Gold, Silver, Metal Prices Commentary – August 2, 2010

Good Morning,

China’s leadership drew one step closer to achieving its overheating-prevention objectives as the country’s manufacturing sector reported its first shrinkage since March one year ago.

The CMPMI index, released this morning, showed a reading of 49.4 (with 50 being the ‘neutral’ zone of growth-no-growth). While the slowdown is indeed just that (not a meltdown), it does reveal that official efforts to curb gambling in the property sector and overall overheating are starting to gain traction.

The CMPMI reading is one of two key metrics being used to define the state of China’s manufacturing activities. Of course, these days, with China having stepped up to the number two (!) global economic spot, the applicability of ‘as China goes, so goes…X’ (insert your favorite part of the industrialized world here) is hardly in question. The other thing hardly in question is the fact that the yuan may not manage to climb much higher following today’s set of numbers. Interest rate hikes appear right out of the question as we head for the home stretch of 2010.

Such worries were nearly absent from at least one mining industry jamboree over the weekend; the Diggers and Dealers Conference taking place in Kalgoorlie, Down Under. Nevertheless, powerhouse firms such a BHP Billiton and Rio Tinto have each cautioned that slowing Chinese demand cannot but affect sentiment and volatility in the commodities’ markets, let alone net visible physical demand for assorted base and/or metals. The mining sector is heavily dependent on what it has thus far seen as virtually ‘insatiable’ demand from China (kind of like the gold market is much too heavily dependent on one, historically less-than-dependable –in terms of duration- sector of demand; investment flows).

It is hardly a secret that investment demand has grown to constitute nearly one-third of overall gold demand over the past two years. Lest anyone conveniently forget, that same period also happens to have coincided with some near-misses of ‘total core meltdowns’ (be they in the financial sector, or in the currencies) in the US and Europe. Now, such Chernobyl-like, End-of-Days scenarios have been heavily discounted –if not yet totally dismissed- by global investors. Ergo, lower price bands for the yellow metal.

Commodity brokers Natixis, over in London, have therefore come to the conclusion that whilst gold prices might remain at relatively elevated price points for a bit longer, the combination of quite poor underlying fundamentals (rising mine supplies trending towards record output levels by 2012, for example) and the possible re-start of producer hedging could take the metal towards levels just above $1,050 as we head into Q4 of the current year. As for the coming year, Natixis envisions possible sub-$1K gold (say, around $950) as being the new price paradigm for parts of the year, possible forays to highs near $1150 notwithstanding. Once again, no zeros were omitted in this writing either.

Bullion prices opened mixed once again, on this, the first NY trading session of August. Gold headed lower by $3.80 per ounce, starting the day off at $1177.60 as against a small (0.21) slippage in the US dollar on the index (to 81.38) and as against a still-resilient euro (last quoted at $1.307).

Bullion could still aim towards $1200 and/or $1220 this week, as spec funds try to repair portions of July’s damage, and as short-covering emerges on occasion, but the yellow metal still lack external drivers of the panicky variety that drove it to headline-making levels back in June. Risk-takers continue to chant “Bon Appetit!’ and that is one slogan that bullion bulls truly do not care for. The risk-seeking species remained on the scene this morning, despite the Chinese news and is possibly ushering in a week that feels quite different from the last two; a period during which global contraction was the featured fear of the week.

As was the case this morning, for example, gold took its main cues from crude oil’s hefty $2 rise, rather than any manifest, scary developments on the global scene. Maybe it is the summer doldrums, but most likely not. The scent of ‘fall’ remains in the air on given days.

Gold lost nearly 5% in the month of July, raising questions about whether the highs for the year have indeed been seen back in June. Investor preference for other, more ‘rewarding’ speculative assets has dented demand for bullion, as has the lessened need to hedge against a crisis such as the one that never fully materialized in either the US last year, or in Europe earlier this year.

One look at US and non US bank earnings for example (HSBC comes to mind, not only having doubled its profit, but returning to profit after three horrible years due to loan-loss provisions), and it becomes pretty clear that the critical market sector that ‘should have been dead by now’ is showing that it is anything but, despite ‘smoke & mirror’ allegations from doomsayers.

Silver prices, on the other hand, gained 15 cents at the start of the Monday session, quoted at $18.12 the ounce. In the same just-released analysis we quoted above, brokers Natixis expect silver prices to average $17.20 during the current year, but see a retreat in the white metal towards an average of $15.50 for next year.

Platinum once again came within striking distance of the important $1600 psychological marker, climbing $16 to open at $1585.00 per ounce. Palladium added $2 to start at $498.00 –itself but a hair shy of a critical pivot point. The former traded above $1600 but twice over the past year, while the latter managed an above-$500 feat only in the spring of this year, but not for more than thirty trading sessions.

The noble metals are still looking mainly to the automotive sector’s recovery to help the make further progress to the upside. This, after having both received a substantial boost from heavy ETF-related offtake in the early part of 2010. In any case, auto sales are expected to show that July might have been a busy month on US dealers’ lots as they closed out 2010 models and gave consumers plenty of opportunities to open their checkbooks.

Brokers Natixis expects platinum to average $1600 this year and a possible $1700 next year, while it envisions palladium to turn in a 2010 average of $465 and one for 2011 near $510 per troy ounce. As has oft been said, better underlying market fundamentals equate better expectations of price performance. What a concept. Kind of like the Cabot Market Letter (a normally conservative stock market advisory service) projecting a 2011 stock market rally that could lift the Dow to 13 or 14. Thousand. This prediction, after it witnessed an investor sentiment reading at its lowest point since 1987, just last month. Long live contrarians.

Happy Trading.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

Original article link: Healthy Appetites

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