In The Lead – Going With The Flow


Precious Metals CommentaryThe trading environment remained thin and bereft of much energy as the abbreviated market week reopened for business in New York this morning. Overnight, gold breached the pivotal $1,600 mark once again and fell to lows near $1,590 despite a slightly weaker US dollar and despite a hefty advance in copper and a mild rise in crude oil values. Options expiry and year-end profit-booking elicited light but steady selling from market participants and the pressure was manifest in all but platinum prices this morning.

Spot gold traded about $10 on either side of the $1,600 level while silver continued to orbit about 30 cents on either side of the $29 mark per ounce. Platinum advanced $12 to rise to the $1,437 bid-side quote while palladium fell $1 to $658 per ounce. No changes were reported in rhodium at $1,350 bid the ounce. The US dollar was down about one-tenth of a percent and was trading slightly under the pivotal 80 figure on the trade-weighted index.

The euro showed sluggish trading patterns but managed to remain above the critical $1.30 level and above recent 11-month lows so far. The greenback has refused to croak in 2011, much to the chagrin of its numerous morticians who have been promising its demise since, oh, forever. Reality check: currency players have actually augmented the levels of their bullish dollar bets. The CFTC reports that net long dollar positions reached $17.63 billion in the week ending on December 20th.

At the same time, investors siphoned off some $490 million from the commodities’ space. Gold and other precious metals outflows have totaled $1.59 billion while non-precious metals commodities saw net inflows of more than $1 billion. Speaking of the flows end ebbs of money and of gold, here is a situation that ought to be worth pondering as we head for year-end tally time in various assets. It pertains to gold ETF accumulation patterns (the lack thereof, to be more precise).

The epic rise in gold prices has certainly been boosted to a significant degree by the advent and subsequent gold-accumulative behavior of gold exchange-traded funds. Some have calculated the "after-burner" effect of gold ETFs to have amounted to perhaps as much as $400 in the value of gold since 2005 (with another, similar-sized booster rocket effect coming from gold mining firms de-hedging over the past decade).

It now turns out that, despite heavy PR and positively spun ETF stories that were in heavy rotation all year long in 2011, the numerical reality is at odds with such propaganda. To wit: inflows of gold into ETFs have more than halved in the current year. Whereas nearly ten million ounce of the yellow metal flowed into such vehicles in 2010 (307+ tonnes), the tally for 2011 shows only 135 tonnes going into warehouses catering to them (this, according to Canada’s Financial Post).

A combination of "temptations" from other assets (see: stocks and the dollar) and gold’s rising volatility (not to mention record price) have made such inflows become much more "moderate.

Now, we are told, "investor interest seems to be maturing" in the gold ETF niche. "Maturing" in this case means that the surfeit of 1200-1700 tonnes currently extant in the gold market will have to be mopped up by sources as yet unknown- lest the gold market clears at a substantially lower price paradigm. In other words, the dependency on ETF gold absorption by the market was worrisome to begin with. Now, it is scary.

More than 100 tonnes per month — not per annum — would need to now flow into such instruments in order to make a good dent into the market’s projected surplus. As things stand right now, the SPDR gold exchange-traded fund (GLD) is on track to record an annual 2011 outflow of more than 400.000 ounces of gold. There was a time when (Q2 of 2010) accumulation and demand was visible and robust enough to touch such levels.

That time is not now, has not been this year, and 2012 offers little in the way of much-improved prospects along this front. Gold may be money, but money is also cash. When values begin to be perceived in hitherto battered asset classes, that "cash" comes in handy for purchases and gold no longer equates the solo "go-to" option for some. Ignoring such a potential sea-change in this all-important sector could be detrimental to one’s financial health. To be continued…

Much propaganda has also been written this year about the growing interest and participation by Chinese investors in gold. Some see those local investors as representing the biggest news for the yellow metal since…India. Well, not all is well on the gold trading front in China, it turns out. Reuters reports that the mushrooming of gold exchanges in the country has been an out-of-control phenomenon and that speculation has reached worrisome levels that can only be compared to the country’s other bubbles (see: real estate).

As a result, the Chinese authorities have outright banned all gold exchanges aside from two in Shanghai. The edict was posted on the website of China’s central bank ( and it refers to a plethora of illegal, irregular, and unmanaged activities in the gold trading space in the country. The PBOC also stated that some folks will be placed under criminal police investigation as part of the crackdown. Note to over-optimistic newsletter vendors: if this is where you see the ‘salvation’ for the gold market coming from (China’s gold bucket shops), please rethink the matter.

Europe’s situation remains nebulous as the final hours of 2011 tick away, but indications are that there is a growing amount of liquidity in the system in the wake of the extension by the ECB of some 500 billion euros’ worth of long-term loans recently. The recipient banks have been opting to park some of the money they are sitting on with the ECB as reflected in the rise to an all-time high of the central bank’s overnight deposit facility. Despite the liquidity overhang there are still trading room perceptions that gold leasing is alive and well in Europe. Lease rates have not budged very much at all from their negative levels over the past couple of weeks.

Liquidation in gold was also partially attributed to declines in Asian stock markets, most notably the one in Shanghai, where the Composite Index fell to a fresh 33-month nadir with a loss of 1.1% on the session. Local investors continue to be apprehensive about the manifest slowing in the Chinese economy and its fast-declining (but still localized) urban real estate market. As well, they remain anxiety-ridden about Europe’s gloomy prospects for robust growth until it deals with its debt crisis.

To be sure, progress to the upside in Asia’s regional equity markets has been stymied not only by such perceptions but it has not been helped by statements such as the most recent one coming from the IMF’s Christine Lagarde either. Ms. Lagarde remarked on Sunday that "the world economy is in a dangerous situation" and that one might not expect growth rates near the previously projected 4% for the global economy in 2012. Ms. Lagarde believes that certain countries (three out of the four BRICs, at least) might suffer from "instability factors" in the coming year.

Meanwhile, over in the USA, conditions are still improving but they remain at risk from a European "event" that many still expect to unfold in the not so distant future. America’s unemployment levels are expected to shrink only marginally next year but the country’s growth rate could rise to near 2.5% following a rather anemic, sub-2%, expansion that was seen this year. 2012 brings Presidential elections to the forefront and along with them, the turning up of the decibel level in the rhetoric regarding who has been or who might be a better manager of the USA’s economy and labor conditions.

Despite pre-emptive but empty GOP criticism of the Obama administration’s performance in this area, the American economy is set to finish 2011 on an upbeat note. More than 100.000 jobs have been created for nearly six months in a row now, and that would be the best such metric since 2006. Economists now anticipate that some 177.000 position will be added to America’s payroll rosters on a monthly basis, through election time in November. Hopefully, Europe will not derail the projected trends.

Until tomorrow,

Jon Nadler
Senior Metals Analyst — Kitco Metals

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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