In The Lead – Winged Migration

by Jon Nadler, Kitco Metals Inc. on September 21, 2012 · 0 comments

Precious Metals CommentarySome (or, in the case of oil) all of the Fed-induced euphoria that became manifest one week ago dissipated during the course of this week as certain market participants were left with an environment wherein Fedspectations can now be considered as being off the table and were in certain assets will have to make "a go of it" based on palpable demand and solid fundamentals. Then again, what are said market participants to really believe, when, just four days after the Fed handed out QE3 (of sorts) its own top policymakers publicly (and sharply) disagreed on its effectiveness?

Gold prices bumped up against long-term (one year in the making) downward resistance levels near $1,780 but remained supported above the $1,730-$1,750 value zone as players attempted to gauge the duration and scale of the US central bank’s bond-buying program. A number of decent economic metrics released during the week managed to dial overoptimistic QE expectations back just a tad.

Standard Bank (SA) analysts summed it up as follows:

"There’s not been much follow-through from the Fed’s QE of last week, which is consistent with the idea that the market sees significantly declining marginal returns from every new easing policy from the Fed. In fact the lesson increasingly seems to be that investors should buy what the Fed buys (or any other central bank for that matter) but not necessarily expect a much wider impact."

On the other hand, continuing worrisome news from various parts of the globe also placed into question the efficacy of the recent spate of QE programs; these may have been a classic case of "not too little, but too late." We noted this week that  China’s flash HSBC PMI survey remained solidly under 50 (last reading at 47.8) and that it has stayed there for the past year now.

China’s output metrics are running at a ten or eleven-month low. BHP Billiton (only the world’s top miner) cautioned that China’s demand for iron ore has been more than halved. When the planet’s largest importer of iron ore experiences such a slump in demand, it is not surprising to read that BHP’s top commercial officer sees

"the beginning of the end of the first phase of economic development in China."

This morning’s catalyst for the bulls may have been the reports out of Europe that Spain is getting ready to announce a plan to reform its economy and that it is indeed working with EU officials on how to prepare for a new rescue plan and for unlimited bond-buying by the ECB. While the euro has clearly benefited from the ECB’s announcement that it may purchase sovereign debt, Credit Suisse analysts are not of the opinion that its gains are here to stay; not for very long, anyway.

The Swiss firm anticipates that the common currency will drop to $1.23 by year-end and that it could trade at $1.19 within one year. We bring this to your attention in order to remind that gold and the euro have had a "BFF" relationship for the better part of a year now. One of the currently most impactful factors running against the euro is the fast-accelerating flight of deposits from four of Europe’s contries (Spain, Portugal, Ireland and Greece). Mind you, with that kind of developments under way, we are yet to learn of massive gold coin and bar demand coming out of Europe. It would only be logical for such worried account deserters to seek the warm glow of the yellow metal.

Nearly half a trillion dollars’ worth of deposits in those countries grew wings and took flight in the year that ended in July (and that was well before the crisis mushroomed into a larger one recently). Here is a disintegration pattern that no poll icy maker at the ECB or the Bundesbank or the Spanish cabinet can paper over with encouraging words. Question: "What’s in your wallet?" Answer: "Oh, only my life’s savings… "

The opening of the final trading session of the week saw the metals’ complex move higher once again after a few sessions marked by indecision and tande-trading with the euro. Spot gold was bid near $1777 early on Friday while spot silver hovered near $34.90 on the bid. Standard Bank (SA) analysts surveying the silver market

"believe that [Chinese} domestic silver stockpiles are extremely large when compared to the lacklustre fabrication demand. PMI readings out of China remain un-inspiring, consequently we do not expect Chinese fabrication demand for silver to improve any time soon. We estimate that since 2009, China has amassed stockpiles of around 15 months of fabrication demand, up from only four months at the start of 2009."

Platinum moved $18 higher to touch $1,639 and palladium advanced $10 to the $671 per ounce mark. EW midweek analysis shows gold

"sitting on the outer portion of its exponentially rising bowl, bringing prices to the edge of a reversal. Gold has continued to hold up relative to a falling RSI (like silver)."

Rhodium was unchanged at $1,325 per ounce on the bid-side.

No sooner was the costly (in more ways than one) strike over at Lonmin, than another similar action appeared to start over at Anglo-Gold Ashanti. The firm’s Anglo American Plc is the world’s largest producer of platinum and it is now facing a new pattern of illegal pay strikes that are bypassing conventional wage-talk conventions. Some analysts feel that Lonmin’s headline (22%) pay settlement is the new paradigm and that workers at other firms might follow suit in disrupting output until adequate offers are made to them.

In the background, crude oil climbed by about $1 and backed away from recently-touched six-week lows but players remained aware of plentiful supplies and wobbly global demand patterns. The euro remained under the pivotal $1.30 level but then retook it in the wake of the Spanish rumors, while the dollar initially gave back 0.12% of previously achieved gains and traded near 79.30 on the trade-weighted index. In EW’s market perspective, the greenback has bounced off the 78.50 low that almost completed a 50% retracement of the rally from early May of 2011 (at 72.70) and with a Daily Sentiment gauge as low as 7% it stands to try some "base-building" before the initiation of a push to higher ground.

Market analysts cautioned this week that the largest gains in the year-to-date in commodities may have come to an end owing to the fact that, despite assorted monetary accommodations (ECB, Fed, BoJ) seen in recent weeks, the policymakers around the world are not tending to the fostering of demand for same in the face of rising supplies. One Swiss money manager noted that

"this is not as much of a one-way ticket as it has been in the previous two instances [of Fed QE] and the tug of war is between how much is already priced in and how much poorer is the underlying commodity demand."

One metric that corroborates such a view is the fact that the S&P Goldman Sachs Commodity Index was trading at over 5% beneath the level it was at when the Fed unwrapped QE3 on the 13th of the month. None of that stopped Bank of America Corp from handing out its visions of $2,400 per ounce gold by the end of 2014 –even if that Holy Grail of a figure keeps getting pushed back by a year or two as we near the end of each year. Lloyds TSB Banking Group opines that equities and high-yield debt will likely achieve higher returns on the money than will commodities:

"We’re heading for a period of under performance in commodities after years of outperformance."

We close today with an unfortunate report on mining equities and investing in that niche. While the vast majority of firms in the industry can be considered safe places to park one’s hard-earned cash (despite the under performance that has been manifest in the sector for some time now) with the hope that they will eventually benefit from being undervalued, there are also those firms whose shares were once worth something based on science-fiction undertakings. It has been learned this week that more than $260 million of investor money is at stake in the trial that is rocking Vancouver at the present time. We’ve said it once, we’ll say it again: "Caveat Investor!" Translation: When something sounds too good to be true, it usually is.

Have a pleasant weekend,

Jon Nadler

Senior Metals 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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