Flight Club – Monday Kitcommentary


Bullion Bars

The Friday rebound in gold, largely induced by the escalating turmoil in Egypt, came to an abrupt halt this morning, despite declarations that "capitulation" was over and despite a renewed salvo of assurances that gold does not find itself in a bubble. Gold’s Monday morning fall -basically a give-back of about half of last Friday’s gains- came despite a significant slippage in the US dollar (down 0.62 on the index, to the 77.70 level).

The greenback also lost some of the safe-haven bids it attracted prior to the weekend, as traders felt that not going home long some dollars/gold/etc. was less prudent than the alternative. If, in fact, Friday’s surge was just a knee-jerk reaction to the events in Egypt, then very little can be said about the validity of that geopolitical link this morning. The situation in Egypt is hardly looking anything but quite messy at this juncture, with foreigners fleeing the country amid chaotic scenes at the Cairo airport.

Spot gold dealings opened with a $12.30 per ounce loss and were quoted at $1,326.10 in New York, leaving some trading desks we contacted to conclude that, perhaps, the selling that routed prices for the vast majority of January was, in fact, not quite over yet. The yellow metal lost over 8 percent in January, despite the $23+ bounce it experienced on Friday. Lows in gold this morning were noted near $1,322.00 the ounce.

The good news, thus far, is that gold’s current 150-day moving average, near the $1,306 zone, was not demolished. However, the turn-around from that support must also be viewed within the context of the oversold (RSI data showed bullion at the 31.7 mark late last week) conditions that had developed in the wake of the sizeable exits by certain players from the market.

Assorted hedge funds and other players reduced their long positions in gold as bets that the precious metal will clearly be able to move much higher than its most recent price pinnacle became more difficult to find amid improving global economic conditions and the tilt towards a higher interest rate environment. ETF gold holdings fell dramatically during the course of the month.

The largest ever outflow for a single day -from the largest of such investment vehicles- was recorded last week, once again bringing to the forefront the unmistakable influencethat sizeable flows, of sizeable amounts of bullion, into, and/or out of the exchange-traded niche, have, are having, and will continue to have, on the immediate price equation of the yellow metal.

Somewhat conflicting talk was on display in quotes emanating from Barclays Capital over the past couple of trading sessions in gold. Whilst a London product manager for the firm expects gold to reach the $1,700.00 mark during the course of this year, the head of Barclays Wealth unit, CIO Aaron Gurwitz, used the "B" word to describe gold’s status quo.

"We think gold is a bubble. The reason we think it is a bubble is that given the fundamental supply and demand for jewellery and modest industrial use, we think the equilibrium price is between US$700 and US$900 an ounce. The price has gotten much higher because of fear and a fundamental misunderstanding of how monetary policy works.

People say the central bank is printing money. First, they’re not printing money. Second, the central bank creates reserves which they can easily "un-create" by buying back the securities they sold, and reducing the balance sheet. And gold has not been a particularly good inflation hedge over time."

The above was offered by Mr. Gurwitz even as Barclays Capital tenders-within its recent commentary on commodities-that gold might be expected to hit $1,495.00 in 2011 (but then receded towards its long-term $850 projections). However, Mr. Gurwitz is not quite alone in voicing such apparent "dissent" and breaking with the "ranks" (some of whose members got quite vocal in the face of the recent erosion in gold). He is, in fact, at the opposite end of the school of gold thought that one, Mr. Faber, currently embraces, but, he has (growing) company.

Singapore’s OCBC Bank in a Thursday commentary, hinted at 2011 as:

"the year of equities, for three reasons: an improved economic outlook, companies are in good shape after major cost-cutting, and interest rates remain low. The increased cash will make the investment in equity very compelling. As such, gold as a safe haven position may erode as investors demand more equities."

OCBC does not envision that such erosion will quickly bring gold down to what is generally agreed upon as "fair value" (around $800) levels (let alone back to its very long-term average in the $500s) and hedges the statement with the proviso that:

"Should the economic optimism reverse due to a relapse of the crisis, do expect gold prices to surge upwards, possibly to US$1,600 per ounce at end-2011. For now, we expect gold to continue to (be within) a range of US$1,300 to US$1,400 per ounce to 2H10, before starting a decline to US$1,300 at end- 2011."

Spot silver started Monday’s market action with a twenty-cent decline, and with a bid-side quote at $27.81 per troy ounce. The white metal reflected some of the same dynamics that were manifest in gold since Friday; namely, that there may have been an out-sized reaction to the events in Egypt, and that the weekend "safety" positions were not needed in as large an amount as previously thought. Crude oil did not continue to react to the on-going Egyptian turmoil, either. It fell 67 cents to $88.67 per barrel and then recorded only a timid climb on the back of the wilting US dollar.

Platinum dropped $10 and palladium fell $8 with quotes indicated at $1,783.00 and $806.00 per ounce, respectively. Good news from the automotive front for the noble metals:US auto sales are likely to have reached the second-best rate of growth in a year-and-a-half, this month. Overall annualized sales rates of between 12.4 to 12.6 million are certainly welcome levels from the brief but quite chilly "nuclear winter" in which America’s car dealers were caught during the crisis. Quite simply, US buyers are buying new wheels as their old ones are getting rattier by the day.

However, it is not just vehicles that Americans are opening up their wallets in order to buy. Overall US consumer spending rose at a pace that made Q4 the most robust such period in purchase outlays in four years’ time. We are talking about more than two-thirds of the US economy here, thus the importance of the number (up 0.7% in December) revealed by the US Commerce Department this morning.

American buyers did their "duty" on the back or rising incomes, after-tax incomes, and a decline in the savings rate. US Inflation moderated further in December, with the Fed’s price index (ex fuel and food) gaining 0.7 percent in 2010 — the least sizeable such rise since the year that "Mack the Knife" was a big hit in America. Inflation remains below Fed targets, for now.

And thus, the markets turn. Volatility and fits/starts/stalls/uncertainty are here to stay as we round the corner into February. The same can be said about the plethora of opinions (and that is all they are) being tendered about the markets in question (even when such words sound…certain). What else is new?

Happy spectating.

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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