In The Lead – Ben Rattles Ron’s Gilded Cage

by Jon Nadler, Kitco Metals Inc. on March 21, 2012 · 1 comment

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Precious Metals CommentaryGold prices fell towards the $1,645 level at the opening of the midweek session in New York as the US dollar climbed slightly on the trade-weighted index (it was last quoted at 79.70).

The initial action was rather subdued but, after yesterday’s additional 1% decline in values to fresh two-month lows, speculators were perhaps justifiably skittish about jumping into the "pits" with both feet, especially as talk continued about lackluster physical gold demand, the continued "absenteeism" by Indian jewellers, and the perception that, ever since the hopes for additional Fed stimulus have been recently dealt a blow, fund liquidations in bullion have been visible while retail investment has not. Gold trading activity on the LBMA fell by 12% last month to a daily average of 19.5 million ounces.

For the first time in seven years, nearly 90% of India’s jewellers (thought to be numbering near 300,000) stayed sidelined as they continued to protest the government’s most recent proposal to hike excise duties on non-branded gold baubles. Their displeasure with the tariff has thus far been met with silence and inaction on the part of the Indian government. The final tally of the Q1 demand for gold by India might well be worth staying tuned for, at this juncture. For the time being, the Chairman of the All India Gems & Jewellery Trade Federation said that his country is — for all intents and purposes — "out of the market."

Seeking Alpha contributor "The Mercenary Trader" provided a fairly comprehensive list of the factors that are currently handicapping gold, in his latest posting on the SA website. Among them, and well-worth noting by perma-bulls, are the following items:

For starters, "gold has consistently traded more as a speculative vehicle than a risk hedge. There is an argument that gold is a useful hedge for one’s portfolio — a way to protect against certain types of risk, like inflation and currency debasement risk. This argument is invalidated by the [recent] price action. Gold has not traded like a hedge, but rather a speculative plaything linked to visions of $5,000 per ounce (secondarily the same idea with silver). What kind of hedge gets the stuffing kicked out of it along with all other risk assets when there is a "risk off" meltdown?"

Then, in the event that "we see full-on global slowdown, precious metals will get hammered. Again, what kind of hedge is so failure-prone under hedge-worthy circumstances? If China truly does experience a "hard landing," the shock of global growth deceleration, plus a sharply rising $US dollar, could cause gold to fall further, to the tune of hundreds of dollars per ounce."

Further, "the long-term monetary velocity arguments (we referred to those in Monday’s post) are suspect too. There is an argument that true global recovery is what will finally send gold over the moon, as monetary velocity increases faster than CBs (central banks) dare to withdraw their support. But if this happens, wouldn’t it make more sense for investors to salivate over, say, railroads or coal producers or other participants in the global growth paradigm?"

Finally the M.T. argues, "Gold’s super-heavy retail participation could turn from a blessing to a curse. The big gold ETF, GLD, is pegged as the best thing to ever happen to the yellow metal. At nearly $70 billion, GLD has brought in tens of billions worth of "little guy" investor participation. But what happens if those little guys are forced to puke up their positions in a bear market movement?" These are all good questions, but they are mostly being swept under the rug as stories relating to a possible $32,000+ gold price target (by 2015 nonetheless!) are making the rounds in gold-oriented forums and are far more ‘desirable’ to read than the above tales of caution…

Another factor contributing to the malaise manifest in the precious metals space is the visible slowdown in China. As mentioned above, sliding silver imports do not exactly reflect an economy that is roaring along at full clip. News from Australian giant BHP Billiton indicates that the Chinese demand for iron ore is turning… rusty and that the firm now expects demand growth for that commodity to only grow in the single digits. As a consequence, an Australian government forecaster has said that there are expectations that iron ore prices might experience a drop of as much as 8.5% this year.

While on the topic of China, it is also worth noting that analysts expect the country’s banking sector to post a rise in non-performing loans on the order of 40% (!) in 2012. The ratio of soured loans at China’s five largest banks could approach the 2% level next year, despite last quarter’s hefty earnings by that country’s 3,800 banks ($35.4 billion). China watchers have noted that in the wake of the perceived ending of China’s boom, in 2010, defaults on bank loans began to swell and that the actual number of non-performing loans may well be much higher than the official data might have us believe is the case.

