In The Lead – The Semi That Could Be A Final

by Jon Nadler, Kitco Metals Inc. on June 27, 2012 · 0 comments

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Precious Metals CommentaryGold’s roller-coaster continued as the yellow metal basically gave up all of Monday’s gains on Tuesday and touched lows near the $1,560 level once again overnight.

Options expiry-related selling and more risk-aversion in the wake of once again soaring Spanish and Italian bond yields kept the pressure up on bullion values and enabled the bears to remain in firm control of the market.

Note that the decline came despite a fifth nation — Cyprus — having joined the "Bailout Club" and despite US consumer confidence falling to its lowest level since January.

Tuesday afternoon’s spot settlements showed gold at $1,572 down $13 and silver bid at $27.11 down 43 cents per ounce. Platinum fell $17 to $1,423 while palladium declined $13 per ounce to the $593 level. The US dollar actually lost 0.10% on the day but the euro remained unable to pop above the $1.25 mark for very long, and it was last seen trading at $1.2467 against the greenback. Meanwhile, crude oil held steady at just above $79.50 and the Dow eked out a 67-point gain on the day.

US durable goods orders recorded a 1.1% jump in May with transportation orders climbing by 2.7%. Commercial aircraft bookings rose 4.9% on the month. Core capital goods orders were up 1.6% last month. In all, this was a pretty decent Commerce Department report and one that added to the US dollar’s ability to remain above the 82.50 level on the trade-weighted index.

This morning’s opening action in metals brought fresh selling in the complex with platinum and palladium getting hit especially hard. The former was down $21 at $1,402 and the latter fell $18 to $576 — just $13 above its one-year low. Gold spot declined $10 to $1,562 and was itself trading but $80 away from one-year lows. Silver lost 52 cents to touch $26.60 on the bid; a major pivot-point. More on gold’s moving averages follows below.

Physical gold offtake remains largely in suspended animation mode owing to Indian buyers remaining largely sidelined.

Reuters News reports that sales "data from three major Mints in Europe and North America showed on Tuesday that gold coin sales fell in the first quarter as the strong demand for small investment products that helped send gold to record highs in 2011 eased."

On the other hand, physical buying of another kind-that by ETFs-is also just barely notable. The year-to-date net accumulation by exchange-traded gold investment vehicles has only totaled a very modest 26 tonnes. That tonnage is but a fraction of the rates at which the precious metal was flowing into these instruments prior to last year. The bigger worry is related to the fact that, on the technical charts, gold has broken the medium-term uptrend which had been manifest since 2009.

The recent breach of certain pivotal moving averages (the 150, 200, and 300 DMAs) and the double "Death Cross" (that of the 50DMA under the 200DMA and that of the150DMA under the 200DMA) also has market participants on edge. However, the penetration of the less often tracked 300DMA at $1,649 (as shown in the chart below) is what has some technicians up at night and applying the "bear market turn" label to the yellow metal for the first time in several years.

Gold Moving Average Chart

Image courtesy StockCharts.com

Tuesday marked the release of the CPM Group New York’s Platinum Group Metals Yearbook 2012. The review contains the most definitive and current data on the sector and is an indispensable resource tool for any individual investor interested in this unique niche. You would do well to seek to acquire a copy of the yearbook. Here are some thought-provoking teaser details from the compendium of CPM statistics:

  • The total supply of platinum to the marketplace is anticipated to experience a 1.6% decline this year to only 7.3 million troy ounces, owing to the addition of practically no new production facilities and to the on-going labor strife in South Africa.
  • South African platinum output could fall by 1.9% to 4.6 million ounces while Russian as well as US output of the metal is also seen falling.
  • Total platinum fabrication demand is projected to rise by 3.5% in 2012 and could reach 7.6 million ounces. That would make the demand for the metal be the highest since 2006.
  • The all-important automotive sector is anticipated to demand 3.3 million ounces of platinum in the current year, representing a 5.1% gain.
  • Platinum jewellery demand could witness a 2.4% increase, reaching 2 million ounces and reach its highest level since 2007.

