In The Lead – [Reality] Check, please!

by Jon Nadler, Kitco Metals Inc. on January 4, 2012 · 0 comments

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Precious Metals CommentaryGold’s best rally in ten weeks came to a halt and prices reversed course early this morning as the reality check that most markets were being subjected to by global investors took its toll. The yellow metal slipped back to under the $1,600 pivot point after having run into resistance near the $1,605 level and after thus far having been unable to recapture the important $1,620+ value zone.

Spot dealings in New York this morning opened with gold down by $10 per ounce at the $1,593.50 level while spot silver fell 2.4% or 70 cents to a quote on the bid-side at one penny above the $29 mark.

The latest CFTC reports indicate that speculators have once again cut their exposure to precious metals. Kitco News reports a decline of 4,094 gross long positions and the addition of 1,138 gross short positions in gold which shrinks the net-long position in the metal to 111,919 contracts. A similar shrinkage in long positions was manifest in silver. However, specs increased their exposure to palladium; the metal now has 5,212 net-long contracts in place. Russian state-owned stockpiles of palladium are expected to be exhausted by the end of the current year.

The spy novel industry and gold conspiracy fans will have plenty of new material to deal with now that 20 fake gold kilo bars have been found on a commuter train near Paris. Mind you, ‘fake’ in this case does not mean that there was no gold in these bars. There was, indeed, a thin veneer of yellow metal covering what were otherwise nothing but base metal ingots. Who got duped, or who was about to be duped, remains to be seen at this juncture, but one may soon expect e-mails from some Hon. Barrister X offering to gift them a suitcase full of gold in exchange for simply providing their bank account information…

A few who did get duped last year were certain investors in the mining share space. The underperformance of the sector has been overwhelming. Consider the basic numbers (during a year in which bullion itself rose to record highs, to boot): large cap shares (GDX) lost 17% while exploration firm shares (GLDX) fell 44% on the year. The sector’s fiasco prompted Kitco contributing commentator Jordan Roy-Byrne to… write the truth (an act for which he will promptly be flooded with less-than-kind e-mails):

"The often hyped "juniors" have been a disaster unless you’ve been extremely patient and selective while getting lucky with your timing. The juniors are an excellent tool for speculation and only speculation. They cannot be bought and held. They have to be timed nearly perfectly. Ironically, many advisors who are "doom and gloom" types favor the juniors. Some of these types are super bearish on the USA. They’ve expatriated, waiting for the collapse of the USA while holding juniors. This foolhardy strategy has helped them sell newsletters but hasn’t been too profitable."

As the time for handing out the Oscars fast approaches, we must note the winners of another type of contest. The LBMA normally announces the winners of annual market forecasts. It just did so, and we note with pride and on a congratulatory note that one of the top forecasters of 2011 has turned out to be our good friend Rohit Savant from CPM Group.

Those who frequently malign the excellent research firm and its chief executive, Jeffrey Christian, for its/his sometimes "unorthodox" market views should take note and rethink their position. Perhaps they are simply jealous… Mr. Savant correctly forecast the annual average platinum price ($1,715 versus the actual $1,720) as well as the one for palladium ($730 versus $733.63). Kitco frequently utilizes CPM’s research in the noble metals niche and we congratulate Mr. Savant for his fine soothsaying work. Other winners included UBS’ Edel Tully and Mitsui’s David Jollie.

Platinum dropped $10 to start the midweek session off at $1,419 and palladium slipped $9 to a $655 per ounce bid quote. In the background, the US dollar retook the 80 level on the trade-weighted index (to rise to 80.10) while the euro fell back to under the $1.30 pivot figure. Crude oil gave back $1 of Tuesday’s spectacular gains and it traded at $101.92 per barrel (basis WTI). As we noted above, it was time for a reality check after quite a session of New Years’ financial fireworks yesterday.

It took little more than a bit of a "lukewarm" German bond auction and the resurfacing of European bank-oriented anxieties to bring about the pullback in the markets that we witnessed this morning.

The action prompted CMC Markets analyst Michael Hewson to remark that "Before investors get too carried away it would be prudent to remember markets exhibited similarly positive tendencies 12 months ago in the first trading days after the Christmas and New Year break, and the backdrop then wasn’t as bleak as the one facing markets now."

France comes to market with bonds tomorrow and Spain and Italy will do so next week. Stay tuned. It does not take very much these days to extinguish risk appetite.

And now, it would appear, it is payback time for ill-placed and/or ill-timed 2011 bets. Citigroup’s Singapore unit is suing hedge fund manager Raghavendran Rajaraman to the tune of $1.03 million in trading losses he incurred after gold fell from its $1900+ pinnacle in September. The fund manager’s $19.2 million position was sold in the face of a "rapidly deteriorating market" but it left Citi with a larger than $1 million shortfall. Another fund that took a drubbing (but not of the legal variety) from investors was PIMCO. More than $5 billion in client redemptions were executed in 2011 when the world’s largest mutual fund trailed its competition quite badly after a wrong-way bet on Treasurys.

Speaking of Treasurys, let’s stretch a bit and "talk" Fed. The US central bank has decided to make public its own officials’ rate forecasts as we go forward. This is quite a step in the direction of transparency from an institution that Mr. Paul would like to abolish, in part, due to its putative opacity. Starting this month, the Fed will announce the forecasts for the fed funds rates as opined by its members.

The first such announcement will be made following the January 24-25 meeting of the FOMC. What might be most relevant (for gold bugs) in the upcoming Fed statement however is the fact that it now appears that the US central bank’s officials are set to alter the language regarding ultra-low rates "through mid-2013" towards something else (of a shorter timeframe). Some Fed watchers have already concluded that such a public showing of the Fed’s "hands" might only add to the confusion in the markets as it might reveal just how splintered the hawks and the doves within it are. Stay tuned for that, as well…

Finally, speaking of rates and such, we note that the speculation about a possible Chinese cut (in either bank reserve requirements of key rates) has flared up once again. The culprit? Falling home prices across the country. Home values have declined in 60 out of 100 cities that are being tracked by SouFun Holdings Ltd. (sort of the Zillow of China).

Others have expressed some doubts about where property values in China are headed by saying that "It’s actually very hard to tell whether China’s property market will succeed a soft landing."

The contraction in this all-important sector is prompting the speculation that the PBOC will do something to try to avert a runway incident that could take parts of the country’s economy down with it. Meanwhile, CTV have quite a different take to offer on the state of the US housing market. You know, the one that has already undergone what we are now starting to see in China…

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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