Gold, Silver, Metal Prices Commentary – October 11, 2010


GoldGood Morning,

Gold prices opened weaker on Monday, after breaking the lower end of the $1,345-$1,355 overnight range in early trading. Spot gold was quoted at $1,343.30 at 8:20 NY time and it subsequently dipped to just under the $1,340.00 mark as a rise in the US dollar and a slippage in crude oil prompted additional selling. Silver opened with a 7-cent loss and a quote on the bid-side at $23.15 the ounce.

Similar profit-taking conditions pushed platinum prices lower by $18 (to open at $1,683.00). Palladium remained resilient, not shedding any value initially, and opening at $584.00 the troy ounce.

Most of the decline in gold values-as seen on the Kitco Gold Index- was due to active selling by speculators and only about one dollar’s worth of losses were attributable to the slightly higher (at 77.24 on the index) US dollar.

Could it be that Friday’s knee-jerk bounce was in fact a head-fake and that Thursday’s decline was possibly the start of a long-overdue correction of an as-yet-unknown magnitude? Not by some market metrics, but the level of nervousness is on the rise with record-high bullishness percentage levels defining the speculative crowd.

The TimesLive of South Africa notes that "As it is, the usual gold bugs are predicting Armageddon and calling prices several multiples of current levels so long as US budget and current account deficits are not addressed; gold coin dealers are egging on the innocent to buy with predictions of fabulous profits to come."

However, the paper also cautions that "According to strategists at Barclays Wealth and Commerzbank, rising gold prices have been self-feeding or self-sustaining. They have created their own momentum. And ETF buying has been partly responsible for the gold “bubble”.

"The gold market, it is argued, is close to a tipping point, at which millions of individuals offload their gold investments because there is little prospect of further price rises and because interest rates (and, therefore, the cost of holding gold) inevitably rise. Recently, Barclays Wealth apparently suggested to clients that SPDR shares be shorted as a precaution against a gold price fall."

At least two icons of hard-money investing let certain words that can only be interpreted as ‘rising caution’ slip into their vocabulary over the past few days. Words such as ‘good times do not last forever’ and ‘the higher an asset goes, the less I like to buy it’ were noted (even as said gurus remain long-term gold bulls). Dennis Gartman made it more obvious than that; he will become ‘interested’ in the market around the low $1,200s level, when/if that comes about.

The weekend meeting of the IMF resulted in little more than lip service being paid to the necessity of avoiding a global-scale ‘currency war’ despite the topic having obviously dominated the gathering’s agenda. A pledge to cooperate more on the currency front was however offered as the awareness that currency interventions are but one step away from trade restrictions (and worse) was also on display in Washington. As things now stand, the working out of a possible solution to the growing impasse has been left to another agenda; that of the G-20 meeting coming up next month.

The IMF meeting did yield a communiqué that concluded that the global economic recovery is ‘proceeding, but remains fragile and uneven.’ The document also affirmed that "the rejection of protectionism in all its forms must remain a key element of our coordinated response to the crisis.’

Finally, on the topic of currencies, the joint release had this to say: "We call on the Fund to deepen its work in these areas, including in-depth studies to help increase the effectiveness of policies to manage capital flows."

Certain currency short-sellers were delighted with such wording; largely interpreted as a reprieve at least until November.

Thus, the US dollar traded at an eight-month low vis a vis the euro and at a fifteen-year low against the yen during the overnight hours. Gold prices advanced to $1,355.00 during said hours as anticipation of Fed easing did not ease up whatsoever. In fact, hedge funds and large specs are more bearish on the greenback than at any time in history. Parlay those bets into other niches and you get Friday’s virtually 100% bullishness level in gold and silver. No room for any error among these players, to say the least.

The ‘error’ may come in the form of disappointment that the Fed might not be willing to throw another 1 trillion bucks at the unemployment problem that refuses to go away as the US economy undergoes recovery. Several economists have opined that Fed purchases may not do much at all to help bring about a significant bounce in the joblessness figures, and that an up to $2 trillion-sized asset purchase program would only yield perhaps a 0.4% gain in US GDP- if that.

Half a trillion of bond shopping sorties might only boost US GDP by 0.1% while still leaving the unemployment rate above the 9% level for a couple of years yet to come. Will the exercise be worth it? Some say it will not be (some, who work within the Fed, that is). We have heard from them all, recently. The Fed’s long-range targets for joblessness percentages are above 6% and such levels may be achieved without the cosmetic ‘enhancements’ of a shot or two of monetary ‘silicone.’

If in fact the Fed adopts a small-steps-at-a-time approach and starts an IV drip of bond purchases while gauging their effectiveness on the economic equation, the trade may throw a tantrum the likes of which will certainly displease the majority of trend-following latecomers to the commodities party. Aside from that, the recent –and largest in eight years- decline in the US dollar’s value has raised the odds of a rally of sizeable proportions by quite a bit at this juncture.

Oversold dollar conditions based on ‘selling the rumor’ (the Fed’s November ‘gimme’) are as obvious as Pamela Anderson in an art museum. The ‘shock & awe’ campaign on the easing front that the greenback’s short-sellers expect the Fed to undertake in three weeks may indeed turn to "s&a" – among them, should the Fed not live up to their dreams. We are at a place now where dollar bulls have capitulated and/or handed in their surrender notices which are under review.

BNP’s London-based head of currency research pointed to the (short-dollar) boat in which ‘everyone is sitting’ as ‘no longer safe.’ Never mind the fact the former Fed Chief Greenspan said the US would have to do ‘very considerable damage’ to the greenback in order to render it unappealing as an investment. China, evidently, agrees. Its reserves might soon reach 2.5 trillion dollars and the single most obvious holding within said reserves remains… the (you-know-what-back).

Here, on the other hand, is one boat that is a relatively ‘safe’ as a bet for today, at least: the gravy one.

Pass it over, please!

A Happy Thanksgiving Holiday to all of our Canadian audience!

Also, a Happy Columbus Day, America! See you in Little Italy!

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

Original article link: Holiday Assortment But no Dessert for the IMF

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