Over the Hedge? Apparently – Friday Kitcommentary


Bullion Bars

Overnight follow-through selling continued in gold and brought it to within $6 of the $1,300.00 mark at one point. The nearly incessant flow of gold ounces out of global ETFs resulted in their cumulative balances having fallen back to levels not seen since June of last year.

As things stood this morning, the yellow metal was on course to complete its fourth week-on-week drop as well as the most extended declining trend in nearly one year. Trading at the 150-day moving average within the same month is not what gold buyers, who did turn out on January 4, with the expectation that 2011 was simply a continuation of 2010, had in mind.

Spot bullion dealing opened the final session of the week with a very modest bounce, gaining 90 cents to rise to the $1,315.80 level while the US dollar slipped 0.09 lower to 77.69 on the index, just ahead of the release of US GDP data. Support at or near $1,300 per ounce is now the talk at trading stations, and the charts do not offer too much in the way of same until the 200-day moving average (nearer to $1,280) in that regard. However, after nearly a full month of battering, some rebound ought not to come as a shocker. For the time being, $1,320 and $1,350 up to $1,375 will present barriers to have to roll over.

Much of such rebounds depends on what happens in the ETF niche. The Motley Fool’s UK twin, Fool UK (we won’t go there with puns) mentions (not in passing) that:

"the relentless march upward of the gold price — which began several years before the financial crisis — seems suspiciously correlated with the invention of gold exchange-traded funds. These now dominate gold trading, yet they were only launched in 2003. Gold ETF holdings rival the reserves of all but the [five] largest central bank hordes [sic]. It’s hard not to suspect this sudden accessibility of gold as an asset has moved the price too far, too fast."

Recall the "happy digging" chart we showed at the end of Wednesday’s comment? Well, as it (unsurprisingly) turns out, China was quite the contributor to the non-peak gold peak that global mine production recorded last year. The country managed to dig up nearly 341 tonnes of the shiny stuff in 2010, making for a gain of 8.57 percent. China is entering the fourth year on the list of participants in the global gold output race at "pole position." Well, at least in this case, it was acknowledged that China’s gold output was "stimulated by the upward trend of gold prices." Duh.

Meanwhile, silver was off by 6 cents, opening at the $26.86 mark after an overnight visit to the $26.59 level. Platinum and palladium managed more defined gains at the open, with the former climbing $7 to $1,792.00 per ounce, and the latter adding $3 to open at the $807.00 price mark per troy ounce. Contrary to expectations, carmaker Ford reported lower Q4 income as it opted to trim debt from its balance sheets.

Signs that gold (and silver) are not the sole assets being unceremoniously dumped by fickle spec hands (something we have repeatedly warned about) were clearly manifest in the markets, overall. Mutual funds aimed at capitalizing on emerging markets, for example, suffered their largest weekly loss of funds since the middle of 2008 (a time when practically everything was being sold off) as global investors demonstrated that their speculation regarding interest rates trends has become more of a…conviction.

Such convictions are not based only on the fact that the "BICs" (Brazil, India, China) have already lifted interest rates in order to combat inflation but also on the perception that the EU, the US, perhaps Russia, and others (see: the Arab world) will soon want to do something in order to avert the possibility that inflation gets out of hand. In so many words, the time has come (judging by inflation levels in 7 out of 10 of the largest developing nations) for central banks to tackle that bogey. Unrest in Algeria, Tunisia, Yemen, and Egypt certainly adds to such perceptions.

This morning’s US GDP data revealed that the US economy was following the general course that Treasury Secretary Geithner had already described in broad terms in a Davos speech earlier this morning, and more specifically, to talk-show host Charlie Rose: "We now have a sustainable expansion, not a boom." The American economy did record a more robust rate of growth in Q4 of 2010, at 3.2%, a number that was 0.6% higher than that noted in Q3. However, economists (eternal optimists?) had factored in a 3.5% pace for said growth rate, and were heard grumbling a tad over the news.

There was nothing much to grumble about when the economic data was looked at, in more detail, however. The "take-home" bullet point within the data set was the pickup in consumer spending. That component showed a 4.4% annualized rate of expansion and it was the best showing since early 2006. Well, at least one can now more reliably count on the American wallet to do its share in the recovery battle.

Also notable is the fact that 2010’s cumulative GDP growth rate was 2.9% – a number that followed a 2.6% contraction recorded in 2009- the best US growth rate in half a decade. Recall that perceptions that the US (and global) economy are on the mend have also been factors cited in the recent sell-off in so-called "safe-haven" assets. Today’s figures reinforce such views among investors, even if they do not make for a case of (too) early euphoria.

In the category of "news that we never thought we’d hear again" was the report that Japan is (gasp!) slowly climbing out of deflation and that its unemployment level has unexpectedly dropped to 4.9%. Ironically, the news that deflation is easing to the lowest level since 2009 came at the same time as S&P lowered the country’s credit rating to AA — on account of what the agency called ‘persistent deflation.’ The Land of the Rising Sun could soon see a rise in its GDP back into positive territory, along with a (much welcome) rise in consumer prices. Unlike in the States however, the consumer remains reluctant to do battle at the local shopping centre for now. December retail sales slipped 2%. Bad Santa.

Friday’s roundup continues with news that 45% of polled-by-Bloomberg-respondents believe that China will come to experience a financial crisis, and do so inside of the next five years. The remainder? Well, another 40% of the 1,000 respondents expect such a crisis..after the five-year window of time. In other words, most people see a China that will be unable to navigate a course that keeps it away from the outcome that is normally the consequence of credit-driven bubbles.

The outcome is familiar to many in the West. We just saw that movie. Given China’s stature in the global economy, its trade valuation, and the size of its reserves, this might fast turn not into a case of ‘too big to fail’ but more like ‘too big to even think about a crisis.’ How the unfolding of such events might be prevented might soon turn into the attraction du jour/week/month/year. The Rabbit is nervous, in any case.

More assorted "future-talk." Or, futures-talk, as may be the case. Guess where the "hedgies" are next aiming to throw their vast sums of money? Down the drain. Or, in the tub, if you like. The new, ultra-cool and compelling trade to come is…drum roll…water. You think gold is precious? Try H2O for just a minute. Try going without it, for starters. When the topic grabs enough attention to become a hot agenda item at the Davos summit, you know that the hedge fund guys cannot be far behind. April water futures, anyone? A "liquid" ETF? You know it’s coming. Want a preview? Look no further than the current gain in global food prices (one that is sparking riots all over the place) as being the direct result –at least in part- of scarce water supplies. The other part, well it’s called speculative greed. Drink up.

Finally, John Paulson is now looking into a place where drinking water is not exactly in ample supplies, but the potential for mega-profit, is: the Sonoran Desert in the Southwest. The man who bet against real estate (before he bet on gold partially) is not looking to bet…on real estate. In the hardest-hit quadrant of the US real estate map, to boot. Last fall, Mr. Paulson spent $42 million on 8277 residential lots and 22 empty model homes in Arizona, Colorado, and Nevada.

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

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