Gold, Silver, Metal Prices: Commentary – 12/04/2009


Bullion update ... Benny Poppin(g)s

Good Day,

Friday’s opening had gold prices slipping towards the $1200 mark on light profit-taking, and  ahead of afternoon book-squaring activities. Spot bullion opened with a $2.80 loss, quoted at $1204.70 on the bid, as against a 74.63 reading on the US dollar index and a 1.506 tick vis a vis the euro. Crude oil fell by about half a dollar, and was last seen at $75.88 per barrel. Silver and platinum on the other hand, managed to remain in the green price column, (the former by 4 cents at $18.85 and the latter by $1 at $1483) while other industrial metals slipped in price (with the exception of aluminium).

Carl Johansson, Sr. Precious Metals analyst at Goldessential said that  "the EUR/USD pair has created a double top formation on Thursday, with the day’s high of 1.5141 nearly coinciding to the Nov 25 over one-year high of 1.5144". He added that "If this pattern holds, this could result in a short-term reversal, which will likely spark heavy profit taking in gold". A breach below the 1.50-1.4970 area could prove to be the initial catalyst."  [Apparently, a breach of the first figure (1.50) did occur, within the first half-hour of trading today. Gold responded with a near $21 drop (to a low of $1186.40 per ounce)].

Current price support for gold is seen fanning out below, at $1,175 and $1,160 an ounce. Resistance appears in place at the $1,220 and $1,235 an ounce levels. A Reuters survey of traders found that more than half of them expect the year-end tally to find gold at under $1200 per ounce. As for 2010, the most optimistic of crystal ball images finds the metal peaking around $1300-$1350, (UBS, Goldman) with little or no justification for higher levels. Of course, there are those who also question a Goldman forecast for such levels, issued just when gold notched a fresh $1225 record to the day.

Others, well, they say that: "Commodity markets have been all gold, all the time, as if nothing else seems to matter,” economist Dennis Gartman told clients in his Gartman Letter yesterday. Gartman said a “bubble” was forming and “only the well capitalized can or should be involved.” Speaking of bubbles, the spec trade was seen digesting a number of potentially significant topics that floated by in yesterday’s news flows.

First up, the ‘bubble’ label as applied to the gold market by one of the  very sources that is supposed to be exhibiting some expressive kind of mating dance directed at the metal: the Chinese central bank. No need to beat this topic to death. In a lychee nutshell, the PBoC does not see good value (as regards buying some of it for reserve purposes) in $1200 per ounce gold. It did not, when gold was $1K, either.

Following that, is the idea that the beginning of the exit from accommodative policies by central banks could be underway. Parsing words (and some deeds) by both the ECB’s Mr. Trichet and the Fed’s Mr. Bernanke, speculators are now…speculating more about the timing of rate hikes and other measures than about their very likelihood. "The ECB chose a quicker exit path," said Laurent Bilke, a former ECB economist, now at Nomura International Plc in London. "It’s very difficult not to think it’s the beginning of a tightening process." Mr. Bilke was referring to the ECB’s decision to end long-term emergency loans and tighten the terms of its final 12-month tender. The course change is thought to give a higher probability to interest rate increases in 2010. Odds of such hikes are now converging towards a second-half of 2010 timetable. 

Meanwhile, Mr. Bernanke, who spent the day under the magnifying glass in Senate confirmation hearings, has indicated a fairly high degree of awareness regarding asset bubbles, the inflationary implications of being ‘behind the curve’ as regards the timing and aggressiveness of interest rate hikes, and similar matters. Although the Fed has only ‘tested’ one exit tool (see yesterday’s commentary) and has only jawboned about what it will eventually do, many feel (and not just Larry Kudlow) that it ought to be reading the gold and dollar market "tea leaves" with more care, and get going on interest rates like its counterparties in Australia and Europe have, or soon will.

