Gold, Silver, Metal Prices Commentary – November 8, 2010


Bullion Bars

Global markets further digested the implications of last week’s easing gesture by the US Fed, but the hitherto one-way progress to the upside in various assets took a breather as the US dollar recovered additional ground late Sunday and into early Monday. The US currency rose to just above the 77 mark after news that German industrial production took an unexpected drop in September and as lingering European fiscally oriented apprehensions took the common currency back to under the $1.40 level.

Gold prices fluctuated in a relatively narrow overnight range of from $1,386 to $1,394 — apparently unwilling to give up much of the post-QE2-induced premium but also apparently as yet unable to challenge and overcome the round figure at $1,400 basis spot prices. Traders were seen buying back an apparently oversold greenback as the euro sank on the German economic news and as some players once again turned their attention to non-smiling Irish eyes this morning…

A case was made for a new anchor or "basket" of currencies plus gold, and it was contained in a Financial Times piece written by World Bank President Robert Zoellick. His ideas were met with skepticism by gold market experts such as UBS analyst Edel Tully, who correctly stated that

"Any reserve currency needs a supply that can grow as rapidly as global trade. Gold supply falls significantly short of that basic requirement."

As has been previously mentioned in these columns, the idea of including gold (a modicum thereof) in a broad basket of currencies and other assets might eventually sound even more appealing that at the present time. However, a return to the ‘good old days’ is not only improbable, but also implausible. Unless, of course, one does not ‘mind’ a parallel return to global growth patterns from, say, circa the 1600’s. A sudden adoption of a strictly gold-based system would in fact guarantee an immediate global plunge into economic dark ages. Thus, Mr. Zoellick’s intent may well be noble, but reality contradicts his nostalgia.

China minced few, if any, words when issuing its latest, highly critical take on the Fed’s easing action. The country’s Vice Finance Minister, Mr. Zhu Guangyao had some fairly harsh words for the US central bank:

"For the U.S. to undertake a second round of quantitative easing at this time we feel is not recognizing the responsibility it should take as a reserve currency issuer, and not taking into account the effect of this excessive liquidity on emerging-market economies."

No wonder Chairman Bernanke was out on the ‘circuit’ over the weekend, defending his institution’s actions. He offered a bright(er) future for the US currency when "the economy is growing strongly" and acknowledged that it [the USD] "plays a special role in the global economy."

New York spot bullion dealings opened with a tiny, $0.60 drop in gold prices and the yellow metal was quoted at $1,393.50 per troy ounce as the aforementioned rebound in the US dollar shaved some of the pre-weekend froth off of its value. This dollar-driven decline (some $7.50’s worth on the Kitco Gold Index) was largely offset by some still visible physical buying by the spec trade, thus the near wash in spot values.

Silver started Monday’s session with a 16-cent rise, quoted at $26.92 per ounce. The white metal has well exceeded some of the most optimistic forecasts that have been previously issued for…2011 — at circa $26.00 per ounce. Rhodium climbed $20 per ounce to open with a quote at $2,250.00 the troy ounce.

Palladium advanced $12 at the 8:20 NY time hour, showing a spot-bid quote at $695.00 the ounce. However, platinum lost $10 at the start of the trading morning and was indicated at $1,757.00 spot bid per ounce. The noble metal is seriously lagging the rest of the complex’s performance this year. While South Africa has not encountered major supply glitches and primary users have started to give signs of ‘demand destruction’ as rising, the metal has primarily been boosted by…ETF demand.

Does that sound…somewhat familiar? It is, explicitly, a formula that applies equally well to gold and to silver. As things stand this morning, platinum — despite having turned in a 69% price gain year-to-date gain (not too shabby at all, and much more than double of the one seen in gold), is still in the process of tallying its ‘worst’ performance period since 2006.

Platinum’s net-long speculative positions are clustered at or near their highest levels since…1993. However, GFMS analysts point to its first cousin- palladium -as having a better/tighter supply/demand fundamental underpinning, and thus better prospects of capturing this year’s (and perhaps next year’s as well) performance crown among precious metals.

One might also add that rhodium — which has also largely ‘sat out’ the summer period- might be poised to show some mettle going forward. Recall that it is the one metal that is not substitutable by automakers when building a catalytic device. Recall also, that there is not rhodium ETF (as yet) on the market. Who knows, that might change in the not too distant future, and everyone know what the patterns have been in other metals when such investment vehicles have pulled into the market’s driveway…

A fresh Reuters survey of twenty gold analyst found that more than half of them (by three) opined that bullion will peak in Q1 or 2 of 2011, somewhere between $1,400 and $1,500. Of course, that means no $1,650-$8,000 per ounce, evidently. As well, nearly half (short by one) of the survey respondents indicated that they are of the opinion that gold will, in fact, correct in Q1 or 2 of next year.

Hmmm. “Gold’s rally is going to last until interest rates start to rise, and then you could see a collapse you have never seen in your life,” said Leonard Kaplan, the President of Evanston, Illinois-based firm Prospector Asset Management, and a true veteran of the gold markets.

Mr. Kaplan believes gold prices will peak in the third quarter of 2011. The eventual re-tightening by the Fed should be a watershed (and hopefully not tear-shedding) event for many a market. Recall that it is not a matter of IF, but of WHEN.

Following the Inside Commodities conference in NYC, this writer had the privilege of dining with another couple of gold market veterans; Adrian Day (Adrian Day Asset Management, Annapolis, MD) and Michael Checkan (Asset Strategies International of Rockville, MD). The gentlemen are considered to be among the original "pillars" of the gold investment industry in the US, having already been present in the markets the last time that gold price tags made bold-font headlines; 1980.

Mr. Day runs an asset management book some $160 million large, for his worldwide clients. He has just published a book titled "Investing in Resources” that ought to be mandatory reading for investors interested in this niche. If you want to know all about bullion and mining shares, you might do yourself a favor and grab a copy of his insights. You can glimpse into Mr. Day’s line of thinking in this Kitco News profile by reporter Allen Sykora.

However, use some common sense and caution when/if "running" after this gold market — so say top US wealth managers, nowadays. No doubt, the core ‘ten percent gold solution’ is something one ought to have on a foundational level in most asset baskets. But, "money managers to the rich are warning that now there is tremendous risks lurking behind gold’s shine.

Investors need to be careful not to do what people do in line at the grocery store: always jump to the fastest moving line or, in this case, to the hot performing category, Lawrence Hughes, chief executive of BNY Mellon Wealth Management, told the recent Reuters Wealth Management Summit.

What is one to do, then? Well, in lieu of being apprehensive, perhaps a better move might be to carefully parse the words of Mr. George Lewis, the head of the Royal Bank of Canada’s wealth and asset management team. Timeless and priceless [as in: Who cares about the gold price? All you have to care about is owning some — but not too much] words, these:

"Many financial advisers are still offering gold as an investment option, not in pursuit of returns but as a way to diversify. ‘Within a properly diversified portfolio with precious metals, there is a place for gold.’"


Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and
A Basket Case

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gold will definite break the $1,500.00. it is still far from where gold suppose to be. that is $2,300.00 an ounce.