In the background, crude oil traded $1.13 higher at $87.20 while the greenback fell 0.14 on the trade-weighted index as the euro once again managed to claw its way above the $1.38 pivot point it has been orbiting around during the week.

Silver advanced 51 cents to open at $31.09 the ounce as the mood in the industrial metals’ space showed marked amelioration. Platinum climbed $12 to the $1,503 mark and palladium was $28 higher at $612 per troy ounce. Switzerland was, once again, a net exporter of platinum in the latest reporting period September). For the fourth month in a row exporting continued and the country shipped nearly 16,000 ounces of the noble metal out last month. The situation was similar with regard to palladium; Switzerland shipped more of the metal out than it imported (308K ounces). Standard Bank (SA) metals analysts continue to perceive "value" in platinum and palladium at under $1,600 and $600, respectively.

This morning’s mood among investors was elevated by reports that France and Germany are in fact drawing closer to an agreement on European debt. Albeit nobody expects the situation to be fully remedied over the weekend the hope is that some kind of looking-forward statement might be made as to how and when to take the necessary steps to tackle the nagging issues facing the 17 nations which use the common currency.

In that sense, Sunday’s summit weighs heavily on investors’ minds. Most of them have been showing a good deal of disorientation and hesitation all week as the ebb and flow of good news/ bad news kept them on their nervous little toes.

As the Financial Times remarks, "Appetite [or lack thereof] for risk has been the main market driver for some weeks as investors have eagerly awaited the outcome of this weekend’s summit of European Union leaders. Expectations for a definitive solution to the region’s debt and banking crisis have faded in recent sessions and the euro and other riskier currency trades came under further pressure on Thursday."

Today, of course, a dose of the opposite sentiment was manifest.

Sentiment of a… different type was relayed by celebrated fund manager John Paulson as he held his call to investors ahead of the October 31 redemption deadline date. Yesterday, Mr. Paulson spoke to investors at the Pierre Hotel in NYC. Albeit the event was off-limits to the media and those in attendance were asked to keep mum about what they heard, one thing did leak out of the closed-door session; the fact that Mr. Paulson said he loses sleep over the poor performance his funds have turned in (specifically his Advantage Plus fund — down by 47% through last month’s end).

2011 is turning out to be a not-so-smooth one for making money hand over fist, evidently. Some of the biggest names in the business have been implicated in headline-making losses as the ill-timed or ill-placed bets they have made are coming to roost. Aside from Mr. John "Greatest Trade Ever" Paulson, names like Bill Gross have also shown that they are… human. "Mea Culpa" speeches are being heard left and right as angry investors seek answers they are not likely to get and not at all likely to like once they hear them.

Consider the above, the next time you are tempted to go "all-in" on a bet that your favorite newsletter vendor or stock picker proposes. Consider the above when you are categorically assured of that $8,000 per ounce gold price being in the works. Macro-sized bets are usually more indicative of… macro-sized egos and not a whole lot more, it turns out. Generally, that means macro-sized losses, sooner or later.

Professor Meir Statman of Santa Clara University says that men like Gross and Paulson make huge bets because they are uber-confident and hubris-driven. That’s your warning signal. "People who are entrepreneurs and money managers… tend to be overconfident in their abilities. When they fail… you generally don’t know about it," notes Prof. Statman.

He also believes that "even fund managers with great track records are living on borrowed time. "They have skill and they have luck. There are some periods when luck combines with skill and they wind up looking infallible." That’s usually around when they crash and burn. I find myself amazed that those people, knowing what they should know — that most of it is luck — can go on TV and say the market is going to go up or go down. It is supreme overconfidence. Anybody, no matter how good their track record, who tries to outguess the markets in a shaky economy like this one, is asking for trouble."

We leave you now with the wisdom of the good Professor to ponder over the weekend:

"People expect that gurus are going to be right all the time. They jump from guru to guru, but there are no gurus."

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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