Here, then, is what Mr. Bernanke did say, when confronted with the idea that bubbles are out there and that they require popping (according to Bloomberg last night):

"Federal Reserve Chairman Ben S. Bernanke said he doesn’t rule out using monetary policy to pop asset-price bubbles, while stressing that financial regulation is his preferred approach. "Supervision, regulation of the financial system is the strongest, most effective" way to deal with bubbles, he said in response to a question at a Senate Banking Committee hearing considering his nomination to a second term. "I do not rule out using monetary policy if necessary, if that situation does become worrisome and threatening."

Some officials in Asia have suggested the Fed’s record-low federal funds rate — the central bank’s interest-rate target for overnight loans between banks — is pushing asset prices in their region too high. Liu Mingkang, chairman of the China Banking Regulatory Commission, warned Nov. 15 of "new, real and insurmountable risks to the recovery of the global economy." Continuing the zero-rate policy may lead emerging economies "to overheat and experience financial turmoil," Bank of Japan Governor Masaaki Shirakawa said in Tokyo Nov. 16.

"There have been complaints about U.S. monetary policy contributing to bubbles abroad," Bernanke said today. "It needs to be understood that in the United States, monetary policy is intended to address both financial and economic issues in the United States." He said other nations have their own ways of dealing with bubbles, including exchange rates and fiscal and monetary policies, he said.

Bernanke was asked to respond to comments by Nouriel Roubini, the New York University professor who predicted the global financial crisis. Roubini said last month investors are "chasing commodities" and there is a risk of new asset bubbles emerging as stock markets and commodity prices surge amid record-low lending rates. "Mr. Roubini is very pessimistic about the economy," Bernanke said.

The Federal Open Market Committee said low rates might cause "excessive risk-taking" or an "unanchoring of inflation expectations," according to the minutes. Central bankers also said further dollar depreciation that might "put significant upward pressure on inflation would bear close watching." Gold futures touched an all-time high yesterday as the slumping dollar spurred investor demand for an inflation hedge. The Standard & Poor’s 500 index has jumped 67 percent since its 2009 low on March 9. "

Meanwhile, demand destruction in gold remains unfortunately alive, and well. In some of the key locations that really matter. While the bullish twist will no doubt be applied to the probability that China will now likely surpass India in demand terms (mainly for bauble-purposes), the reality is that surpassing a decade-low demand level by India is not proving to be all that hard, for anyone. Courtesy of the prices brought to you by the mountain of COMEX positions that are the hallmark of the carry-traders.

"Gold imports by India touched a decade low as the prices shot up significantly affecting the demand of the yellow metal. In the current calendar year, gold imports were estimated to be around 380 tonnes. Data available since 1997 showed that gold imports in India have never fallen below 400 tonnes.

India’s gold demand has remained in the average range of 600-800 tonnes. Only in the lean economic period in global economies and specially in India during 2002 and 2003, gold imports slumped to around 500-550 tonnes. According to Indian Bullion Market Association (IBMA) data, the national body representing Indian bullion trade and industry, gold imports in 2008 fell to 413 tonnes compared with 757 tonnes in 2007. "High prices have affected the demand. Imports in the current year may be around 380 tonnes. Imports will rise if prices moderate as people have accepted the fact that they have to live with higher gold prices," Suresh Hundia, president, the Bombay Bullion Association said." Thus far, very little in the way of such acceptance has been noted. 

When queried about he nature and the state of the current god market, our good friend Paul Walker from London-based GFMS, opined that: "I guess the word caution – and this is something I remind everybody – it really has become a one-horse race in some degree. It’s all about investment. And as long as investment stays positive, gold could go higher and continue to grow. The limit to that is anybody’s guess. But it’s highly contingent on just one phenomenon, and that’s investment flows." Operative word: "flows." Usually associated with "ebb" -as in flowing back. If anyone thinks that healthy markets can be built and stand on one leg, we advise a bit of…meditation.

Have a good weekend, everyone.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

Websites: and

Check out other site market resources at Bullion Prices, Silver Coins Values and the US Inflation Calculator which easily finds how the buying power of the dollar has changed from 1913-2009.

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