In The Lead – Captain [Credit] Crunch


Precious Metals CommentaryPrecious metals — with the exception of palladium — opened mildly higher this morning in New York as players awaited US GDP and consumer sentiment data with a degree of caution and as profit-takers stood by to possibly pull the trigger on certain assets following recent spikes. Spot gold started the final session of the week $3.50 higher at $1,724 per ounce while spot silver climbed 20 cents to $33.65 on the bid-side.

Support levels in the yellow metal are at $1,707 and at $1,691 while overhead resistance looms at $1,736 and $1,744 per ounce. In silver, the barriers to overcome on the upside remain neat $34 per ounce. Platinum advanced $14 to touch $1,619 the ounce but palladium appeared stalled with a $2 loss near $688 per ounce. The next upside resistance points in platinum and in palladium are thought to reside at the $1,650 and at the $699 levels, respectively. Rhodium was still ahead by $25 following yesterday’s climb to $1,425.

Despite the hefty two-day rally in gold, the analytical team at CPM Group New York believes that we are possibly in for a short-lived spike in the precious metal. Kitco News notes that "they are maintaining their view that "gold prices will still decline over the next few quarters. "Beyond the start of February gold prices are expected to decline, possibly moving toward $1,700 over the first two weeks of the month," they said, adding that prices should move between $1,500 and $1,760 through February.

They point out that open interest in the Comex gold futures has fallen over the past few days, suggesting short-covering — which is the buying back of previously sold positions to close a trade — drove prices higher. In the physical market, they said the premiums on gold Eagles and gold Maple leaf coins have fallen, "suggesting that smaller investors have been selling gold coins back to dealers during this rally, more than buying new coins."

Analysts at Standard Bank (SA) — albeit not showing too much concern about the development just yet- note that "For the first time since mid-November 2011, our Standard Bank Physical Gold Flow Index moved into negative territory yesterday — this indicates that physical market participants have turned net sellers [recent scrap sales from Southeast Asia have risen]. This lack of physical demand partly explains the inability of gold to make a sustained move beyond the $1,730 level."

Although not covered in the CPM advisory, the fact that physical gold ETF demand has fallen quite sharply since the heady offtake days of 2009 should not go unnoticed by overeager, inflation-fearing individual investors. Gold ETF demand totaled 617 tonnes in 2009, it then fell to 338 tonnes in 2010 and it subsequently dipped to only 171 tonnes last year. That total tonnage is less than the demand levels seen in 2007 (253 t), 2006 (260 t), and 2005 (208 t) and it represents the lowest figure of annual demand from the ETF niche since the very creation of these investment vehicles. Ironically, the decline in 2011 took place during the most intense stages of the European crisis and amid a growing threat of a global one.

Speaking of physical demand, the weak rupee contributed to India’s importing of only 125 tonnes of the yellow metal in the fourth quarter of 2011 — less than half of the previously anticipated 281 tonnes by the World Gold Council. India’s love for gold may in fact have been the prime factor in weakening the nation’s currency and widening its trade gap. $23 billion worth of gold imports into that country in the period 2008-2011may have been responsible for one third of the 1.3% rise in India’s current account deficit, according to analysis conducted by Aussie investment bank Macquarie Capital.

If gold imports were removed from the equation, the deficit would have been half as large Over $1 trillion in Indian wealth has been channeled into what is seen as ‘dormant’ and ‘unproductive’ — as gold is clearly an ‘inactive’ asset that normally does not get sold. Gold is India’s third largest import and albeit crude oil is a more important factor to the nation’s struggling balance sheet, the "contribution" that gold has made to that ledger ought not to be ignored just because one is in love with the "love trade" in the metal. The country’s government certainly is not ignorant of the issue, as reflected in its latest tariff slap on bullion.

As we noted in a recent article, there is an undeniable dark side to the production of gold around the world. We expressed optimism that there are some signs that small steps are being taken to rectify the environmental and human dramas unfolding in relation to the digging up of the precioussss… We are now even happier to report that, among other things, the World Gold Council has come up with "conflict standards" to be introduced this year.

In the markets’ background, the euro traded near $1.315 against the US dollar. While it was not yet reflected in the euro’s quotes from this morning, the much-dreaded credit implosion [AKA THE Credit Crunch] in the Eurozone could already be in progress, according to the readings of December’s lending and money supply data. Private sector lending in the region barely eked out a gain last month, while money supply (M3) growth also contracted significantly. While the focus is on the travails of Greece, Spain and Portugal continue to present a different type of threat to the union. Unemployment in Spain exceeded 5 million and is approaching almost a quarter of the nation’s workforce. Bank lending in Portugal fell by the most on record last month.

As well, while also not yet being mirrored by the $1.315 quote in the euro, the on-going quarrel over Greece’s debt write-downs is pushing that nation ever closer to a (disorderly) default. Little attention is being paid to the fact that the next 72 hours are critical to the future of the region and to the investor confidence levels in the same. Athens is hard at work in the meantime, trying to get a hold of another batch of bailout money from the EU, lest it does go bankrupt by March when it is due to repay more than 14 billion in bonds.

Equity and commodity markets are not yet apparently factoring in any negative news from Europe as they continue to remain enchanted by the Fed’s offer of cheap money for some time to come, even though there are those (insiders, to boot) who see it having to eat its own words and raise rates prior to that time. Also being dismissed in various bets being currently made is the Fed’s overt inflation target of 2% and its longer-range interest rate target level near 5%.

In fact, the latest Fed pronouncement could well push yield-hungry speculators (as well as a bunch of retirees who seek income) into risk-laden assets that they can ill-afford to hold in the event rates rise prior to the 2014 self-imposed target date by the Fed. And, make no mistake; rates could indeed rise swiftly provided the US economy picks up further steam and the European situation morphs into what is perceived as a good enough solution not to result in toxic contagion. For now, however, at least one leg of the US’ economic recovery is inexorably tied to what takes place in Europe these days and in coming ones.

Fourth quarter US GDP came in at the 2.8% mark, in large part owing to a bump in consumer spending and in business inventories. The gain was the largest in 18 months. Still, economists had anticipated a 3% gain on the quarter. As well, America’s GDP rose by 1.7% last year as compared to a 3% rate of expansion that was seen in 2010. Meanwhile, inflation continued to remain a non-threat, with consumer PCE rising by only 0.7% and with a 1.1% increase in the (ex food & energy) inflation index. Stock index futures appeared less than pleased with the data and the dollar remained under mild selling pressure in the wake of the same as well (at 79.22 on the trade-weighted index).

Have a pleasant weekend, everyone.

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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