Gold, Silver, Metal Prices Commentary for Dec. 2, 2010


Bullion Bars

Looking for all the world like a typical December holiday session, the overnight market action dragged on indecisively in gold an in silver. No lack of upside progress was however on display in the noble metals’ complex, where participants continued to push prices higher still.

Most of the tenor of the early trading activity was still shaped by a euro-dollar situational affair and few players jumped ahead into fresh positions ahead of the ECB rate decision announcement. That one was not hard to pre-guess given the background of uncertainty still ruling the skies (aside from the heavy snow clouds) over the Old World.

Mr. Trichet’s office left "well enough" alone, for the time being, rate-wise (1% is the order of the day). It is now up to the man himself to let the inquisitive folk at his upcoming press conference know just what the ECB will be up to in the near future, as regards further bond-buying plans and/or the eventual unwinding of its special liquidity actions. And, evidently, what the ECB will be ‘up to’ — at least until the end of Q1 of 2011 is…more of the same (bond-buying and ‘special’ liquidity measures). Not exactly a recipe for a strong(er) euro…

In fact, most foreign exchange strategists polled by Reuters recently opined that the common currency will continue to struggle against the US dollar and that one will likely find it trading at $1.31 (same as today) in one year’s time (and not even at the $1.33 that had been projected by the same respondents just last month). However, Spain this morning did manage to successfully sell 2.5 billion euros’ worth of bonds (five times as much as Portugal also successfully marketed yesterday) and with that sale, managed to quell contagion fears (for at least the duration of the weekend).

New York market opening time had little in the way of variety to add to the overnight trading patterns and ranges in gold and silver. The yellow metal opened the Thursday session with a $1.80 per ounce gain and was quoted at $1,388.40 the ounce. Silver was showing only a few early signs of weakness, opening with a two penny loss at $28.40 per ounce on the bid-side.

This morning’s jobless claims put a bit of a damper on yesterday’s jobs creation statistics. The dollar however refused to roll over and slip away on the news, at least initially. Gold and silver remain poised to try to penetrate the $1400 and the $29 levels respectively, but it will take some more dollar selling and light treading as resistance levels come into sight.

Platinum continued to burn rocket fuel, rising $18 off of the Thursday morning market launch pad — at $1,706.00 the ounce. Palladium advanced $7 to the $739.00 per ounce mark, while rhodium added $10 to open at $2,270.00 per troy ounce. Yesterday’s GM car sales report looked quite encouraging, as they tallied an 11.4% gain in the number of pieces of rolling iron that were moved off of dealer lots in November.

Car industry sales were up 17% over November of 2009. The average age of the US private auto fleet is ten years. Rising employment gives confidence (and the means) to seek replacing that aging clunker in the driveway. Little wonder then, that the noble metals are sparkling this week. Just use caution, as hedge fund and ETF activity remains quite visible at this time as well.

Chinese gold imports soared in the first ten months of 2010 as local investors ran for cover against what their government has now recognized is Public Enemy No. 1: inflation. The country’s investment oriented demand for the metal may reach 150 tonnes in the current year (as against 105 tonnes in 2009). However, surprises could still be in the cards for those who see Chinese inflation (and potentially related gold buying) on strictly a one-way street to the stratosphere.

The China Stock Digest newsletter cautions that, at the end of the day, "Every China investor knows that Beijing will not allow consumer inflation to get out of hand. In deed, China raised interest rates once and bank reserve ratios twice as the inflation picture worsened. "The fear weighing on Chinese stocks is the worry that Beijing will clamp down hard and cripple China’s growth story. In fact, more interest-rate increases before the end of the year seem to be a certainty."

If real interest rates turn positive, the local investor may have a few investment strategies to rethink, in the Year of the Rabbit.

The Digest then remarked that: "Other inflation-fighting measures, including aggressive price controls, are already beginning to show up, especially in crucial commodities like food and fuel. The biggest fear is that China will shut down the spigot on bank lending. If the current torrent of money coming from Chinese banks slows to a trickle, the real-estate bubble could pop."

With that ‘pop’ certain commodity mini-bubbles may not be far behind in making the same startling sound…

NYU economist Professor Nouriel Roubini has warned that "the economy of China is overheating." He has also cautioned that country — now the planet’s second largest economy-is facing certain asset bubbles owing to recent "excessive monetary and credit growth."

Professor Roubini has also opined that "there were ‘excessive increases’ in gold and oil prices that are creating possible commodity bubbles.

He stated that "several asset bubbles have sprung up in the last few months across the world."

The US, on the other hand, is suddenly not looking all that bad anymore. The American economy is apparently headed for a fairly strong 2010 finish. The country’s factories — while not humming along at full idle — are showing signs of being more active, auto sales are picking up, and even construction spending is up. Despite this morning’s initial jobless claims figures, the reality of yesterday’s report that showed the largest number of private sector jobs as having been added in three years’ time, remains a beacon of hope. Ten out of twelve of the Fed’s regions are showing signs of economic expansion. Rounding out the "hot-cold" data flows this morning, the report that existing US home sales jumped 10.4% in the month of October.

At the center of the restorative trend remains the US Fed, which, as it turns out, has not only brought the US back from the brink of the you-know-what, but has also acted as the world’s de facto central bank when the going got really "rough" in 2008. Huge sums were borrowed from the Fed by firms such as UBS and Barclays as was revealed in a report on 21,000 transactions that was recently made available for examination.

The Fed had 11 emergency programs in place, with which it helped stabilize markets and support the process of global economic recovery. No credit losses were incurred on the rescue programs that came to be closed eventually.

Thus, now, the top forecaster of the US economy for the past two years, Wrightson ICAP’s Lou Crandall, says that this [difficult stage for the US] too shall pass, and that he (and us) can "expect moderate growth and somewhat faster employment growth in 2011. But we should finally have restored a sense that progress is being made."

And now, for something completely different; an at-once “hot-and-cold” and bold forecast for gold prices. Goldman Sachs says gold will peak at $1,750.00 per ounce by 2012. Case closed. You have the possibility of chasing another 25% return from the metal over the next 24 months. That is, if you are not yet satisfied with your near six-fold return on the stuff (if you bought it at its lows back at the turn of the millennium).

On the other hand, "the investment bank said it expects downside risks for the precious metal, which has rallied 25% since the start of the year, to increase as economic growth and real interest rates recover."

Then, follows quite a slam at gold:

"At current price levels gold remains a compelling trade, but not a long-term investment," Goldman says. This is where we part ways, in part. True, the ‘trade’ has been as hot as a batch of Habanero chilies.

However, while not exactly an ‘investment’ per se, gold is very much a long-term insurance policy and savings vessel (one that no investor with assets worth protecting should be without, at a safe/sane/sound ten percent holding level).

(Ed.) In the report, Goldman also suggested it is "a good time for gold producers to begin scaling up hedging of forward production, particularly for 2012 and beyond." Yep, that’s right. Bombastic smugness about gold price prospects that prevents the (recommended and prudent) enactment of hedging policies at a time when downside risks are growing larger than the remaining upside potential might yet unseat someone from their CEO-ship down the road. Ask the shareholders.

Onwards and upwards until tomorrow.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and
Article: Tasty Trichet Treats

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