Yesterday, Fed Chairman Bernanke, following a lecture he gave at George Washington University, made a (for him) rare reference to gold and the gold standard. Once again, in doing so, he managed to agitate supporters of the Ron Paul-flavored idea that the US ought to return "sound money" via to a gold standard. Mr. Bernanke stated that, owing to the limited global supply of gold that would be available for such a peg, as well as due to the fact that any central bank on such a standard would be incapable of responding to economic cycles in an adequate fashion, the revival of a gold-backed currency is… simplistic, anachronistic, and rather wishful thinking.

Mr. Bernanke also noted that, on a year-on-year basis, a gold-based peg might in fact not provide the long-term price stability that many believe it does. He cautioned that, under a gold standard, the money supply goes up and interest rates go down during periods of economic growth and that such a paradigm is diametrically the opposite of what a central bank normally aims to do. He called the gold standard idea a "waste of resources."

Mr. Bernanke was heard from once again, but not on the topic of gold, when he gave another speech, in front of a Congressional Committee. He cautioned that Europe’s financial crisis may not yet be over and that the EU must aid the region’s banks at this most ‘difficult’ of times. The Fed Chairman also noted that the majority of US banks do have adequate amounts of capital to be able to weather a possible new crisis if one were to emerge. Meanwhile, speaking of that same Fed that some would like to abolish altogether, it turns out that the institution and its member district banks earned more than $77 billion in 2011– the second highest income in its near-century-long existence. The US central bank also reported that it would not record a loss on any of its emergency loan programs.

Spot dealings saw gold quoted on the bid-side at $1,647 initially while silver traded at lows under $31.90 per ounce overnight and then hovered just a few pennies above the $32 mark this morning. There is still possible room for gold prices to try to climb back towards the $1,700- $1,730 before resuming their downtrend, but as participation remains thin and bullish news rather sparse, the odds are not necessarily tilting towards that event materializing. News from China indicates that the country’s February silver imports fell by a not insubstantial 21% on a year-on-year basis. Only slightly more than 213 tonnes of the white metal found their way into China and that came on the heels of a January silver import tonnage tally of 191 tonnes –a three-year low.

Platinum declined about $15 to trade at $1,637 the ounce while palladium remained relatively steady at $691, falling only $1 this morning. No changes were reported in rhodium, which was bid at $1,450 per troy ounce. Background indicators included copper climbing very slightly, crude oil advancing by only one nickel after having fallen by the most in three months, and US stocks rising a tad after opening at the 13,170 level.

Just-released US existing home sales data showed that despite a 0.9% dip in February’s activity, the NAR reported that the metrics in the housing sales market have been the best in five years since the start of 2012. That trend provides more ammo to the perception that better jobs prospects, a mild winter, and lower price tags on homes are all contributing to the repair process of the imploded real estate bubble and that the US economy is, indeed, on the mend.

Yesterday’s related industry tally showed US housing starts falling by 1.1% in February but homebuilder permits for new construction rising by 5.1% on the month. French bank Societe Generale is being reported (albeit we have not managed to find the actual story as of yet) as opining that gold could experience a sharp, Fed-accommodation-flavored rally when (or perhaps if) US first and second quarter GDP data "surprises dramatically to the downside." One has to wonder exactly what metrics the producers of this putative report have been reading…

Until Friday,

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 }

Kevin March 22, 2012 at 12:04 am

Mr. Nadler, you lead with your favorite words, “Gold prices fell.”
comments on your musings….

Re gold standard, Bernanke doesn’t want it because it would limit his money-printing.tress and stress test, it determined if banks would have enough Fed mandated capital, and this is NOT an indicator as to if they could survive another 2008 type crisis.

It’s a game of confidence. Musn’t panic the sheeple.

Now if I can only find that article about the unprecedented number of bank executives that have recently resigned. What do they know that we don’t about banks and the future?

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