In The Lead – Fathoming The Facts And Figuring The Figures

by Jon Nadler, Kitco Metals Inc. on August 17, 2012 · 0 comments

Precious Metals CommentaryPrecious metals headed a bit lower early this morning while noble metals headed in the opposite direction and built on yesterday’s hefty gains.

Spot gold was quoted at $1,612 per ounce while spot silver was indicated at $28.05 in early trading. The yellow metal continues within its recent tight range and is picking up various ‘vibes’ that either hurt or help, depending on the day.

Fundamentally however, the gold market is still over-dependent on Fed action; in the words of Precious Metals Equity Research director Ed Bugos,

"too many gold bulls are hanging their hat on QE from either the Fed or the ECB."

The trouble with the above line of investment-think is that –just yesterday- Goldman Sachs Group Inc. issued opinion that basically concludes that the odds of a September Fed QE have diminished of late. Goldman Chief Economist Jan Hatzius wrote in a client note that

"we do not expect a move to QE3 at the Sept. 12-13 FOMC meeting."

Among the reasons cited for such a stance were recent US economic statistics (retail sales among them). The firm now figures that any QE might not see the light of day until about late 2012 or perhaps early 2013 –if then. Some Fed officials suggest the US central bank may not need to wait until 2014 to commence raising interest rates.

Platinum added another $21 to rise to $1,456 and palladium gained $4 to touch $587 the ounce. Rhodium was unchanged at $1,100 after adding $20 on Thursday. More on the PGM will follow later on. The US dollar recaptured the 82.50 pivot point on the trade-weighted index and the euro hovered near $1.2325 despite intimations by German Chancellor Merkel that her country would conditionally support the yet-to-come assistance by the ECB. Meanwhile, "Grexit" type of market chatter intensified once again in various trading rooms. Crude oil retreated to near $95 after specs decided that this week’s rally to a three-month high was perhaps a tad overdone.

For now, let us start the last day of this otherwise (once again) lacklustre trading week off with some sobering facts and figures, as usual. According to the World Gold Council’s interim report that was issued yesterday, global gold demand for gold fell to its lowest level in more than two years in the second quarter of this year. The overall tonnage demanded by various sources of offtake fell to under the key 1,000 tonne/quarter level for the first time since the first trimester of 2010. Key demand markets such as India, China, global investment, and the historically all-important jewellery sector all experienced varying degrees of declines during the period.

Over the past half a year, we have relayed numerous cautionary statements from most of those same demand sources about the slipping interest in purchasing additional amounts of the yellow metal during what actually turned out the be the second "perfect storm" in recent years (the eurozone crisis) but, this time, the WGC statistics spoke for themselves, more powerfully than we could perhaps characterize them here with some trite adjectives.

Here, then, is a summary list of the declines in gold demand by sector, and by country: Indian overall gold demand — down 38%. Indian investment demand – down 50%. Indian jewellery demand — down 30% (despite the May wedding season). Indian gold imports — down 56%. Notably, Indian gold holders turned out to be the stand-outs in terms of selling scrap gold from under various mattresses into the gold market during the period. Existing holders of gold India mobilized some 30 tonnes of the yellow metal in the second quarter (the most in more than three years) based on the perception that gold prices have limited upside potential left in them. Meanwhile, global gold mine production was up to 706.4 tonnes – 3 tonnes higher on a year-on-year basis.

Chinese gold demand — down 7% from 2011’s first trimester. Chinese investment demand — down 4% vis a vis 2011. We bring you the numbers from these two markets because they are thought to be (and are normally heavily being touted by many hard money newsletter scribes as the saviours of the gold market) the key offtake areas for gold of late. Many articles have referred to "Chindia" as the next best thing for gold, Western demand be darned.

However, there are some other areas of slipping gold demand in this latest quarterly report that deserve your attention as well. Among the, most notably, the fact that — as mentioned — despite the most intense phase yet of the EU financial crisis — gold investment demand fell by a not insubstantial 23% during the period and it fell to under the five-year quarterly average of 340 metric tonnes. Aggregate gold coin and gold bar demand was down 10% on a global basis.

