Gold, Silver and other Metal Prices: Friday Commentary


Hedge-Trimmers Get a Haircut

Bullion update ...Good Day,

Gold prices climbed back above the $1,000 mark in overnight trade, after reports showing that China’s economy is on an apparently stronger than strong track motivated global investors to once again seek riskier, and/or higher yielding assets. Global stocks rose to eleven-month highs, commodities rose along with them, and the US dollar sank further on the trade-weighted index as the aforementioned quest for returns in other markets  left it wanting for buyers.

Additional data, this time from the US, kept pressure on the greenback as the morning trade got underway in New York today. Specifically, US imports rose at twice the expected rate -likely as a result of the flood of imported autos destined as clunker replacements- and sent the American currency to the 76.66 level which now shows a 2% loss for the week.

New York’s spot bullion gold price opened with a $4.50 gain this morning, and was quoted at $1000.90 per troy ounce. As trading commenced, the dollar index was trading at 76.61 and crude oil lost a little more than a quarter, quoted at $71.68 per barrel. Gold ETF GLD holdings remained static for a fourth day, at 1077.63 tonnes. Silver prices rose 13 cents to reach $16.80 per ounce, while platinum climbed $4 to $1289.00 an ounce.

Palladium showed no change and continued at $290 per ounce. "Cash for clunkers" has now morphed into ‘cash-back guaranteed’ over at GM. The firm announced that any buyer who is dissatisfied with their GM-brand purchase can return the vehicle to their dealer within 60 days. The newly reborn automaker benefited less from the auto trade-in stimulus plan last month than did rival Ford and/or arch-rival Toyota.

Shortly after the open, precious metals matched and/or took out their February highs, motivated by further declines in the US dollar. Previously mentioned targets for the dollar-euro rate at 1.46 were achieved and have given rise to ‘what’s next’ type of questions from trading quarters we surveyed.

Gold traded as high as $1013 before pulling back to $1007, silver vaulted to $16.84 an ounce, and platinum leaped above $1300 (by $5) showing a $20 gain. Conflicting reports of Coast Guard shots being fired at a vessel on the Potomac River rattled market nerves for a brief time. The dollar index was last seen at 76.59 whilst oil rose 45 cents to $72.39 per barrel.

In the interim, Treasury Secretary Geithner outlined that which one would have expected to be outlined shortly after the G-20 meeting; the blueprint for the next phase of official activities. Mr. Geithner let it be known that the passage of the crisis stage brings with it a new strategy by the Fed and the Treasury.

Whilst expecting that the US and global recoveries will be fraught with ‘more than the usual ups and downs’ the Secretary indicated that the time has come to ‘unwind the extraordinary programs that were put into place during the crisis.’ He also intimated that the mopping up and removal process would be dependent -in both strength and pace- on manifest economic conditions as time goes by. No sudden moves, in so many words.

Much opinion-flavoured noise has recently accompanied the decision by Barrick management to stop all gold hedging. Gold perma-bulls have hailed it as the sign of the ‘all-clear’ signal for the lunar gold mission. Yes, this is the same Barrick that had once been sued for allegedly ‘illegally manipulating’ the gold price via its hedging programmes. And, the announcement came at a time when the trend towards hedging shows real signs of life.

Many an analysis (BNP Paribas VMFortis, GFMS, CPM, etc.) reveals that the de-hedging programmes in force in recent years are drawing to a close, or are shortly expected to do so. Now, we know that you just have to have read a plethora of commentaries that hail the firm’s decision as nothing short of the catalyst and/or reflection of gold’s second (or fourth?) coming.

What you may very likely have missed however, are some equally incisive blogosphere commentaries to the contrary. We bring you just two of them (and remember, these are opinions – just like all of the other writings), for the sake of balance, courtesy of the Globe and Mail.

First, excerpts from MSN Money blogger James Dlugosch:

"The hedges basically commit the company to selling gold at specified prices. The idea is to guarantee consistent cash flow for the company. But as the price of gold has increased, the hedges forced Barrick to sell gold at less than market value.

Succumbing to shareholder pressure, management claimed that its gold hedges had weighed down the valuation of shares in a rising-price environment.

By closing the hedges, Barrick can get more for its gold and more for shareholders – if the price of gold keeps rising. In effect, this is a huge bet on $1,500 or $2,000 gold. Stop me if you have heard this before: An investment fails to perform for several years, often irrationally. Then, just when investors give up on the trade, the trade turns.

This move is either the company’s brightest move ever or one of the most insanely dumb thing any company has done ever. I vote for the latter."

Next up, Seeking Alpha’s blogger Chad Brand’ take:

"As you may have seen, gold prices have risen sharply in recent weeks (chart below) and now trade near $1,000 an ounce for the third time over the last couple of years. The metal never seems to stay over $1,000 for long, even in the depths of the credit crisis. Barrick has decided, seemingly based entirely on pressure from shareholders to go 100% long on gold just as the metal is nearing its all-time high. I thought we were supposed to buy low and sell high?

Barrick is going to pay $5.6 billion to lift its hedges, which is the mark to market loss it has on the books right now. On 9.5 million ounces, that means the company is underwater by $589 per ounce and must pay that much to get out of them. That means Barrick is partially hedged at $411 per ounce with gold at $1,000.

Why not wait for gold to drop to $800 or $900 before lifting the hedges? That would be a "buy low" type of move and even buying at $900 per ounce would save the company $1 billion in cash, versus making this move right now."

The National Post reported this morning that Barrick shares rose C$1.28, or 3.2%, to C$40.99 on Thursday in Toronto Stock Exchange trading. The shares have declined 8.3% this year. Barrick is the third-worst performer this year on the Philadelphia Stock Exchange Gold and Silver Index. The company also announced that it will be seeking to invest in higher-risk areas in its quest for metal and profits (see yesterday’s commentary on "Risky Business" in certain parts of Africa). By comparison, Vancouver- based Goldcorp Inc., the second-largest producer of the metal, has risen 15% in 2009.

And the beat goes on…

Polled traders in Europe had these thoughts to offer to our friends over at

One London-based trader said in an interview that "volumes so far have been relatively light, although with decent two way trading making up for a narrow range". He added to be still looking for a close above the figure in order to unlock further upside next week.

"The bounce off the $985 support mark on Thursday showed that the stuffing has not yet been knocked out of gold", he said, adding that a short-term overbought condition had mostly been unwound as gold hovered sideways for much of the last week.

A technical analyst at a major German bank added that "a weekly close above the $1,000 would be a bullish item, but that short-term confirmation of further gains was still to be seen above $1,010 and $1,030.80".

Have a Peaceful and Reflective Day.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

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Check out CoinNews market resources at Live Bullion Spots, the Silver Calculator, U.S. Mint Collector Bullion Coin Price Guide. The Inflation Calculator easilys find how the buying power of the dollar has changed from 1913-2009.

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