Der Optimist – Friday Kitcommentary


Bullion Bars

Gold and silver extended Thursday’s deep losses early on Friday as leftover selling continued to be visible and the probability of margin call-related selling rose significantly. Gold fell to two-month lows at $1,340.00 basis spot bid values, and has now put in its worst monthly performance since last July as well as its third consecutive weekly drop.

The most readily identifiable factors responsible for gold’s turn in fortunes could likely be much more than mere "profit-taking" or asset book-adjustments. Rising optimism about the progress of global economic recovery and the return of the appetite for other, (seen as) more attractive assets has prompted fresh outflows from precious metals-oriented ETP products. Such tonnage leakage might be indicative of the fact that the preference for more gold than necessary for insurance purposes is waning among investors.

Assets of the yellow metal in global ETPs fell by 9.84 metric tonnes, to 2,067.57 tonnes, yesterday, according to data compiled by Bloomberg, from 10 market data providers. It was the biggest decline in gold balances since Oct. 7 of 2010. Bullion holdings in such products had reached a record at 2,114.6 tonnes on Dec. 20th of 2010. The hope (as expressed by certain bullion vendors), at this juncture, is that bargain hunting-related offtake from perhaps China (ahead of the Year of the Rabbit) and India (always formerly ready to bite amid price declines) will pick up some of the slack and help the metal stabilize at some point.

Adding to the aforementioned rising levels of global optimism, the Munich-based Ifo Institute reported on Friday that its "Business Climate Index" increased to the highest level since record-keeping of such data was started in 1991 following Germany’s reunification. The euro hit a two-month high (@ $1.355) in the wake of the German data. In Spain, the government announced that it has a plan to boost the capital of the country’s savings banks, known as "cajas." Over in the USA, jobless claims benefits applications fell by 37,000 in the week ended January 15 to 404,000, the US Labour Department announced on Thursday. Small steps? Perhaps. Important trend-changers? You bet.

Most polled economists had been anticipating the filing of some 420,000 claims. Moreover, despite wobbly US housing starts figures revealed earlier in the week, the number of permits for buildings did take a substantial jump, as did the sales of existing US homes in December (up 12.3%). To be sure, not every bit of news is rosy-pink just yet. To wit, Bank of America threw $1.2 billion out of its corporate windows last quarter, following a $2 billion write-off in its mortgage-related unit. Analysts were not happy.

All of this manifest improvement in global trends notwithstanding, all we are being offered in terms of "information" from the hard money newsletter niche, are the same shopworn assertions that the ‘worst is yet to come’ and of the still-imminent and ‘utter destruction of the USA and of the US dollar’ as well as of the ‘unsustainable debt loads’ and "24/7/365 naked money printing"– you know that tune. It is circa…30 years of age. But, somehow, we still do not bear Zimbabwe-issued passports. Go figure.

Spot gold bullion opened the final session of this brutal week with a $3.30 per ounce loss, and was quoted at $1,342.30 on the bid-side. Within the first hour of trading however, the precious metal broke under the $1,340.00 mark as continuing long-liquidation did not appear to be drying up. Up to the time this story was filed, the lows in gold were recorded at the $1,337.00 mark (within striking distance of a $100 fall-off from the early December 2010 price peak, and also a match for last October 17th London PM Fix level).

Once again, the drop in value took place against a decline in the US dollar on the index (down 0.37 @ 78.45) underscoring the fact that predominant selling was at work in the physical market. As players eye the bearish head-and-shoulders top reversal pattern that has formed in February gold, there is a potential for a test of what is thought to be a support zone around the $1,330.00 level. The 100-day moving average (at $1,354) now presents resistance in lieu of former support.

Silver fell 30 cents at the market’s open, with spot bid indications at the $27.17 level. The white metal traded at overnight lows of $27.10 per ounce. Similar developments on the ETF front as those in gold continue to put question marks over silver’s near-term price prospects. Technicians, at least, continue to point to the $25 area as the next potential target for silver players to test on the downside. The white metal, in a notable twist of fate, is this year’s worst performer in the Thomson Reuters/Jeffries CRB Index, after having dazzled investors in 2010 with an 83 percent gain.

Meanwhile, the iShares Silver Trust has lost 346 tonnes of the precious metal thus far this year, while Barclays Capital underscored once again that "investor interest is critical for silver, given its poor supply and demand dynamics." That reality is precisely what we attempted to point out in a recent overview of silver’s fundamentals. Adding to silver’s present woes, the Taurus Fund Management Pty sold all of the silver holdings from its $200 million precious metals portfolio, citing the fact that, in its view, "[silver] simply went up too much in too short a period."

On the other hand, platinum prices managed to climb $10 at today’s market opening, rising to $1,819.00 per ounce. Palladium was ahead in price as well, showing a $3 gain at the $813.00 mark per ounce. Meanwhile, rhodium added $10 of its own to bid values, and was quoted at the $2,390.00 per ounce level.

The noble metals do not appear to be lacking buyers amid news that inform us that, for example, China imported 40% more of one of the group’s components (platinum) last year. Albeit the Chinese government is now placing some restrictions on new car registrations in the current year, in an effort to address nightmarish urban traffic conditions in the country, the nation’s car sales are still on track to eventually show a 10 to 15 percent annual gain in 2011.

And, since China was very much on player’s minds during the metals’ meltdown this week (something we alluded to in the first part of the Kitco 2011 Precious Metals Outlook recently), let us take a small excerpt from a Reuters Q&A on the topic of Chinese policy; specifically as regards that scary word: "tightening."

Q: HOW will they do it? Answer:

"A slew of measures are likely including higher interest rates, tougher reserve requirements, faster currency appreciation as well as administrative measures such as bank lending restrictions, property market curbs and price controls. Their total impact, however, is likely to be more gradual than heavy-handed. In monetary policy, the central bank will rely mostly on required reserves, because they are seen as a softer alternative to interest rate increases and it can change the requirements without seeking cabinet-level approval.

Some analysts think the required reserve ratio could climb to as high as 23 percent by December, from a record 19.5 percent now. On rates and the yuan, investors reckon authorities will be far less forceful. The market consensus is for interest rates to rise 50 basis points by the second half. For the yuan, analysts believe gains will be capped at about 5 percent this year. The China Securities Journal, an official newspaper, said on Friday that the next interest rate increase could come as soon as the Chinese New Year holiday in early February.

There has also been a debate about lending curbs, with the central bank pushing for a lower ceiling than other government agencies. But with the bank regulator pushing this week for a quick halt to off-balance-sheet lending, the indication at present is that Beijing is indeed pulling in the reins, aiming to cap new loans at about 90 percent of last year’s total."

Until next week, take care, and we hope to see you ALL (well, most of you anyway) at the upcoming Vancouver Resource Investment Conference in that most beautiful of Canadian — indeed, world cities.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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