In The Lead – Papa Was A Ruling Throne


Bullion BarsThe events that began in February and became known as the "Arab Spring" have now apparently turned into (a) fall; the fall, that is, of the reign of Mr. Gaddafi. Rebels poured into Libya’s capital over the weekend and are reported to be in near full-control of it, while clashes have now been reported near the besieged ruler’s compound.

Separately, the "Colonel’s" son was arrested by rebel forces and is now (along with his Papa) facing charges of crimes against humanity in The Hague’s International Criminal Court. Howler of the day: even as images from the turmoil in Tripoli dominated the world’s television screens, Syrian President Assad went on… television to declare that he is not "worried" about the unrest roiling his own country…

All of this sure took long enough, was fraught with uncertainty, and appeared at times to have no end in sight; well, that is apparently about to all change. Even as Mr. G’s whereabouts were still unclear, some US lawmakers wasted no time in taking advantage of the circumstances and became all atwitter on Twitter last night, complete with 140-character declarations of "freedom/liberty/peace/victory" and such.

The Libyan uprising did have a notable initial effect on oil prices but analysts have now opined that whatever shortage premium crude oil has been carrying since February should soon dissipate, albeit Libya might take some time before it is able to resume full output of the commodity. Brent crude did slip towards $107 on the Libyan news but US black gold traded more than $1 higher this morning, mainly on account of a lower US dollar and continuing expectations that the Fed might give certain accommodative signals this week.

Even as one of the primary catalysts for the start of gold’s 2011-based gains is apparently falling away, the market continues to now blissfully ignore that development. The Libyan uprising and related gains in crude oil values was among the chief price-moving agents that ignited gold’s ascent from near $1300 in early February to the present time. Signs of said blissful ignorance have been noted by various market observers but they are being counted as "also-rans" in a sea of sky-is-the-limit pronouncements that are currently the rage again.

The head of Dubai-based INTL FCStone, Jeffrey Rhodes — a name that is familiar to many in the gold industry-noted at a gold conference in Kerala, India, this weekend that:

"people are buying gold and they don’t understand why they are buying gold and that’s a big problem and that is a classic symptom of a bubble."

Mr. Rhodes characterized the present gold market as a "caveat emptor" market.

Speaking of India, the news flows remain filled with conflicting news reports of just how much or how little the country’s gold imports might end up being at the end of the current year. One of the conclusions one might walk away with after reading such disparate headlines and content as shown in these news stories is that India’s gold imports are either a nebulous mystery wrapped in an enigma, or the subject of tallies that are dependent upon who is being asked and when.

No joke, this. While the Hindustan Times confidently projects that Indian imports may surpass the 1K tonne mark this year, Reuters India forecasts a drop in same (of perhaps as much as 20%); to perhaps at least the 825 tonne level (off 12% from 2010’s putative record). At the same conference where Mr. Rhodes spoke this weekend, the range of estimated Indian gold imports given for 2011 extends from 500 (!) tonnes (as per the largest gold-importing bank, Scotia Mocatta) to 1,000 tonnes (as per the BBA and JJ Gold House). Okay, go and try to pin down an actual figure. Best of luck.

Separately, veteran market diagnostician Ned Schmidt remarks in his latest "Gold Thoughts" that:

"near the end of any investment cycle a transfer of ownership normally occurs, from investors to speculators. The asset moves from strong hands to weak hands, from real ownership to fictional ownership in the market for contracts for future delivery. That usually set up conditions for the penalty phase, as those still bleeding from the Silver bear market fully understand."

Mr. Schmidt computes that — based on ratios of gold’s value to the S&P 500 (from 1945 to present) the odds of "nonsensical forecasts of $5,000 gold" (which would mean a negative 4.5 ratio of gold to the S&P) are fast-approaching the zero mark.

None of the above stopped bullion speculators from pushing the yellow metal to a fresh overnight record price of $1,896 in Asian trading. Monday’s action in New York got off to a positive start in the entire metals’ complex once again, on the heels of last week’s string of daily gains in gold. Spot dealings had the bid side quoted at $1,867.00 per ounce in gold; nearly $30 under the overnight peak, but still showing resilience and the adrenaline boost it is carrying courtesy of the spec crowd.

No "glances" of import in the direction of the US dollar (apparently still above 74.05 on the index) or at the recovering (by 55 points) Dow this morning; it was all "full-steam-ahead." The juncture where numerous, formerly impactful external news are no longer part of the gold market’s daily dynamic has been reached once again. It goes up because it is going up and 95%+ believe it to continue to do so.