Turning over to the palladium market, the CPM team notes the following highlights on the fundamentals’ side:

  • Total palladium supplies could decline by 0.7% from last year, to approximately 8.55 million troy ounces. The shrinkage will largely be attributable to a 3% and 2.5% fall-off in South African and Russian supplies of the metal, respectively. Meanwhile, mine supplies of palladium could drop 1.7% in the current year, amounting to approximately 6.8 million ounces.
  • South African supply will be impacted by recurring labor and safety-related issues while Russia’s anticipated supply decrease is being characterized as more of a case of unwillingness on the part of that country’s government to sell the metal from inventory as opposed to the putative exhaustion of official inventories. However, no one really knows what the actual count of such metal is, since Russia has always kept the information a state secret.
  • Total fabrication demand for the noble metal is expected to rise by 5.6% from last year with robust percentage gains from the auto sector and from electronics.
  • Automobile emissions clean-up applications will demand 5.3 million ounces of palladium, or 8.5% more than last year.
  • The use of palladium in electronic applications is anticipated to grow by 3.4% this year.
  • Also expected to rise by 3% is the demand for palladium by petroleum refiners and chemical plants.
  • The jewellery sector however will likely take 4.5% less palladium in 2012 than it did in 2011. High prices of the metal last year deterred would-be buyers.

Finally, on the topic of rhodium, the CPM analysts revealed the following market developments:

  • The surplus of the metal in the marketplace is expected to shrink by over 34,000 ounces to a net of 62,927 ounce in the current year.
  • Last year’s fabrication demand amounted to almost 895,000 ounces but it grew by only 1.3% year-on-year as the automotive users continued to use the metal frugally after its spectacular spike to over $10,000 in 2008.
  • Albeit South African production of rhodium fell to just over 670,000 ounces, the total annual supply of the metal rose to a record 991,000 ounces in 2011. The current year’s supply is expected to slip by over 8,000 ounces. Meanwhile, another 1.7% drop in South African production is also anticipated.
  • The key automotive sector on the other hand is seen as augmenting its demand for the metal as the Japanese and US auto markets make further progress and could absorb as much as 760,000 ounces of rhodium.
  • There has been an increase in the levels of investment interest in rhodium as reflected by the total holdings in the recently launched Deutsche Bank rhodium ETP swelling to nearly 30,000 ounces from last year end’s total of 16,950 ounces (an increase of 74% in just 90 days).

All eyes and ears will now focus on the upcoming and once again pivotal (some say final) meeting of the EU’s leadership in Brussels.

Dire statements such as Italian PM Mario Monti’s "Europe has one week to save the union" and Spanish PM Rajoy’s "Spain cannot finance itself at this point" continue to clash with other assertions such as Ms. Merkel’s "I don’t see a total debt liability [Eurobonds] as long as I live" and are making for a high-stakes game of political poker while the debt fires continue to rage on.

Mr. Monti has threatened to resign if Eurobonds are not going to be hatched at this meeting, but, at the same time, he is also willing to sit at the negotiating table late into Sunday night if need be. This is fast turning into the finals of the UEFA soccer battle being actually played out in Brussels tomorrow. It is doubtful that this time around the Merkel-Monti duo will take a fast plane to Warszaw to root for their boys. They truly have bigger fish to fry. The tensions however will be as high on the grassy field as they will at the round table.

Until Friday, keep your eye on the… ball(s).

PS – Of course, as has by now become fashionable, the potential for the EU to unravel has also engendered Nostradamus-like predictions of a global recession, depression, bank runs, and economic chaos. The same TEOTWAWKI visions — also as usual — come with the promise that great fortunes could be made trading on such misery by those who are astute enough to take advantage of the situation.

Jon Nadler

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal 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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