Gold, Silver and other Metal Prices: Friday Commentary


W(h)ither Hindustan?

Bullion update ...Good Afternoon,

At first glance, Friday appeared to be once again shaping up as an oil-driven kind of day in the precious metals pits. Gains of from half to three-quarters of a dollar in black gold were initially seen sustaining incremental speculative buying of gold as well as silver. The greenback offered a bit of encouragement to metals players as well, as it briefly breached the 78-mark on the index ahead of the NY opening.

Gold started the final session of the week on a positive note, showing a $5.30 gain and a quote of $953.50 on the spot bid ticker. Silver added 24 cents to open at $14.53 per ounce. There was no change reported in platinum (at $1241) while palladium rose $2 to start off at $287 an ounce.

Spreading South African labour action against platinum miners continues to be on traders’ minds, as are worrisome statements from South African power supplier Eskom. The utility firm finds itself having to double electricity rates in order to stay alive. Not what users would like to hear, exactly.

We wrote this morning that: "While another run to the mid $960s could blossom if the current post options-expiration trend remains intact, market participants are eager to learn about fresh bullish news for gold. They are hoping to hear that India imported something-anything this month, in order to gear up for upcoming festivals, and/or that the largest gold ETF bought something-anything since it went into a state of suspended animation in early June. Lacking such developments, the gold market could extend the seasonal ‘summer’ doldrums to the point where they become the ‘fall’ ones."

Gold did indeed try for the mid $960s during the course of Friday’s session. Highs were recorded at $963.40 before the NY lunch hour, but that was prior to crude oil turning lower on the day amid sliding stock prices. The dollar also reversed course, regaining the 78 level -plus 0.20- on the trade-weighted index. In any case, gold managed to erase the losses it was on course to sustain for the week.

At last check, bullion was trading at $954.80 on the bid side, – up $6.60 per ounce- while silver cemented its 50-cent gains for the day, and was offered at $14.82 per ounce. Platinum and palladium did not make significant moves on the day, as each was showing but a $2 per ounce gain as of this writing.

Overnight equity markets saw another fall in China, where liquidity-related apprehensions pushed the Shanghai Composite Index down by nearly 3.5% for its Friday session. Investors threw in the speculative towel after learning that bank lending shrank again this month. Perhaps as little as 200 billion yuan were lent in August, as compared to 356 billion in July, and 1.53 trillion yuan in loans that were extended in June. Up to the mid-point of 2009, the lending ledgers of Chinese banks were growing by one trillion on a monthly basis. Laissez les bon temps rouler, no more.

Banks and steelmakers were among those hit in the session’s selling spree. The growing sense that the house is no longer willing to supply gambling chips has had players in the Chinese market fretting about investing for several weeks now, notwithstanding the large stack they managed to pile up since the year started.

The Japanese yen tripped and fell pretty hard overnight as well, undermined by troubling economic data (deflation and unemployment at record levels) and election-related maneuvering by traders. The same was not the case with the sterling; it lifted to higher ground following evidence that the UK economy is also catching the recovery bug and has shrunk less than expected of late. In the Old World, economic confidence rose significantly more than expected, reaching a 10-month high. Looking forward is one thing, but the current reality shows the German economy, for example, contracting at a 5 to 6 percent rate for the current year, despite the Q2 reversal of fortune it enjoyed.

This spring’s ‘green shoots’ are evidently maturing quite nicely, and are doing so globally. Hope is manifest that no early frost will damage this pattern of growth. Except, of course, among radical extremist dollar morticians, who still expect many another shoe to drop and derail everything in sight, while only helping gold and silver, somehow. Last year, it was the crisis that prompted them to pin such hopes on. This year, it’s the recovery. In other words, they will take anything that makes for a positive spin. Except for the possible glitch that such an honest-to-goodness recovery might have in the cards for the metals (see the GMFS opinion below).

While nobody really expects an abundance of low-hanging economic fruit within the coming year, most central bankers and individual investors will take whatever they can get, following the brush fire that has swept the global economy since late 2007. Thus far, the recovery in equities since March has been anything but anemic as participants keep tabs on broad signs of emerging growth, and the taking has been good. The St. Louis Fed’s Mr. Bullard sees positive numbers for the growth rate of the US economy for the current half of the year.

The latest batch of statistical data issued this morning revealed a picture of unchanged personal incomes, a slight increase in consumer spending (for July), and lower levels of consumer confidence (the post-cash-for-clunkers hangover could be quite ugly). All of this took place while inflation remained flat as a gluten-free pancake. Consumer prices did however fall 0.8% over the past year.

