Gold, Silver, Metal Prices Commentary for Nov. 16, 2010


Bullion Bars

Liquidations in precious and base metals continued to depress prices overnight as well as this morning, despite news that would normally play nicely into the gold bugs’ hands; that of Ireland’s forced bailout possibly moving closer to being a reality.

At the very least, the EU is in the garage workshop along with Ireland, and, having both rolled up their sleeves, efforts to clean up the mess in that country’s banking sector are well underway. "Bailout" or "restructuring" labels are not the issue; the fact that progress is being made, is.

Gold prices touched two-week lows at under $1,350.00 per ounce in the back of a slump in the euro and on continuing apprehensions that China is dead-set on inflation combat as its top priority. South Korea hiked interest rates overnight, contributing to the rising malaise among those who see central banks on an open-ended mission to kill fiat currencies altogether.

Price controls could soon become a reality in China and local officials have intimated that keeping inflation in check via tight controls on money supply, restrictive policies on further speculation-oriented bank lending, and monitoring of food prices remains at the centre of their current focus –growth be damned. The Chinese and Korean circumstances sent Asian equity markets for a ride on the descending price escalator overnight.

The US, meanwhile, is grappling with the opposite scenario — at least as reflected in this morning’s PPI and core inflation figures. Producer prices gained 0.4% but inflation was, once again, a "no-show" and underscored the fact that the Fed likely had the right bogey in its sights as it launched QE2 a couple of weeks ago (even if the gesture has now received its share of sharp criticism and ridicule from practically everyone but South Park’s Cartman).

Core producer prices fell 0.6% in the largest decline since the summer of 2006. Deflation is still shadowing the on-going US economic recovery. A recovery, which, by-the-way, is seen blossoming into GDP growth rates of perhaps higher than 4% in 2011 by Michael Darda — Chief Economist at MKM partners.

A possible glimpse into 2011 was on tap in this morning’s US factory production numbers; they rose by the largest amount in three months. Also bouncing higher was US November homebuilder sentiment; it was showing its second consecutive monthly rise. However, US industrial output remained flat in October –likely due to lingering summer weather cutting utility usage.

The mid-morning round-up of metals prices showed gold struggling to maintain the $1,350 level as the US dollar gained more ground on the index in the wake of the Irish situation putting a bigger dent into the euro. Billionaire fund manager George Soros reduced his stake in the SPDR Gold shares vehicle in Q3 while shifting into another similar fund; the iShares Gold Trust.

However, the Hungarian-born financial wizard’s overall gold holdings have been slashed by a not insubstantial 24% over the past three quarters. Is this a case of selling into the very bubble he identified earlier in the year? One would be tempted not to disagree.

Selling a part of his suddenly much more "shiny" bullion was on the mind of another fund guru; Eton Park Capital’s Eric Mindich. He offloaded 2 million shares of SPDR exchange-traded instrument (6.22 tonnes of the yellow stuff) during the past quarter. Between them, Soros, Mindich, and Paulson (of Paulson & Co.) own/control more than 12% of the largest gold ETF.

Commodities fell across the board on the possibility of further erosion in Chinese-originated future demand. Crude oil lost $1.60 (nearly 2%), copper sank 2.7% and the white and noble metals shed values as well. The Dow fell over 135 points on the aforementioned Chinese and Irish news items. Silver was showing a 12 cent loss at the 10 o’clock hour in New York, quoted at $25.41 (my, how quickly that $30 ‘is imminent’ price paradigm has shifted). As for gold, the $1,325 level now appears as a ‘must-hold’ since clustered sell-stops are thought to be trip-wired thereabouts.

Platinum fell $14 to the $1,657.00 level while palladium gave back an additional $15 to drop to $655.00 the ounce. Rhodium was off by $10 at $2,390.00 per troy ounce. Johnson Matthey opines that platinum will show a surplus for the current year (likely to still be absorbed by ETFs for the most part) while palladium might shift into deficit conditions next year, if Russia does not come to market with stockpile sales.

Volatile metals markets have engendered action on the part of market mechanism mavens. Last week’s hike in silver futures margin requirements (just in time?) have apparently paved the way for similar restrictive moves coming as of tonight’s close in gold, platinum, and palladium contracts as well. Both initial as well as maintenance margins will be affected. Cooking with heat is now best done with a nice pair of Nomex gloves. All puns intended.

No Dudley puns to follow, but the Fed’s William Dudley (he, dove) asserted flat-out this morning that the Fed’s QE (1 or 2 or both) will NOT cause an ‘inflation problem.’ Those words alone were good enough for a seven basis-point decline on the yield on ten-year notes right after the 9 o’clock hour in New York.

It has been repeatedly tendered that the Fed (and other central banks) not only possess the power to create unlimited amounts of money to throw at particular ‘problems’ during given business cycles, but also to suck up (hard, and fast) any such excess liquidity when the cycle normalizes and (most importantly) before one or another country begins to resemble Zimbabwe in terms of runaway inflation. Thus, we bring you the ‘heretical quote of the day’ –

"People do not understand clearly" that "we can have an enlarged balance sheet and not have a long-term inflation problem," Mr. Dudley said in an interview with CNBC.

{Insert howls of disbelief here} Yeah, we know; it’s all propaganda. Like it was in 1982, when the Weimar Republic, famine, and martial law were all ‘imminent’ in the US (at least in the minds of certain newsletter vendors).

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and
Article: Lunch Special: Irish Stew & Fortune Cookie

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