The aforementioned crowd of specs did not alter its speculative positioning a whole lot (okay, the reduced it by just a tad); the tonnage the longs have been piling into now stands at above the 930 mark; a statistical development that — analysts at Standard Bank (SA) opine — makes the yellow metal look "vulnerable." The tally: July 1 = $1,481. August 22 = $1898. "Vulnerable" and "overbought" and "correction" might take on entirely new meanings, if and when. Meanwhile, speculative short positions are only a touch higher than last year’s averages; another peg to worry about.

Silver started Monday’s session with a gain of 34 cents, at the $43.24 per ounce bid mark. The CFTC positioning data shows a hefty decline in silver speculative shorts and a concurrent rise in longs. While the shift in positioning apparently reflects some growth of confidence in the prospects of price gains to come in the white metal, the Standard Bank analysts caution that, it too, remains vulnerable to sell-offs and that its upside is "capped." One item to watch as relates to silver’s vulnerability to a sell-off is the continuing ebbing of ETF-based intake of bars.

Last week more than 51 tonnes of silver flowed out of that investment sector and its cumulative holdings now stand at 14,387 tonnes; still down by nearly 1,200 tonnes on the year during which the half-century price mark was once again revisited after 31 long years. As noted in Friday’s Elliott Wave short-term update, the white metal faces an area of "substantial resistance" that extends from $43.19 up to as high as $46.14 the ounce.

Platinum, palladium, and rhodium all showed decent gains at this morning’s opening bell. Platinum added $17 and rose to $1,900 on the offer side of spot, touching the forecast made earlier in the year by Standard Bank’s analytical team. Net speculative length in platinum has increased in the past reporting period as per the CFTC. The overall positioning reflects a slightly less bearish stance on platinum than was the case a fortnight ago.

The markets’ focus now shifts to Mr. Bernanke and the speech he will deliver on Friday morning from Jackson Hole Wyo. Ask the same markets and it would appear that they have already baked in the sweetness of the gift of a QE3.0 into the dough.

"The bond market already is pricing in an expectation that the Fed will announce new purchases of $500 billion to $600 billion," Barclays Capital analyst Anshul Pradhan said in an Aug. 12 report, according to Bloomberg News.

Mr. Pradhan said that "investors looking for confirmation in Bernanke’s Jackson Hole speech may be disappointed." Why? Well, for starters, to say that any such "offering" by the Fed Chairman would be met with a Katrina-sized maelstrom of conflicting (read: opposing) "reactions" on the part of fiscally-conservative politicians in the US (not to mention also on the part of his own FOMC colleagues), is to state the… very obvious. Do note that this speech comes at a time when perceptions that the Fed saved the "aristocracy of American [and to some extent European] finance from going down the tubes" have been making the rounds in the news. Legislators who might want the Fed to act will surely be asking for a QE (any QE to come) that is directed at the man in the street, for a change; on that one might place solid bets right about now.

Perhaps Mr. Bernanke will just resort to enumerating the list of available options with which to try to maneuver this apparent rough stretch of economic road. If, on the other hand, he is now convinced that the signals received over the past trimester are indicative of the "R" word being already underway, then he is more likely to ask for permission to act before it is "too late." He is likely to be castigated by one camp (markets) or another (politicians) no matter what choice he reveals. The man finds himself in a similar "Sophie’s Choice" conundrum as German Chancellor Angela Merkel is facing currently.

Ms. Merkel can just let the euro zone fall apart and concentrate efforts on keeping Germany’s economic engine from acting like the one in a Trabant car used to. She can also just ignore the growing grumblings of members of her own party and the German public-both of whom are apparently less than willing to be seen as having bailed out the various PIIGS out there. Well, look at the "bright side" of things; at least Germany is now thought to be able to balance its finances a lot sooner than was expected. The AFP story delves into the details as to why this might be the case; it is a worthwhile read.

Finally, Hugo’s gold might soon set sail on the high seas and head towards Caracas. Marketwatch confirms that:

"Venezuela [really, Hugo] is planning to repatriate more 200 tons of gold, worth about $11 billion, AFP reports. The precious metal store, most of which is held at the Bank of England, will come home “as soon as possible,” Nelson Merentes, the president of the Central Bank of Venezuela, told the wire service late Sunday."

Howler number 2 of the day:

"President Hugo Chavez is "also taking $6.2 billion in liquid assets and bonds held by Swiss, British, French and American banks and transferring them to institutions in “friendly” countries like China, Russia and Brazil."

Man, those "unfriendly" countries… what were they thinking???

Hey, it’s ok though. Soon, some similar amount might find its way back into those evil hands — provided Mr. Gaddafi strikes a deal for a quiet "slip-slidin’ away." Remember… (insert name of favorite former dictator here).

Until tomorrow, another day of the laws of [market] gravity in suspension.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. and

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