In The Lead – Leftovers

by Jon Nadler, Kitco Metals Inc. on November 25, 2011 · 1 comment

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Precious Metals CommentaryGold was seen heading for its second weekly decline this morning as the European crisis rolled on and showed no mercy to certain countries’ ratings (Portugal, Hungary both cut to ‘junk’ status) or to the common currency (it fell to under $1.33). The US dollar received a fresh influx of scared money and it vaulted towards the 79.50 mark on the trade-weighted index. Investors remained fixated on Europe in the wake of a poor debt auction by Germany the other day and a ‘disastrous’ one by Italy.

Thus far, no one has come up with the "seven percent (warning yield level) solution" and Chancellor Merkel was once again heard coming out against the floated idea of a eurobond. "Team Merkozy" plus newly-installed Italian PM Mario Monti met yesterday in Strasbourg but did not take the euro turkey out of the pressure cooker it finds itself in, letting it stew some more, and then offered the market only… leftovers; warmed-over words of optimism and a regurgitation of the stance that the ECB will not be pressured into heaping out helpings of printed stuffing to assuage certain would-be risk-hungry speculators.

The euro-saga thus continues and it is making for a weak commodities’ space as market participants are trying to cope with the liquidity crunch and are not exhibiting much of an appetite for anything risk-laden. What they are doing is to stay on the sidelines and observe the unfolding story whilst hoping that a replay of 2008 does not fully materialize at this stage. We say ‘fully’ because it should be fairly obvious that at least a partial repeating of that year’s pattern has already been painfully noted in certain sectors.

Spot gold dealings opened the final session of this abbreviated trading week with a loss of $16 per ounce and the yellow metal was quoted at $1,679 per ounce on the bid-side. Overnight lows came in at the $1,671 mark which was, itself, only some six dollars per ounce above the most recent low. Standard Bank analysts noted in their daily missive that ‘despite the price fall in gold this morning, we still haven’t seen any significant physical demand coming through."

The 200-day moving average (at the $1,600 level) is seen as a potential target for current sellers and the ‘much weaker than it was six weeks ago’ level of physical demand is not providing desired support at this time. Once again, as was the case prior to last week gold traders are exhibiting unbridled bullishness vis a vis gold as manifested in the record pile present in ETFs and in the once again rising net long speculative market positions.

This is all taking place even as Credit Agricole analyst Robin Bhar observed that "gold is under-performing as investors are more concerned about return of capital rather than the return on capital, a situation last seen during the great financial crisis of 2008-2009." Not only is the yellow metal under-performing but the sector it is intrinsically linked to- that of mining shares- continues to bleed heavily.

Miners have fallen some 16% this year puzzling the throngs who had been promised ‘to da moon, Shirley!’ performance when and if gold vaulted to new highs. It did. Twice. The mining shares: absent.

The miners headed towards the pit. The excuses now being offered are not worth the time it takes to print them here.

Market analyst Michael Gayed, referring to crude oil versus equities of late, remarks that"every disconnect must be resolved in some way, shape, or form — so long as you’re willing yourself to be confused and ultimately take a stand on which market is right."

In the case of oil, it shows signs that the ‘fear premium’ that brought it to the century mark recently is starting to dissipate. In the case of gold…

Some are also pointing to recent central bank purchases as the best validation for more good times to come in the gold space. Bloomberg news however points out that such purchases may in fact serve as a warning sign.

"Prices rose to a then-record $850 in 1980 as central banks bought gold, only to drop for most of the next 20 years. Bullion tripled from 1999 to the beginning of 2008 as the [central] banks sold more than 4,000 tons."

Meanwhile, commodities overall are headed for their most feeble annual performance since the fateful year of 2008.

Silver dropped 67 cents at this morning’s opening bell and it was quoted at $31.20 per ounce. The white metal has been on a stair-step declining pattern and following its recent brush with the $33.09 per ounce level it is expected by some technically oriented observers to be headed towards the September lows near the $26 mark as a first rest-stop on the way to a range of from $19.50 to $21.50 potentially.

Platinum declined $8 to touch $1,529 per ounce and palladium fell $5 to reach the $571 per ounce mark.

The aforementioned Standard Bank analytical team notes that "from a cost-of-production perspective, platinum is good value at current levels below $1,550. The same is true for palladium at present levels. However, continued weakness in the ZAR (now at around ZAR8.50 to the dollar) might undermine platinum and palladium support, which we currently see at around $1,500 and $600 respectively."

Two news bits from Asia to ponder: Japan remains mired in deflation and China’s banks are a possible house of cards. Reuters reports that Japanese consumer prices fell for the first time in four months in November as weak aggregate demand and the strong yen bit into exports. The BoJ remains unhappy about the yen’s too-strong paradigm and it has put ‘feelers’ out among global central banks to learn whether they would be willing to assist it in a potential future ‘raid’ on the currency.

Meanwhile, in neighboring China, owing to the fact that lenders do not possess sufficient amounts of capital to mitigate sour or about-to-sour loans, the situation is "extremely fragile." Those were the words being used by Kynikos Associates Ltd. President and founder Jim Chanos.

Specifically, Mr. Chanos said that "The Chinese banking system is built on quicksand and that’s the one thing a lot of people don’t realize," said Chanos, who is shorting the shares of Agricultural Bank of China. "Everybody seems to think it is a free and clear open checkbook. It’s not. The banking system in China is extremely fragile."

That should raise quite a few eyebrows out there…

Something else that has already raised a few sets of the same, were the words of Nobel prize laureate Prof. Nouriel "Doom" Roubini uttered the other day. The NYU professor took on the author of "Currency Wars" James Rickards who argues that returning to the gold standard would de facto be a panacea for what currently ails the world and the US economy. Dr. Roubini called the calls for such a turning back of the clocks as a "theology" and dismissed their sources as "lunatics and hacks" who cannot see that being on the gold standard was — at the time-one of the principal reasons for the US having experienced the Great Depression.

Does that mean that Dr. "Doom" is enamored with the US dollar or that he is somehow — by default — "anti-gold?" No, it does not automatically follow.

He in fact notes that "People may complain as far as they want about the U.S. dollar, but the reality is that actually when there is risk aversion, when there is tail risk, when we have trouble like today, people dump the euro, people dump emerging markets and go to the safety of the U.S. dollar and U.S. Treasuries because it’s the tallest small midget in the room."

It would be well worth your time to view the embedded video clip in the above-linked article; it is sobering, to say the least. Gold can be, and is, many wonderful things (core insurance among them) but a "cure-all" it most certainly is not.

Have a pleasant weekend. Do hope to catch some of you at the Hard Assets Conference in beautiful San Francisco on Sunday and Monday. Stop by the Kitco booth and see if we have any Ghirardelli chocos left over for you. Shameless self-promo follows: We will have a workshop on platinum group metals and a stage presentation about… silver.

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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{ 1 comment… read it below or add one }

RonnieBGood November 25, 2011 at 6:29 pm

All the talk of a European Debt Crisis. How soon will the US be in the conversation? We are held up by China’s purchasing of US Treasury bonds. And now we send troops to Australia? Keep a healthy investment in Gold and Silver while there is a break in price!

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