In The Lead – …And Whispered in The Sounds of Silence…

by Jon Nadler, Kitco Metals Inc. on December 14, 2011 · 0 comments

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Precious Metals CommentaryThe price washout in precious metals intensified in the wake of the Fed’s failure to please the markets with more stimulative action. The disappointment was palpable and when combined with the on-going angst surrounding the European debt debacle, the sentiment resulted in fresh two-month lows for gold and significant breaches of long-standing moving averages. The domino theory in action here, and now. Curiously, the one domino that was supposed to be ‘toast’ by now — the USD — is not only standing, but it is taking out the 80.50 (!) level on the index. Hmmm.

The yellow metal fell to fresh lows right at, and then well under the 200-day moving average price of $1,619 per ounce in increasingly scary dealings this morning. Such an occurrence normally ushers in what Mr. Gartman referred to as a ‘bear market’ just yesterday. Do take not of one thing, if you take note of anything this morning: Gold has not broken its 200 DMA since 2009. Until now, that is. Roughly $100+ has been stripped from gold’s price tag in but a small handful of trading sessions. Now, the $1,600 psychological price marker is clearly in play, followed by…(insert your favorite ‘must-not-break’ number here).

At the same time, the 144-day MA was pierced overnight amid heavy liquidations and a hint of panic. Spot silver broke well below the $30 mark and dropped to lows near $29.65 the ounce while the euro also penetrated a notable psychological pivot point at $1.30 against the greenback. That pivot point was last touched eleven (!) months ago, for perspective. Analysts have now allowed for the common currency to possibly touch $1.20 amid skepticism that the fix that Europe needs can be achieved any time soon, or properly. Italian bond yields set a fresh record today at 6.47%. What a $1.20 euro might mean for bullion values, well, that remains to be seen…

Meanwhile, yesterday’s ‘bull alarm" that was rung by economist Dennis Gartman (see our coverage in yesterday’s article) prompted swift ‘damage control’ type of critical statements (mainly from worried bullion dealers) about the man’s ‘track record.’ A classic case of ‘shoot the messenger first, then ask questions later.’ The propaganda in the gold space has shown to be louder and more powerful than the "force" in Star Wars, all year long.

To wit: you have been repeatedly told that India is consuming gold faster than a shark eats fingerlings at a feeding frenzy, price be damned. Reality check time:

“Imports by India, the world’s largest gold consumer, may decline as much as 16 percent from a record as the rupee’s plunge to an all-time low boosts local prices, according to the Bombay Bullion Association. Purchases may fall as low as 800 tons this year from 958 tons in 2010, Prithviraj Kothari, the group’s president, said yesterday.”

Reconcile that bit of news with the promises made by newsletter vendors and the World Gold Council. We cannot.

Hindsight is always value-laden, of that there is little doubt. The fact that certain top-callers and sell-signal-issuers were roundly criticized (or worse, dismissed as amateurs) speaks volumes about the euphoria that a decade-long bull market can induce in the trend-following crowds out there. Market observer Nigam Arora, writing on Marketwatch this morning, remarks that "reading the sell signal [in gold’ at $1,757 could not have been easier." The morning of December 8 as it now turns out, was a fateful time indeed. However, right about the same time, we were all inundated with countless pronouncements of the "rocket about to take off" and promises of $2,050 (precisely!) gold in virtually no time at all.

New York spot metals dealings opened with assorted losses as the technical damage intensified and the psychological damage aggravated some more. Gold market players saw bullion opening near $1,625 and struggling to avoid a repeat of the previous two sessions’ 2%+ cave-ins. Silver traded nearly two bucks lower and was seen as trying to desperately hang on to values at anything near $30 (more like $29) as more longs started to throw their respective towels in. Platinum and palladium did not escape the damage resulting from the widespread selling and fell $45 and $38 respectively, to touch $1,427 and $604 per ounce in turn. Copper lost 3.2% while crude oil slid 2.8% amid the massive rout developing in the commodities’ space.

