In the Lead – It’s Academic


Bullion BarsFurther weakness was manifest in the precious metals’ complex overnight and early this morning as the US dollar was seen approaching the 76 level on the trade-weighted index amid continuing (and aggravating) troubles related to Greece and its debt.

A collapse in that country’s government bonds pushed their yields to 30.26% and there was quite a bit of "contagion" on display in other European bond yields and in the premiums for insuring against defaults (Spain, Portugal and Ireland all caught the Greek flu in that sense) in the wake of the worsening situation in Athens.

Greek PM Papandreou failed to secure support for additional austerity measures and his entire Cabinet is now subject to being reorganized. Meanwhile, the country was once again brought to a halt by yesterday’s general strike. Some analysts have labeled the European situation as that continent’s "Lehman Moment." The euro was hit by its steepest loss since 2009 in the wake of the latest round of difficulties that Greece is experiencing. You know already which currency benefited from that damage…

As the US dollar picked up a fair amount of safe-haven and "risk-off" bids this morning, the metals sank at their opening time in New York. Helping the greenback this morning were news that jobless claims fell by 16,000 in the latest reporting period and that US housing starts climbed by 3.5% in May. Countervailing the positive news was the report that the Fed’s gauge of Philly area manufacturing activity turned negative in June.

This follows a similar development in the Empire State gauge of such activity. There is a school of thought that sees the current rough patch in the US economy as little more than the consequence of the supply-chain disruptions that resulted from the Japanese Sendai quake in March. At any rate, the Dow finally exhibited a modicum of stability this morning, and it managed a 50+ point gain to near the 12,950 level.

Gold was off by $3.40 per ounce and was quoted at a bid price of $1,527.20 while silver lost 45 cents to start the session at $35.36 per troy ounce. The $1,550 and up to $1,570 price neighborhood in gold and the near-$38 to $40 value zone in silver remain overhead resistance targets that must be demolished convincingly in order for bullish tilts to resume in the two metals.

Until such time as that is possibly achieved, the trend remains aimed at lower value ground. Expectations that the Greek crisis would fuel a summer rally in the yellow metal have thus far been unfulfilled and this really ought to be a time for bullion to shine at its brightest, all things considered. More than one source at the IPMI Conference in San Antonio this week posited the possibility that one of the PIIGS countries might need to pledge some of the gold held in reserves to the EBC/IMF in order to secure more time to work their fiscal woes out. Certainly, that would be a better option than a forced sale of bullion in order to raise sorely needed cash.

Platinum-group metals fell in sympathy with the yellow and the white metals, with platinum witnessing a $19 decline to the $1,751.00 mark and with palladium dropping $25 (2.59%) per ounce; the most in the entire complex. It was last quoted at $752.00 the ounce on the bid-side. Rhodium exhibited no change and was quoted at $1,850.00 per ounce. Market analysts still peg that unique noble metal to be under-priced in terms of being nowhere near "fair value" (unlike gold and silver at the present time).

In fact, the BofA Merrill Lynch Survey of more than 250 fund managers reveals that the institutional crowd has indeed reduced its exposure to commodities and has begun diverting funds towards cash and towards bonds. The same surveyed group opines that gold is currently more overvalued than at any time since the final month of 2009. Meanwhile, crude oil has given up a fair amount of its spring price froth and is struggling near the $95 level; a price that many believe is still too high given global conditions.

Thus, it came as not too much of a surprise that Fidelity International’s Multi-Manager Income Fund sold down its precious metals allocation "for fear commodity prices will suffer first as the global economy slows down." On the other hand, the sell-down might perhaps partially also be attributed to the fact that the manager’s ETF holdings had experienced a 90% appreciation since the time they were first bought two years ago.

The theme of potentially cratering commodity values was echoed by Hackett Financial Advisors yesterday; the firm’s principal said he is expecting a "collective tumble" in the near future in that space. The metric that Shawn Hackett uses as an early indicator of a major top being put into place in the niche is the weakness in copper prices. The pattern was manifest back in 2008 and it turned out to precede a significant sell-off in commodities.

Reuters’ Metals Insider reports that "copper prices slid on Wednesday as the US dollar rose and fears of weak growth and demand prospects from the United States, the world’s largest economy, hit investor sentiment."

The then surging dollar (signs of which have also begun to be seen of late) also posed difficulties for commodities at that time and it might do so once again, according to one senior market strategist at commodity broker Lind-Waldock.

And now, for something completely… the same. A view on gold from the world of academia. The decade-long bull market has yielded more research on the yellow metal than perhaps at any previous time in market history. More than 186 papers (most of them in-house productions) have been circulated on the subject, according to Associate Professor Brian Lucey of the School of Business Studies at Trinity College in Dublin, Ireland. Professor Lucey dissected the aforementioned body of work in a monograph titled "What do Academics Think They Know About Gold?" which the LBMA published recently.

As it turns out, the academic studies do tend to underscore a number of long-standing attributes that gold indeed has. However, the same in-depth research also overturns some common (and quite erroneous) views being held by global investors as regards the yellow metal. For example, the collective body of research focuses on  gold as a diversifier and especially on the allocation level that it might occupy in an investment portfolio consisting of ‘traditional’ assets (read: equities). While the gold allocation range mentioned in the studies extends from a low of 5% to a high o 25%, the consensus appears to gravitate towards the 10% mark (a number, which will you recall, has been mentioned in these columns as the possibly "best" compromise in terms of portfolio-weighting).

However, the studies collected by Prof. Lucey reveal that while a low-to-negative-correlation asset- such as gold tends to be- can offer a "natural hedge" in most circumstances, the same asset may actually not be offering "safe-haven" protection in all eventualities. Certainly, that comes as a surprise to some. As for inflation-protection as well as diversification, gold shows that it can be a useful tool but that such benefits are "long-run" phenomena and that they come at the "expense of short-run volatility."

In terms of market functionality, the studies also found that "shocks to the gold price take a very long time to dissipate." Finally, the academics also concluded that the perceived relationships between gold and other precious metals are not corroborated by "strong evidence of long-run stability in the relationship." Thus, for example, "readings" of the historical "coffee grounds" between gold and silver may amount to nothing more than trying to impose wishful thinking on "must-have" ratios that were once the norm and will never likely be repeated again.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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