Gold, Silver, Metal Prices: Commentary – 1/8/2010


Bullion update ... Unemployees Of The Month

Good Day,

Gold prices tried to find support at lower levels overnight, following yesterday’s declines that were largely a combination of dollar strength and on-going profit-taking. Asian markets witnessed further declines in the yellow metal, which sank to a low near $1118 as mild selling spilled over into the overnight hours and as few bargain hunters stocked up on it ahead of critical US data that was released this morning. The dollar continued to mark time, hovering near 78 on the trade-weighted index, while crude oil remained fairly steady near the $82.50 mark as wintry weather continues to keep portions of the US in a deep freeze.

While all eyes were on the US jobs figures on this second Friday of 2010, similar data from the Old World contained a rather unpleasant percentage: ten. The number of unemployed Europeans reached an 11-year high in November, meaning that nearly 23 million folks were jobless in the broader 27-nation EU region. Some countries – Ireland, for one – recorded jobless rates nearing 13%, but the unfortunate prize this morning went to Spain – a country in which unemployment levels are now nearing the astounding 20% mark.

US jobs data did not manage to surprise to the upside this morning, and contradicted a fairly large number of economists who had expected a turn in the employment situation. The economy lost 85,000 jobs in December albeit November’s numbers were revised to show a small degree of job creation. The unemployment rate remained at 10% in the US. The US dollar declined towards the 77.75 level in the wake of the labour statistics, and gold regained its footing, going from an earlier negative $6 to a near $6 gain on the day. The market sees such statistics as giving the Fed little reason to hike rates, just yet. Therefore, the carry trade is seen as able to…carry on (for at least the next month or two). In any case, the post-jobs spike in gold turned out to be rather brief and by 10 am –despite continuing dollar weakness- the yellow metal had turned back to the negative side as profit-taking and pre-weekend book-squaring came into play.

However, not everyone sees today’s jobs numbers-induced losses in the greenback as the catalyst for a return to the era of virtually non-stop losses that was the defining characteristic of at least a good portion of 2009. In fact, Citigroup, as quoted in a Bloomberg piece posted before the government’s figures were released at 9:30 this morning, sees this dip as a window of opportunity for would-be dollar longs and advises that: "Investors should buy the dollar if it declines as a result of any "disappointment" in today’s U.S. payrolls report, according to Citigroup Inc. "Consensus forecasts for U.S. nonfarm payrolls appear to habitually overestimate rises," New York-based strategists Todd Elmer and Asaf Bernstein wrote in a report dated today. "Ahead of today’s release, this implies risks are skewed towards disappointment. Given increasing dollar sensitivity to data surprises, this could see a temporary pullback. But we suspect this presents a dollar-buying opportunity."

Spot metals indications as of the last check, showed New York gold bid at $1135.70 per ounce, sporting a $5.60 gain on the day. Silver added 16 cents to rise to $18.41 an ounce, while the noble metals complex continued to show gains (platinum was up $14 at $1569 and palladium gained $4 at $429), aided by the advent of a platinum and palladium ETF notes that: "PPLT and PALL will join the ranks of other popular physically-backed ETF Securities funds. Already trading are the ETFS Physical Silver Shares (SIVR) fund and ETFS Physical Swiss Gold Shares (SGOL), launched in July and September respectively. If the rapid growth of SIVR and SGOL is any indication of investor interest, PPLT and PALL could quickly attract volume."

As has been the case with most of these species of ETF vehicles, the initial stages of accumulation are thought to enhance prices of the underlying metal (in some cases, by quite a bit). However, as is also the case, the facilitation of more speculative plays and the entry of spec funds into this little niche, is likely to add to volatility and presents unknowns in the event of future sideways and/or downward phases in the markets, especially in less liquid ones, such as platinum and/or palladium. In any case, Happy Birthday, PPLT and PALL.

One soon-to-be-voting Fed president, Mr. Hoenig (he of the Kansas City Fed), spelled out exactly what he thinks the US central bank ought to do, and sooner, rather than later, at least as far as he is concerned. Marketwatch has Mr. Hoenig saying that: "The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal-funds rate target from zero back to a more normal level, probably between 3.5% and 4.5%, and restore its balance sheet to pre-crisis size and configuration," Hoenig said in a speech at the Central Exchange in Kansas City."

Mr. Hoenig also cautioned that not taking such steps until evidence of economic recovery is incontrovertible risks bringing about conditions replete with ‘financial excess’ (read: carry trade-induced bubbles) and what he described as ‘economic volatility.’ His views might be in conflict with at least some Fed officials whose views-according to the last set of FOMC minutes- entail a Fed that keeps rates at rock-bottom for an ‘extended period.’

For the moment, much of the gold trade is focusing precisely on the timing, magnitude, and consistency of the eventual Fed exit process. Speculative fortunes (and record gold prices, among other things) have been built mainly on the bet that the Fed is not only stuck in a rut, but that it will not be able to prevent or sterilize the effects of its crisis-induced largesse.

Gold, for the moment, continues to meander in the $1118 to $1142 channel, and while upside pushes are still apparently being favoured, the metal needs to show its mettle at levels above $1180 in order to obviate the reversal that took place last month. At this juncture, let’s just wait and see if $1150 can be attained, first. One veteran trader we spoke to last night, at an event in Barbados, opined that whilst it is not unlikely that gold might see a 2010 high on a short-lived spike (based on a one-off external event) to anywhere between $1280 and $1320, he would ‘sell the stuffing’ out of it at those levels as it would be followed by a hefty reversal.

Of course, others still disagree, and see the ‘spike’ as more like the ‘norm’ or baseline. Why, we have even seen projections calling for an average gold price for this year, of $1290. Others still, are dreaming about $5000 gold based on scenarios that are best left within the pages of a Stephen King novel. That would imply a 32% gain in the year-on-year average for the metal. Traditional year-end crystal-ball gazing is apparently still active, well into the new year.

Happy Trading, and Pleasant Weekend!

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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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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