In the Lead – Back On The Roller-Coaster


Bullion BarsA larger than nine percent reversal in the price of silver overnight helped drag the entire precious metals complex to lower price ground as the new trading day dawned on Thursday. Proving once again that it is little more than investment nitroglycerine, the white metal turned away from the high of $39.01 seen just hours prior to the start of trading this morning and fell to lows just above the $36.00 mark as sellers made an aggressive exit from the niche and likely took some sizeable profits in the process.

For the moment, the previously apparent push towards the upper end of the $39 – $42 zone appears to have failed at the bottom end of that range and brings into question what might come next for the metal. At any rate, the leakage just this week of some 280 metric tonnes of silver from the ETFs that use it for their backing has helped bring the total tally of the current year’s losses in such balances to 1,331 metric tonnes. Not exactly the type of pattern that makes for a sustainable period of price strength in silver.

Thursday’s opening bell in New York saw gold declining by about $7.00 per ounce to start at just under the $1,520.00 level despite a sizeable easing in the US dollar (off 0.40) on the trade-weighted index, and despite a still-resilient crude oil (down only three pennies at $101.29 pbbl). Silver fell 86 cents (2.27%) while players were seen trying to halt its slide with less than successful efforts. However, losses in both the yellow and the white metal were pared somewhat following the worse than-anticipated figures on the US jobless claims and GDP fronts. The disappointing figures added to selling pressure in the US dollar within the first half-hour of trading action and this helped the precious metals recover somewhat.

Speaking of the greenback, just when PIMCO has sounded the alarm on the US currency, Boston-based Fidelity Investments ($1.46 trillion under management) opines that "the value of the dollar is close to a bottom." In fact, the firm’s manager of the Fidelity New Markets Income Fund, John Carlson wrote in a report on their website that he has "never been more optimistic on the long-term prospects of the US dollar and the US economy." The dollar has lost 13% over the past year even after it gained 3% since May the 4th. The battle of Carlson versus Gross bears watching, folks. Much money under management is at stake.

Thus, and not to be discounted still, for the remainder of the session, would be larger-than-"normal" (whatever "normal" might be for silver anymore) moves in either direction. Whether or not gold also begins to exhibit a trend towards having clearly turned away from attempts to penetrate into the $1,530 – $1,545 zone will define some of what could take place in silver, but, at this juncture, one could say that it is rather the latter that is "calling the shots" in the precious metals’ space. Players will be looking out for options expiries and the emergence of pre-long-weekend book-squaring rituals which some label as the "get-me-out-before-the-weekend syndrome."

Platinum dropped $12 on the open while palladium eased by $4. The former was quoted at $1,769.00 while the latter showed a bid indication at $746.00 the ounce. Rhodium was unchanged after having bounced back by $30 to the $1,910.00 per ounce bid-side quote. Picking up on yesterday’s theme of deteriorating fundamentals in the noble metals’ niche, traders at Japan’s metals giant Tanaka Kikinzoku Kogyo K.K. projected that the losses in auto production in the wake of their country’s worst ever temblor might result in a surplus of platinum of as much as five metric tonnes this year.

That tonnage of higher supply than demand compares unfavorably with last year’s overhang of only 600 kilograms for the noble metal. Such a ballooning in supply could impact the hitherto robust price advances in the metal on the charts. Platinum has gained 18 percent in 2010 and palladium vaulted 71% higher. Japan still represents a source of demand as high as 15% of the total global tally in platinum. As a result of the recent developments in Japan, Bank of America Merrill Lynch (the most accurate forecaster for platinum over the past two years) has scaled back its average annual price forecast for platinum to $1,838.00 from the $2,000 level for the current year.

On the other hand, palladium could still remain in a deficit situation this year, despite the fall-off in Japanese autocatalyst-related demand. Albeit this year’s shortage might only amount to perhaps seven or eight metric tonnes as compared to last year’s more than fifteen tonne deficit, the market’s overall balance still offers some support for prices in the nearby lower price channels on the charts. If Chinese jewellery demand, ETF acquisitions were not slowing and if Russia did not come to market with the roughly one million ounces of the metal with which it did in 2010, the situation might be a tad different. We noted yesterday that palladium-based ETFs have seen a leakage in balances of about 42,000 ounces in the current year.

Some of that situation was apparently reversed during the month of April. Analysts at StandardBank (SA) noted that Chinese palladium demand improved last month, as the country imported 22,923 ounces of the metal — some 5,000 more than it had in March. To be fair, there is a huge divergence in what Swiss customs versus Chinese customs data reports are for such exports/imports. In fact, Chinese customs figures show a 44% decline in month-on-month imports for palladium.

Over in the US, palladium demand also appears to have ameliorated last month with net imports of 124,880 ounces of the metal. Some 24,228 ounces were possibly added to ETF holdings and that may have reversed the aforementioned shrinking trend for such balances in the current year somewhat. Thus, the StandardBank team envisions decent support for platinum and for palladium at the price zones that are found near the $1,700 and $700 levels respectively, while still targeting $1,900 and $950 for possible peaks later in the year for the duo.

While we are on the topic of production and demand for metals, it is worth mentioning that South Africa’s highest court has ruled that former mine workers can seek damages from companied where they worked under the previous apartheid-era’s conditions. Estimates are that mining firms might face as much as $100 billion is claims from such affected workers (whose lungs have been severely damaged by the dust found in South Africa’s mines).

While some expect settlements in such cases to tally far less than the $100 estimated by RBC Capital Markets in London, the executives as AngloGold and Harmony have thus far either said that they have made no provisions for such damage claims or that they feel it is too early to determine the very issue of liability. Negligence on the part of the firms would have to be proven in some cases, but the recent ruling evidently "opens the floodgates" for damage claims by perhaps as many as 300,000 claimants who once worked deep in the bowels of the country’s mines to bring precious metals to the light of day.

Some have claimed that the mining firms were fully aware of the risks of silicosis (the lung condition that results from exposure to underground dust) and that it was preventable, yet they skipped the expenses of providing additional underground ventilation to the workers whom they treated as "a commodity" — according to one of the claimant’s lawyers. RBC analyst Leon Esterhuizen concludes that the "million-dollar question is how big the settlement will be." Make that the billion-dollar question, perhaps.

We close today with a reminder to visit the splendid website where the latest addition of images showcases bars from China’s ICBC, and the CombiBar (made by Switzerland’s renowned Valcambi) — an innovative 50-gram unit that offers the option to "detach" up to 50 pieces of 1-gram sub-units to the owner. Quite a concept, that.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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