Gold, Silver, Metal Prices Commentary – May 5, 2010

Fund Feeding Frenzy Begets Fund Flight

Good Morning,

Yesterday’s metals price cratering certainly came as somewhat of a surprise to market watchers who were convinced that the morning rally in gold to very near the $1195.00 level was the harbinger of yet another day of robust gains, and one that might possibly bring bullion to (or beyond) the $1200 psychological mark.

The yellow metal in fact did not retain its safe-haven aura despite the threat of the spreading of Greek contagion as the US dollar peeled away from yet another (higher) curb and a host of equities and commodities were discarded in a brutal sell-off.

"Gold lost out in selling from funds that now worry about the gold holdings of Spain and Portugal as possibly having to be mobilized," said George Gero, vice-president of global futures at RBC Capital Markets, in Tuesday’s closing market wrap. Whilst there certainly was a profit-taking component to the Tuesday decline, it is hard to argue that silver, for example, was ‘ripe’ for a near $1 cave-in on account of only such motivations.

The selling pressure continued this morning (albeit at a somewhat more subdued pace) as market participants observed Asian stocks being hammered overnight (the Shanghai and the Nikkei eventually ended higher) and as the embattled euro continued its journey under the 1.30 level for yet another day.

Jean-Claude Trichet is seen fighting hard to save the credibility of the euro, the ECB, and the EU itself after having discarded collateral rules for Greek debt in the process of throwing that country the much-needed proverbial flotation device. Meanwhile, unfortunately, three people have already been killed after a bank building was set on fire in Athens. That is the real tragedy, and one hopes, there are no more acts in this play.

Gold, on the other hand, was perceived as fighting for its credibility as a safe-haven asset and was seen as once again being grouped with risk assets (thank you, momentum funds) and sold in favour of the dollar — which, at this point, was seen as the best alternative holding even if it might itself present some structural problems or might be approaching possibly overbought levels.

New York spot dealings opened the midweek session with assorted losses in the complex as the greenback approached the 83.75 level on the trade-weighted index and as oil gave up another $1.5 to slip to the $81.25 per barrel price marker. Spot gold started off with a $2.00 per ounce decline, trading at $1170.20 after having touched an earlier low at $1164.20 the ounce.

A slight recovery ensued in the first half-hour of trading and observers were on the lookout for possible bargain-hunters to make an appearance now that an opportunity to buy the metal $30 cheaper than on Tuesday morning had emerged. However, as Kitco’s AM Roundup technical analyst Jim Wyckoff observes this morning, "Many traders continue to seek out the U.S. currency and U.S. government securities as a safe-haven asset amid the developing European Union sovereign debt crisis."

Meanwhile, the ADP survey indicated that US private sector jobs grew by 32000 positions in April- the third consecutive month of job additions. Despite the figure being largely in line with economists’ expectations, the statistic casts a bit of a shadow on the upcoming unemployment report, due on Friday and could perhaps give rise to more risk aversion (and a softer Dow once again?).

The battle for $1170 (or $1160) might thus be in the making for this day. Losses incurred in the equities markets are however once again (shades of 2008) forcing investors to sell gold (and oil) to cover the financial damage from exposure to that sector. Reaching for the most liquid parts of a portfolio and mitigating losses with partial liquidations of such assets is thought to be one of the primary purposes of gold as ‘insurance.’ A margin call can indeed relegate gold to the margin –for at least a while.

Silver continued lower, opening with a fresh 16-cent loss at $17.70 per ounce, widening the recent gap in the gold/silver ratio a bit further, and threatening to undo the three month-old uptrend in the white metal. Platinum fell $12.00 to the $1657.00 level and has now lost nearly $70 over a two-session period. The losses in the noble metals complex accelerated subsequently, with platinum reaching down towards $1645 and palladium breaking the $500 mark by $3 at last check.

Palladium dropped $15 to come to within $1 of the $500 psychological mark this morning. Finally, rhodium continued at $2750 having thus far not lost very much in the metals selling spree. Analysts over at Standard Bank (SA) opined this morning that:

"Although gold is not falling much in the face of dollar strength, we believe it can’t ignore a large move in the euro/dollar exchange rate. We expect gold in dollar terms to struggle to hold its ground should the euro move to our target. Gold scrap selling continues. With scrap selling rising, combined with our FX view, we favour selling gold into rallies. We expect gold in euro terms to outperform gold in dollar terms."

A drop beneath the $1160.00 level is seen by analysts as a potential catalyst for further declines in gold. For the moment it remains a currency play — as observed by one bullion dealer in Sydney overnight. That, and a fund play, we might add. Ned Schmidt, author of The Value View Gold Report, said that the recent gains simply reflect speculative trading and not due to doubts over Greece or other negative sentiments in Europe.

Gold, in dollar terms, was seen as way ahead of itself, said Mr. Schmidt in an interview with Kitco News yesterday morning. "What gold is doing has no basis in news events or fundamentals, it is simply trading," he said.

"As long as the chart is going up they are buying, if it goes down, they sell. It doesn’t make any difference what is going on in Greece, or Portugal or Washington. It is being played by speculative traders in a classic model. You can see it every morning when the exchange opens in New York — gold gaps up. That’s speculative trading; it is not investors. And we know from every past experience in every trading market that this type of experience always ends up in a disappointment."

Watch for risk aversion, continued metals selling due to margin call fallout, and further turmoil in Europe. The Greek ‘quarantine’ will be put to the test as one ECB council member sees the rescues going viral, while Spain’s PM denounces such fears as ‘complete madness.’ Who will benefit from said madness? What will benefit from said madness? The jury was unavailable for a verdict, but left a note on the bench: "The only thing certain is uncertainty."

PS- Small (but quite interesting) footnote: Fortisbank Nederland’s VM Group finds that the 2009 full year average cash cost of producing an ounce of gold was $485.00 and that it was up 3% from 2008. Probably not the figure you have been given by ‘peak gold’ partisans. Something else you might not read in those forums today is that China’s gold production was up 4.4% in Q1 of 2010. Just the facts. FYI.)

PPS – And, indeed, the selling resumed and bargain hunters opted to opt out, while gold fell to under $1160, silver lost another 60 cents and platinum and palladium were each seen losing more than $30 per ounce.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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