Thus, Friday’s session was -as we mentioned at the start- shaping up as once again being defined by the gains/dips in oil, the Dow’s minute gyrations, and the dollar’s successes or woes of the moment against the euro. In so many words, another nice play for some, but nothing in here to break the well-established summer ranges. We still need surprise news or larger fundamental developments for such an achievement.

Our friend, Paul Walker, the CEO of London-based GFMS predicates gold’s much talked-about rise to a potential 1200-1300 dollars per ounce on the tangible manifestation of inflation in the global economy. Mere concerns about inflation are deemed insufficient to drive the metal to those levels.

In a classic face-off of market analysts versus mining company CEOs, chronicled by Miningmx this morning, Paul held his own views up against those of GoldFields’ CEO Nick Holland:

"The two [obviously] differ about whether renewed investment demand for gold is sustainable.

Holland believes it is, and predicts investment demand is going drive gold "to the next level".

[Paul] Walker agrees there’s considerable concern over possible looming inflation but he’s not so sure that’s actually going to happen.

The implications for gold and gold shares are huge. If the higher inflation scenario becomes reality then gold is headed for new record levels around $1 300/oz within the next year to two.

However, if inflation is kept under control then Walker says gold is likely to pull back to levels around $850/oz, after which it could decline further.

Says Holland: "I don’t see anything that’s going to stop rising investment demand. The US is going to reflate its way out of its problems. There’s no other option. There’s going to be serious inflation yet again, although it may take another year to come. When it does I think we’ll see some interesting action in the gold market."

"But if the ‘green shoots’ prove to be genuine and markets start to stabilise – with a slowing of the rate of decline in house prices and interest rates beginning to rise – then the investment case for gold becomes far more difficult to justify and investment flows may drop off. My personal view is I don’t see inflation taking off."

Neither do we,Paul. And, like you, we see a "very interesting journey for gold over the next six to twelve months" as well.

One possible factor that the gold market might have to come to contend with is a prolonged period of very weak Indian offtake, especially after its festival season. There are must-buy obligations, but there are also must-eat realities.

If disturbing trend reports such as the following one from Bloomberg prove to turn out correct, the average potential Indian gold buyer will have buying priorities that are completely different, like, the basics of survival.

Thus, Western investment will have an even larger share of the burden to bear in this market than it already has. We think that such apprehensions have already shaped the current year’s (lack of) buying patterns, in addition to near-record high bullion values.

"India’s future is threatened by shortages of food, water and energy and these should be addressed on a priority basis, the Prime Minister‘s security adviser said.

"These are part of a broad national security plan, and defense is only one aspect of it," Shekhar Dutt, India’s deputy national security adviser, said in an interview in New Delhi yesterday. "We think water is going to be a very severe determinant of prosperity and well-being."

Inadequate rainfall has led to a drought in as many as 278 of India’s 626 districts, according to the farm ministry. This has sparked concern over food shortages and rising prices, prompting authorities to raid wholesalers hoarding commodities. Raw sugar futures have soared 90 percent this year.

"Unless we drive in the fear of god among hoarders, the man on the street will suffer from rising prices," Ashok Das, principal secretary of food, civil supplies and consumer protection in the central Madhya Pradesh state, said in a phone interview from Bhopal today. Authorities seized 480 metric tons of sugar in the past week, he said.

Prime Minister Manmohan Singh last year imposed stockpiling limits on food items such as wheat and sugar to curb hoarding as inflation surged to a 16-year high. The government ended import taxes on edible oils, banned exports of rice and halted futures trading in commodities including soybean oil and potatoes to cool prices and avert riots that broke out in more than 30 developing countries including Haiti and Pakistan.

This year’s drought has underscored the need for India to improve collection of rainwater. With dam-based irrigation having nearly reached capacity of about 50 million hectares, additional water storage can be possible only with harvesting, Dutt said.

"In the next 20 years water harvesting will become the most important feature to generate groundwater storage more effectively than major dams," he said. Three northwest Indian states lost a volume of water from underground supplies equal to more than twice the capacity of Lake Mead, the biggest U.S. reservoir, between August 2002 and October 2008, scientists said in the Aug. 12 issue of the journal Nature.

Without measures to curb demand, dwindling groundwater supplies may cause drinking-water shortages and erode crop production in a region inhabited by 114 million people, the authors said. Water harvesting involves collecting rain from rooftops and local catchments and capturing seasonal floodwaters.

With more than 70 percent of India’s population living on less than $2 a day, the government is addressing internal security including jobs, infrastructure and literacy in addition to defense. In the next five years India plans to invest as much as $35 billion on weapons to modernize its military.

Power shortages impede development in India as more than 400 million people lack electricity and supply falls short of peak demand by 16.6 percent, the World Bank said in June."

We wish you all a pleasant weekend.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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