Furthermore, the demand for gold bars and coins in the United States dropped by 27% in this period. Remember that the US is the country whose national currency was supposed to demise several years ago and yet, somehow, it continues to "stick around." Remember also, that these numbers come to you courtesy of what is being called a "market development organization for the gold industry." In other words, you read it from the horse’s mouth (not ours).

Moving on, it was also revealed that gold-based ETF vehicles shed a net amount of almost one tonne during the period, in lieu of perhaps accumulating new, record amounts of the metal, given the severity of the debt crisis that battered (and continues to batter) the European Union. Global jewellery demand — if one can even speak of such a thing any longer — was down once again, this time by 15% on the quarter. Once upon a time (and not that long ago), jewellery offtake used to constitute more than two-thirds of the total gold offtake, per annum. The normally steady industrial gold demand sector also witnessed a contraction in demand — it was down 5% versus one year ago.

The above prompted Reuters market analyst Clyde Russell to project that

"If the pattern of the first half of 2012 is repeated in the second half, demand would total about 4,180 tonnes, down a significant 8.6 percent on the 2011 figure." More importantly, Mr. Russell notes that "gold demand has now weakened for four consecutive quarters," and that, therefore, "assuming that it will hold steady in the second half may be a touch optimistic."

Mr. Russell’s reservations were corroborated by certain projections coming from the World Gold Council as regards the second half of the current year as regards Indian gold demand (and more). The Reuters analyst thus concludes that

"in fact, so rapid has been the decline in gold demand since last year’s record price in September that if there is a surprise, it’s that the price has held up as well as it has."

Now, let us move on to silver. In the opinion of the analysts over at Standard Bank, the white metal is currently

"testing its long-term support, currently at $27.40/50, once again. This trend-line support dates back to October 2008." The analytical team at SB believes that silver shows a "real risk that it could break lower and retest the low $26/oz. level," as "Industrial demand makes up almost 50% of silver demand and this demand remains weak. At the same time, silver stocks in China are high."

Therefore, the SB opinion remains that the precious metal is

"a sell into rallies for the next few weeks, with risk of it retesting support, at around $26.00/oz."

It is very difficult to continue with this next segment, and we can only wish that it did not have to be done, and that reporting on platinum‘s near 5% gain over the past 24 hours did not have to be based on such horrific circumstances. However, the stark reality is that 30 or perhaps up to 36 people have lost their lives and another 78 have been injured in what is turning out to be the bloodiest clash between protesters and police at Lonmin’s Marikana Mine.

Over the past week, ten lives had already been lost during such clashes. In what can now only be described as the "Marikana Massacre" local police used "maximum force" to cut down what they said was a throng of machete-wielding and illegally striking miners who were advancing on them. We will not give you a direct link to the disturbing YouTube video of the deadly event but here is a link to the BBC story within which you may, or may not, opt to view such footage.

WW4 reports that

"Lonmin announced the day of the massacre that it is unlikely to meet its full-year production target of 750,000 ounces because of the lost work time. South Africa has 80% of known platinum reserves. While the country remains the world’s top producer, several platinum mines have stopped construction or suspended operations this year because of low prices, rising operating costs and labor strife."

Standard Bank (SA) analysts note that they

"maintain that SA platinum production will be 567K ounces less in 2012 than in 2011."

The SB team also expects SA to produce 4.28 million ounces in 2012, resulting in an actual deficit in the market this year. However, the team also expects that the platinum market could return to a surplus in 2013. For an in-depth look at some of the background conditions that have resulted in yesterday’s bloodshed you might wish to read this report from the Daily Maverick which relays some of the findings of The Bench Marks Foundation.

In separate but equally sad news, Thomson Reuters reports that

"at least 60 miners were killed when a shaft collapsed in a remote part of northeastern Democratic Republic of Congo, where local armed groups complicated rescue efforts, officials said on Thursday. The local miners were digging for gold in shafts up to 100 metres (109 yards) underground when the accident occurred on Monday in Mambasa territory in Orientale Province, said Simon Pierre Bolombo, the provincial head of mines."

We close this week with a moment of silence for those who have fallen at Marikana and in Mambassa.

There is another price to gold and/or platinum than that which we can track on the daily tickers.

Until next week,

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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