At least part of what we saw this morning unfolding in the commodities’ space is due to the realization (finally) that China is slowing, and, that, as China goes, so do the prices of "stuff." A leading Chinese leading economic metric experienced a decline in October and it highlighted the increasing risk of a larger-than-desirable contraction in that country’s economic activity levels. We have, for months now, tried to bring you stories replete with warnings that such a slowing in the world’s second largest economy will not go ‘unnoticed’ in the world of commodities. It has not.

Intrepid Wall Street Journal / Dow Jones reporter Liam Pleven asked this question of his readers yesterday: "You want to know where the global commodities markets are heading in the coming years?" He answered it with: "Then it’s probably best that you remember a single word: China." Investors have, for years, been hypnotized by various pundits who claimed that the appetites of Chin-dia for commodities are virtually insatiable and will never experience a contraction. Well, so much for that shoddily-built theory. Nothing, it seems, is immune to the basic laws of ‘gravity’ (read: supply and demand).

Mr. Pleven shoots a hole into the ‘non-stop Chinese demand’ paradigm by noting that "Many analysts consider the fast-growth scenario improbable. The consensus is that China is headed for slower economic growth than it experienced from 2001 to 2010, when its annual rate of expansion ranged from 8.3% to 14.2% and reached double digits on a percentage basis six times, according to the World Bank. If the consensus is right, the question becomes how much China’s growth will slow."

Note that it’s not "if" but "how much" that matters here. Such prospects prompted Roubini Global Economics LLC’s director of global resources and commodity strategy, Ms. Shelley Goldberg, to caution that “Obviously, it doesn’t bode well for commodities.”

Another sign that the aforementioned scenario might be underway is to be found in the latest money-supply figures emanating from China. Not only did lending activity experience a slowing last month, but the country’s supply of currency expanded at the lowest pace in ten year. To be fair, China’s leaders did target inflation as ‘public enemy No.1" for most of this year. It turns out that they might have managed to do a bit more than just stop the inflation dragon in its fiery tracks, at this juncture. To be continued…

We leave you today with the wisdom of one Brett Korsgaard — Seeking Alpha contributor, journalist, and founder of Koa Capital Management. There is much to be gleaned from Brett’s analysis on the yellow metal, even if some of what he tried to remind us of should have been constantly on one’s personal radar throughout the past decade. Warning! The word ‘manipulation’ makes an appearance in a Nadler article. Not for the squeamish, that. Mind you, it is a wholly different kind of ‘manipulation’ than what you are normally sold at the conspiracy forum around the corner. Take it away, Brett:

"There is a store of value in most any hard asset, but the price paid does have a bearing on the potential for retention of value. Gold has a store of value at $300 an ounce, $800 an ounce or $22000 an ounce. But is that store of value a moving target not exempt from manipulations by hedge funds and the madness of crowds? For those who think equities are manipulated on Wall Street I have a surprise for you: so is gold.

With the advent of exchange traded funds such as GLD (Spider Gold Shares) and IAU (iShares Gold Trust), gold as a securitized asset has been unleashed to all manner of manipulations. Just like Wall Street got a hold of your friendly neighborhood home through the sale of CDO’s and the juicing of the credit bubble, they can and are getting a hold of commodities and precious metals. Unfortunately, when manipulation comes into play what comes up usually does go down.

What I have learned in my investing career is this: when the general public gets enamored of something, and when the masses are bombarded with ads extolling the virtues of gold, real estate, or stocks, that is generally a fair warning that it is time to give that asset class a miss. Better yet, time to sell and move capital to areas that better represent that proverbial "store of value". This point seems to be lost on hardened gold bugs who are likely to see gold’s parabolic rise and fall and be harrumphing the same platitudes that they were during gold’s twenty year slumber while most other assets appreciated."

Learn and live.

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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