A Happy Mending – Thursday Kitcommentary


Bullion Bars

The selling pressure in precious metals continued for a fourth session this morning, as the US dollar built on its previous, economic data-induced gains, and as risk appetite (a word that keeps being in high ‘rotation’ among market pundits) gained further traction, but not for certain commodities and assets. Gold suffered and concluded its largest two-session decline in nearly a full year on Wednesday.

The ‘false’ start that briefly gave the bulls hope of ‘more of the same’ for the remainder of the week and perhaps longer, succumbed to the realization that perhaps economic conditions are improving fast enough on a global scale (and certainly in a robust manner in the US) for central banks to commence thinking about the (for safe-haven and commodity specs) "unthinkable" — a withdrawal of the "easy money" upon which so much of the various chart parabolas in certain assets had been built since last summer.

Perhaps such exit strategies may not be enacted for a couple of quarters, but the sentiment related to incessant future gains based on previously seen difficulties in the global economy is certainly undergoing a test at this time.

While the necessary gold "lining" will not suddenly go out of fashion, the possibility that there may not be a need for quite as much of it under future circumstances being hinted to by emergent statistical data is gaining odds with each passing day. Perhaps the world has decided that it has had enough of crises and doom, perhaps some are "disappointed" that fiat currencies have not demised as promised, perhaps the New Year brought a new mood with it.

Such factors remain to be ascertained, and they will, of course be revived once again, when/if gold starts a move in the opposite direction. For the time being, as UBS sees it,

"In the midst of a short-term commodity depression, a stronger dollar and, more importantly, growing conviction in the U.S. recovery as macro data improves, gold is struggling to assert itself.”

Such a "struggle" (or, at least the attendant volatility) may well continue, as one or more bits of economic data showed improvement this morning. The number of Americans filing for unemployment benefits –as reflected by the four-week average fell to 410,750. That number is the lowest in claims filings since July of 2008. Even if claims for the week ending January 1st rose by 18,000 filings (to 409,000) , the trend shows that employers are more confident, are not handing out pink slips like candy, and that the labor market in the US is clearly on the mend.

Moreover, the confidence level in European economic recovery climbed to a three-year high last month. German factory orders surged 5.2% in November, in their biggest gain since the first month of 2010.

Finally, Ireland could create a second asset management agency in order to "slim" down the Irish banking system and assist in lessening the dependence on ECB funding for it. Crisis? What crisis? Sorry, Supertramp.

Spot bullion prices opened lower once again this morning as physical selling, coupled with the US dollar’s muscle-flexing took additional value out of the complex. Gold fell $10.80 per ounce at the market’s opening bell, and was quoted at $1,367.80 as against the 80.40 reading on the dollar index. Various support points are still being hinted to, when it comes to the yellow metal.

Some traders are content to try to put fresh long positions on near the $1,360 price zone, while others warn that they might have to "reconsider" strategy if the precious metal breaks below the $1,340s any time soon. Technicians over at LaSalle Futures in Chicago pointed out that the yellow metal is trading under its 50-day moving average (and that’s "not a good sign" in their words) and that it could be targeting the 200-day one (at around $1,266) should the pattern of asset reallocation (mainly into equities) keep being manifest.

Silver dipped under the $29 mark with an opening quote at $28.98 (down 28 cents). Platinum and palladium declined as well, with the former showing a $6 per ounce loss at $1,721.00 and the latter losing $16 in value, to start the session at the $758.00 per ounce level. Mineweb’s Lawrence Williams opines that silver, copper, and the noble metals group may be "in far more of a bubble than gold" while pointing to the hefty percentage gains they have experienced in recent months.

Mr. Williams then (correctly) identifies the "trouble" with such "over-the-top" gains:

"Perhaps the main difference in investor classification is that copper, palladium, and to an extent silver (very much borne out by its similarity in performance to palladium), are seen as industrial metals with supply/demand parameters much more dependent on global industrial growth than gold where investment demand (seen as more fickle by the bubble proponents) has a substantial impact. Yet if one looks at the charts this ‘fickle’ investment demand has been consistently growing while the industrial commodities have suffered far more ups and downs – and sometimes very substantial ones."

Time and again we have warned about conditions whereby a particular market becomes a junkie to "fickle" investment demand, it becomes divorced from underlying supply/demand fundamentals, ignores long-term mean price trends and sustains itself on talk, momentum, sentiment, speculation, and froth. According to Commodity Online, several commodities analysts have already warned that [for example] crude oil prices [currently above $90 per barrel] could "crash" to $80 per barrel level in 2011.

"I am unsure if commodities led by gold, silver, copper and crude oil will be able to sustain the current rally. There is a fundamental chance that commodities prices can crash. The main reason for this is that prices of crude oil, gold and agricultural commodities are at record highs," Sam Johnson, a commodities specialist. According to Johnson, historically commodities prices have crashed for short durations even during super commodities cycles.

"Commodities will witness a cooling period in 2011. I would not call it a big crash in prices. But certainly, commodities prices will come down," Mr. Johnson added.

Meanwhile, Edward Meir, senior commodities analyst MF Global, one of the largest global commodity brokers, says while investors have reaped rich dividends out of putting their money into commodities, they need to be "cautious" about commodities class in 2011.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler
Article: A Happy Mending

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