Thursday Kitcommentary From Kitco Metals Inc. – India, Indeed


Bullion Bars

Gold prices meandered within a fairly tight range overnight as fewer buyers or sellers were visible on the scene in the absence of substantial market news developments and amid the emergent trend among participants to square their books and head away from trading desks in search of holiday presents.

This morning’s market radar had two relatively noteworthy blips (one ‘hot’ the other ‘not-so-hot’) on display; the first one showed jobless claims filings dipping by 3K to 420,000 (the second lowest level of 2010) and the second one revealed that US housing starts gained by 3.9% in November (remaining sluggish, at best).

Spot gold dealings opened with muted (50-cent) gains this morning, quoted at $1,379.90 per ounce as the Kitco Gold Index revealed an about equal amount of dollar slippage-induced gains as it did losses from profit-taking selling among funds ahead of the end of the year. The low $1,370s remain an important support level that needs to hold, but on the other hand, the bullishness that was so pervasive even just a few days ago is thought to be invalid unless the metal manages to pierce through its most recent price peak. Following the data releases, bullion edged towards $1,375.00 per ounce.

As for future price peaks, well, they may run into a bit of a demand-side snag if the most recent take on the market by turns out to be correct.

LM Reporter Siddesh Mayenkar notes that India’s gold demand will "take a hit as increasingly prosperous rural consumers switch to other investment options and step up on discretionary items."

While China’s gold demand (provided a sizeable slowdown and/or higher interest rates do not alter the landscape significantly) may go part of the way towards filling such a potentially emergent demand slump, the author cites sources as projecting that:

"demand for gold from rural areas that account for about 70% of annual consumption, which averages 550 tonnes, is likely to fall to 50% in coming years, industry watchers say. With the government keen to make more savings avenues available, rural consumers would consider the newer instruments, taking away money from gold," said Pinakin Vyas, assistant vice-president with IndusInd Bank, a large gold importer."

Such a decline would amount to roughly 200 tonnes of gold not being sought by India’s rural buyers as they shift purchase preferences towards durable goods and automobiles. Despite reports to the contrary and a heavy emphasis on this year’s possibly much better gold intake, the bottom line is that India’s 2009 gold demand hit its lowest level in nearly twelve years.

Bullion market participants note there are indications of market saturation in the consumption patterns visible of the world’s top gold consumer and they fear that local investors are now more likely to switch to other asset classes, including equity mutual funds and real estate. All of this means, that the "pressure" to convince buyers to buy increasing amounts of yellow metals is now going to shift to China. What could be easier than tracking the number of stories on the topic (going forward) that include the country’s name?

One can certainly blame the recent, ultra-high gold prices as the most visible culprit for this Indian trend, but one must also allow for this nascent shift in consumer priorities not only when it comes to investments, but to a ‘general’ and ‘must-have’ shopping list among Indian buyers.

"Sales of large domestic appliances and cars have grown exponentially and this was seen during Diwali itself, while gold sales have not kept pace with this rise," said Daman Prakash, director, MNC Bullion, a large gold seller."

The US dollar also offered little in terms of noteworthy movements as well, but managed to maintain above the 80-mark on the index as remaining concerns about the European debt situation kept bids on the US currency active and pressured regional equities. Moody’s has motioned that it may yet need to take out its rating scissors and trim a letter or two off of Spain’s current rating.

Over in the US, one of the most oft-gauged metrics of the housing market — foreclosure activity — showed a dramatic drop last month. The number of homes being notified that their title is about to be ‘reassigned’ to the lending bank fell by 21 percent in November, making for the largest such drop in five years. Part of the reason for such a contraction in troubled real estate filings can be found in a pattern that normally shows a 7 to 10 percent decline in such activity around year-end.

The other component that may be at work in this statistical release is the cessation of filings that resulted from the robo-signing scandal which made headlines during this fall. However, at the end of the day, actual repossessions by banks fell 28 percent last month to tally just over 67,000 US homes.

That is a relatively far cry from September’s 100,000 mark, even as the current year’s tally could well end up at a record one million homes seized. Nevada led the depressing parade of monthly foreclosures for what is now the fourth year in a row. The state also has the dubious distinction of showing the highest unemployment rate in the US.

Speaking of the Silver State, silver opened with a gain of twenty cents this morning, quoted at $28.99 per ounce as scattered buying was still manifest in fund-land and in ETFs. The white metal has been white-hot but it is precisely such a pattern that has prompted some observers to raise sizeable caution flags on the asset.

Last night’s Elliott Wave update remarked that "stories of silver scandals and [market attempts at] corners are becoming so common that they are starting to surface in the mainstream press. No matter the news item or rumor, the interpretation among rabid silver bugs is invariably bullish." EW further notes that "a Wall Street Journal blog called "The Source" assesses the latest silver hysteria: "If you listen to reports and videos popping up on a number of websites these days, the same thing [that happened with the Hunt brother’s attempted corner in 1980] is happening again."

"Only this time, [it is touted] silver could reach $500/oz from $29/oz currently, some of the reports suggest, because of the trading activities of a handful of banks that have been craftily cornering the market." Yes, it’s happening again, and silver is actually a week past its peak. We could not ask for a more perfect confirmation that a protracted wave 3 down, is on for silver" concludes the update, targeting $25 as the first destination for silver prices as part of said wave that might be in the making.

Platinum opened with a $1 gain in New York, showing a quote on the bid-side at $1,696.00 per ounce. Its close relative, palladium, started Thursday’s session with a $2 gain and a spot bid quote at $748.00 per troy ounce. Rhodium remained at rest at $2,280.00 per ounce. India (as shown above) and China remain at the front-centre (along with ETFs to be sure) in the platinum-group metals niche. This morning’s announcement that GM sold its one-millionth passenger vehicle in China (a Buick Lacrosse, to a lucky buyer in Shanghai) this month only reinforces the trend.

The US automaker anticipates that is will move 2.3 million units (including minivans) in China this year. GM also looks for a 15% gain in sales for 2011. Hopefully, the possible expiration of government car-buying incentive schemes and (more importantly) China’s new penchant for fighting inflation and imminently higher interest rates will not dent the locals’ car fever to a significant extent.

Finally today, a round-up of potential winners for 2001 — as relayed by SFGate (the Chronicle) last night. The paper opines that while gold has been 2010’s headline-maker, metals such as palladium, silver, lithium, and commodities such as coffee and most other food-related ones are likely to show good returns in the coming year. One must note that twenty-one commodities have "outgunned" the S&P this year, and that 17 of them are showing gains of over 20%. Thus, sustainability questions must also be posed at such a happy tally time.

Perhaps the more ‘notable’ stories of 2011 might just come from sectors such as the two commodities that were in the "dog house" in 2010: natural gas and cocoa. It’s all about upside potential in undervalued niches versus chasing incremental gains (following 20, 30, and/or 50 percent gains already under the belt in certain commodities) at the risk of a trend reversal when least expected (with one possible exception: that to be allowed for certain items that we must all actually consume (or else): food and energy.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and
Article: India, Indeed

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