Gold, Silver, Metal Prices Commentary – September 29, 2010


Gold BarsGood Morning,

Spot gold trading opened the midweek session unchanged, at the $1,309.00 bid level after having oscillated between the round figure and nearly $1,315.00 during the overnight hours.

The setting of the tenth record in as many days (following one of the sharper intraday turnarounds in recent memory courtesy of spec fund maneuvering) did not faze the longs in terms of becoming more nervous about the possibility of additional corrections such as were attempted (but failed spectacularly) on Tuesday.

The bullish market confidence level among said longs was the precise inverse of that being exhibited by US consumer as regards US condition. The latter was the very fuse that lit yesterday’s advance in prices. However, as has also become routine with each such price achievement, the application of labels attempting to characterize this market was a ritual amply on display yesterday as well. "Bubble, parabola, an accident waiting to happen, the beginning of a moon landing" — you name it; it was all there in bold print on Tuesday.

Deutsche Bank opinion has gold as being prices in the "extreme" only at a figure north of $1,455.00. The bank is in fact targeting the $1,450 figure as achievable next year, albeit it lowered its current year projection by 2.8% to $1,211.00 the ounce. Meanwhile, RBC analysts describe the current environment as the "perfect scenario for momentum traders." No specifying whether the traders are creating said momentum, or whether the momentum is creating new traders with each passing day…

Deutsche analysts added that "the rally has the properties of turning into a speculative bubble given that investors seem to be eager to buy gold on inflation and deflation and gold’s ability to rally in rising and falling US dollar environments” without specifying whether or not the metal is already at that juncture, but correctly identifying the ‘any reason to buy gold, is a reason good enough’ mentality that has taken over the daily blogosphere (and, evidently, the market as well).

Others (veteran-and not in the sense of being old-gold analyst Ned Schmidt) see a curve here that can only wear one label; that of a "classic parabolic curve." The problem that Mr. Schmidt brings into focus here, while describing a curvature that has become the envy of one, superstar J.Lo, is that

"the penalty phase of a parabolic curve is not enjoyable. When the end arrives, and they all do end, the discomfort can be down to 40-60% of the high achieved. Some may actually exceed that depending on the nature of the speculation.

Moreover, he also adds that: "Gold, with much of it held in strong hands, may only decline 30-50% from the high. A characteristic of the late stages of a parabolic move is the widespread discovery and fanciful creation of fundamentals and outrageous forecasts. Analysts begin to create price forecasts in a race to grab headlines, and spur speculators on. Am still waiting for oil to reach, what was it, $250."

Mr. Schmidt goes one step further in his snapshot analysis and points to the equally classic contrarian signal that recent central bank behavior (slowing in sales along with scattered purchases) is sending. No news to anyone that central banks were falling all over themselves to get rid of their gold at the very nadir of gold values back around the turn of the millennium.

You, of course, can make whatever you will of such Rorschach tests and conclude whatever suits the mood of the moment. At some juncture the patterns will be dissected in hindsight and the real labels will eventually be applied; was it a Mt. Fuji foothill region some kilometers from the peak, or was it a daredevil jump-off ramp over the Grand Market Canyon that eventually ended up respecting the laws of financial gravity?

Well, there was life in other metals markets as well, gold headlines notwithstanding. Silver opened with a four penny gain and a quote of $21.78 per ounce on the bid side. Platinum added $15 for good measure, opening at $1,647.00 the ounce, while palladium was no slouch either, rising $7 to the $567.00 mark. No change in rhodium at opening time; it was quoted at $2,250.00 per troy ounce. Barclays analysts envision platinum possibly advancing to $1,750 in the current year and opine that the noble metal remains on course for such an achievement unless it breaks the circa $1,595.00 level of support.

Most of what we have witnessed in the complex during the month has been clearly based on perceptions of an inevitable (and now presumably imminent) second chapter of Fed accommodation. We already know how Fed member Hoenig feels about such actions (half a dozen dissenting votes later). He is not alone in tempering such cocksure betting.

Atlanta Fed President Dennis Lockhart says in fact that the central bank’s policy makers have not agreed on the start of a new campaign to buy assets, and that the need for some type of QE is also not quite clear. Mr. Lockhart would prefer giving the US economy another six or twelve months to send statistical signals as to whether it really does require further injections of monetary adrenaline. Another Fed official, Governor Warsh, summarized the current paradigm as follows: "Markets are normalizing if not normal. The economy is improving if not improved."

Since we are loosely on the topic of stratospheric price predictions, how about a real wild one? How about a Dow average at 38,820 (no more, no less) following an eight-year moonshot set to commence in 2017? Ten years after the team of Glassman and Hassett predicted a 36,000 Dow by the end of 2005 (not quite what we got), Jeffrey Hirsch, editor in chief of the Stock Trader’s Almanac offered up that five-digit number. Okay, a 259% gain. The only question is how many will live to see 2025. Recall that 2012 spells: Shhh! "teotwawki" on the Mayan calendar. Then again (were all things to remain kinda equal), there is your $4,852.50 gold, too (and $80 silver, to boot). It’s only a matter of fifteen short years…

Meanwhile, over in China, someone does not want to see stratospheric (make that, outer space, since they already have stratospheric) prices on real estate. Horrors! The Chinese government is imposing a 30%+ (wow!) downpayment requirement on homebuyers. It also asks Chinese banks to suspend mortgage loans to buyers of third (!) homes.

Imagine what might have happened if the US had implemented a no-excuses rule of requiring every home buyer to absolutely put down 20% as a downpayment, prove actual income with actual pay stubs, and not allowed anyone whose mortgage would exceed a third of income to buy a McMansion. Why, we might not even be writing these Fed second-guessing theories, would we? We might even have had that 36,000 Dow by now, eh?

Happy fantasizing.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

Original article link: J.Lo – Approved Curves

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[…] of an inevitable (and now presumably imminent) second chapter of Fed accommodation," noted Jon Nadler, senior analyst at Kitco Metals, […]