Gold, Silver, Metal Prices Commentary – October 1, 2010


Gold BarsGood Morning,

With manufacturing activity results on the radar, the precious metals markets’ players manufactured yet another morning full of price surges in the complex. Within a speculative feedback loop that still sees any, even remote sign of US economic weakness as the catalyst for a fresh round of Fed ‘gimme’ dollar sellers invaded the currency market as so many predatory insects overnight.

Such currency market raids, in turn, pushed metals higher, obviating any traces of yesterday’s attempt at a correction and making it look in retrospect like just a slight misstep in the march to (question mark).

Spot gold sported a $5.20 gain out of the session’s starting gate this morning. The bid-side quote was $1,314.50 per ounce, while the overnight new high water mark was but 90 cents short of the $1,320.00 level. The financial media appears to have lost count of the number of records that have been set in recent sessions but they are fairly certain that one Mark Spitz would be green with envy when it comes to the subject of them.

Silver players mounted a fresh assault on the $22.00 mark once again this morning, pushing the white metal 20 cents higher despite what would be an obvious disconnect between a weak US manufacturing index reading (who needs more silver if they are not producing ‘stuff?’) and the need to pile into the metal.

Ditto for platinum, whose market participants’ buying added $29 (!) to its opening quote, raising it to $1,680.00 on the aforementioned speculation that all will be well if the Fed just gets with the ‘program’ and buys something as well. Like some bonds, or something. Palladium gained $9 an ounce, climbing to the $572.00 mark while rhodium showed no gains/no losses at $2,250.00 the ounce.

The string of US economic data that came due this morning actually offered very little in the way of additional and urgent motivating factors for the Fed to launch that certain vessel from the central bank’s docks. Personal spending in August was up by 0.4% (more than the expected 0.3%) while personal income gained 0.5%.

Granted, the numbers show a US consumer predisposed to save (who wouldn’t under uncertain conditions?) but the fact is they are earning and spending. All of this, against a background of tame (a euphemism for barely visible) inflation running at the very edge of the lower end of the Fed’s target zone of 1.5%-2%.

Despite the fact that most of the Congressional record (at least on the Democratic side) shows a US legislature that is apparently loathe to let the Fed throw some more money at the problem of a less-than-Chinese-fast rate of economic progress (something the administration’s critics have no patience for, at all) the positioning ahead of the pivotal November Fed meeting is as obvious as a poppy seed between one’s teeth.

And, how could it not, when — once again, despite several key Fed members coming out against such action this week- one, Mr. Dudley, (he of the NY Fed) argued this morning that half a trillion in government bond buys would equate a 3/4 point cut in the fed funds rate and somehow be the panacea for what ails the US economy? Divisions on what to do about all of this within the Fed are growing perhaps even faster than the vast chasms which have already formed between GOP and Democratic factions in the US body politic.

Furthermore, as veteran stock and commodity market analyst Ira Epstein notes, the US House is likely to be busier considering a bigger fish-fry at this moment; that of leveling formal charges against China for what it sees as currency manipulation. The IMF meets next week in DC and the topic of currency manipulation, competitive currency devaluation, and growing imbalances in the global economy as a result of such self-serving (but intended to be self-preserving) actions will be at the top of everyone’s legal pads, circled in bold. This spring’s pledges by the G20 not to engage in what is ultimately a Shiva-esque death dance of currencies will be trotted out and flashed in front of certain developing nations (who shall not be named here). A vocal US delegation is also expected to be heard from, in said meeting.

Mr. Epstein believes that if the US manages to upset China (despite the by now obvious co-dependent relationship the two countries find themselves in), the latter might just retaliate and

"curtail purchases of U.S. Treasury securities, which in turn could drive real interest rates higher and rally the dollar. A rally in the dollar could initially bring with it a downdraft in gold prices over the short term."

Ira Epstein also said that: "Longer term, I view price breaks as buying opportunities." Still, according to Kitco News – he does offer one concern about over so many trade advisors suddenly offering recommendations to get into gold.

"While the advice is good, seeing so much of it taking place at new all-time highs has me concerned," he says. "It’s important to remember that markets can and do correct. Few go in straight lines, gold included."

All of this brings us back to "The Preciousssss" — gold. In a (courageous) display of utter logic and level-headedness, the CEO of the respected GMFS metals consultancy and statistical services house, good friend Paul Walker, walked into the lion’s den (bull’s pit?) in Denver recently and laid out a list of factors that should (but do not yet) have the attention of every latecomer to the gold party. Every single factor the Paul outlined has been previously mentioned here as a caution sign and potential ‘unravel’ factor in an attempt to have one consider a gold investment allocation as essential, but not by going overboard with it.

Here are eight selected passages from the apostolic message of Paul, as delivered to the Denver love-in crowd, courtesy of MiningmX:

  1. Investment demand is now the key driver in the market, having far outstripped fabrication demand — mainly for the manufacture of gold jewellery — which has collapsed as the price of the metal has shot up.
  2. "My problem with investment demand, is that it’s fickle compared with jewellery demand, which is more consistent. You have to focus on the flows of funds into the gold market.
  3. When investment demand turns negative — as it inevitably must sometime in the next five years — jewellery demand may not pick up the slack until the gold price drops significantly.
  4. "The last time investment demand turned merely neutral on gold was in 2007 and the price dropped $200/oz in two months. I believe the bull case for gold over the long term is fatally flawed."
  5. "The United States economy will get back into growth within two to three years. The Federal Reserve will then have to re-establish its credibility through its interest rate policy. The key variable affecting the future of the gold price is the return of real interest rates, which will be negative for gold because at that point investors will start to query whether they buy gold or some debt instrument.
  6. "That may be some way off — but it’s going to happen. At that point you don’t need to have people actually sell gold for it to go down. You just need them to stop buying. The gold market has to run just to stand still in terms of investment flows required," Walker said.
  7. "Everybody thinks I’m a pathological gold bear [sound familiar?] but, I actually don’t have a problem with gold going above $1 400/oz, given the extent of the current economic mess."
  8. “But the end game for gold is going to be the return of a market environment with positive real interest rates. I’ve a suspicion that’s going to happen a lot sooner than many people in this room might think."

Go ahead and try to dismiss any of the above ‘eight commandments’ knowing full-well that a) GFMS has been the more accurate gold price forecaster over recent years, b) the supplier of market flow data to the World Gold Council, and one of the two most frequently used sources of supply demand statistics in the mining and investment community (the other being CPM Group NY).

As good and as plausible as Paul’s opponent on the Denver stage (Martin Murenbeeld) might sound, time (after a decade of a marathon run and three years of an additional sprint on top), could well be on Paul’s side. Expectations reinforced by merely more expectations do not a bright future portend, even if making for conditions to allow for a hundred or two dollar’s worth of "perks."

And thus starts the first day, of fourth quarter, of the tenth year, of the millennium. At odds. Within the Fed, within the US government, within the public at large, within the investment community, and most certainly within the gold niche.

Happy odds-making.


Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

Original article link: The Go[ld]spel According to Paul

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