In The Lead – Rational Exuberance?


Precious Metals CommentaryThe G-20 meeting in Mexico City failed to produce a pledge by its attendees to chip in with half a trillion dollars’ worth of fresh lending facilities for the IMF. The group signaled that if there is any new money to come from anyone to provide further help to Europe’s now three-years-long crisis, it would have to be doled out only after the region reassesses its financial safeguards next month.

At that point, the next meeting of the G-20 in Washington DC during April might take up the expansion of the IMF’s fund once again. The development left European stock markets on the defensive and it also made for a modest retreat in the euro this morning. That combination of trends bolstered the US dollar and resulted in fresh, albeit small-scale profit-taking in precious metals as well.

Spot gold dealings commenced the new trading week with a loss of $6 per ounce and the yellow metal was quoted at $1,767 on the bid-side. Silver prices fell by about a dime per ounce and initial indications came in at $35.32 the ounce in the white metal. Unless gold commences a decline to under the $1,680 area in the next few sessions, the interpretation coming from the EW technical desk allows for the yellow metal to aim towards not only the next logical overhead resistance price marker(s) ($1,795 to $1,820) but perhaps to the previous peak above $1,900 that was seen last September.

That the latest round of price increases in gold has been an overwhelmingly fund-engendered phenomenon is quite obvious. More worrisome on the other hand are certain trends in the physical markets (we covered the potential erosion in India’s 2012 imports and the decline in USA-based physical investment in 2011 in last week’s articles).

Well, you can now add Vietnam to the roster of countries where domestic investors are suddenly ‘uncertain’ about continued, (some say endless) gains in gold.

VietNamNetBridge reports that local "investors have run out of patience. Together with the warning that gold would be no longer an attractive channel, the State Bank said it is tightening the management over the gold market and compiling the plan to mobilize gold from the public, which are all the big worries hanging over 12,000 gold companies."

In any case, gold’s "paper" bullish sentiment is approaching certain levels (above 90% according to’s Daily Sentiment Index) from which previous sharp corrections have ensued. Silver has some work left to do as it begins to encounter overhead resistance that extends all the way up towards the $37.85 overhead resistance level. If and when support near $32.62 is breached, the tenor of the market will tilt towards deeper corrections.

Both precious metals witnessed an increase in net speculative length in the latest reporting period covered by the CFTC. The commodities’ complex positioning makeup showed that more than one million bullish bets (as in: futures/options contracts) are in place in the wake of the most recent batch of wagering on higher prices being manifested by hedge funds and money managers.

That’s the best such level of betting since September of last year. However, this time, the bullish tilt (in gold for example) comes amid expectations for economic recovery (in the USA mainly) as opposed to the economic and financial Armageddon that many had expected to materialize for several years now. In so many words, this is now a niche that simply does not make room for anything but positive news. That’s when the worrying should begin…

The enthusiasm being seen in commodity futures and options positioning is most certainly not being mirrored in the still poorly performing mining share sector and the type of betting going on is itself being questioned by some:

"The latest commodity flow numbers is catch-up with previous positive trends. People are moving into them based on a string of relatively positive numbers. Whether those will continue to carry weight is a little more questionable," said one money flow analyst at EPFR Global in Cambridge, Mass.

So, is this merely more trend-chasing, or valid confidence in future rallies? You decide.

Before you do so, however, it might be quite worthwhile to heed at least one of GMO’s CIO Jeremy Grantham’s ten maxims for what makes for a successful investor: containing natural optimism.

Mr. Grantham advises that "Optimism can win friends and influence people, but it’s a lousy investment strategy. You have to be willing to hear bearish, bad news about the risks you’ve taken with your money — and to make informed decisions about it. That’s doubly true at times when buyers and brokers are exuberant."

He then goes on and cautions that "market bubbles and the madness of crowds are exciting — until they’re not. Hard as it might be, don’t jump in because everyone else is. Ignore especially the short-term news. The ebb and flow of economic and political news is irrelevant."

Mr. Grantham has not minced words when it comes to the topic of bubbles and China. Just a thought, or two, for those who still insist that China and the fate of commodity prices have nothing to do with each other…

Platinum and palladium lost ground this morning as well, with the former shedding $12 to start the week off at the $1,695 mark on the bid-side per ounce, and the latter slipping $5 to open at $703 the ounce. Investment interest in platinum remains robust as underscored by the largest addition of ETF holdings in the metal for the current year; 24,000 ounces’ worth.

Rhodium was quoted unchanged at $1,475 per ounce. US equity futures indicated potential selling to come in sympathy with what had taken place in European markets earlier in the day and the indication turned to tangible reality when the Dow fell 85 points within the first half hour of trading action this morning.

In the background, the US dollar advanced by 0.18 on the trade-weighted index (to the 78.58 level) while crude oil declined 85 cents to just under the $109 per barrel mark. Near-$110 oil prices continue to pose a potential threat to the emergent recovery in various parts of the globe but, for the moment, the spec funds continue to remain intoxicated by the ‘results’ of the latest pop in values despite clarion calls for a"well-overdue correction."

Said pop has not been lost on the IMF; the institution warned this morning that the world economy is "not out of the danger zone amid fragile financial systems and rising oil prices."

It is not just the IMF that is in the business of doling out warnings and cautionary perspectives on certain economies and trends however. The World Bank (soon to have a new President) has produced a joint study that alerts us to the possibility of a mishap in China’s economy in the event that its leaders do not rethink the country’s development paradigm and what role government plays in the scheme of things economic.

The NY Times reports that the WB research paper found that "As remarkable as China’s growth has been during the past three decades, the study suggests that its ascent has also been dirty, uneven and increasingly dangerous to the long-term health of the nation and the global economy, and that change is needed soon." No suggestions were offered as to the timetable for "soon" in the report. Some say it entails "yesterday."

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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Mr. Nadler, you should work for CNBC where the gold sky is always falling.


From the well-respected John Embry of Sprott Asset Management regarding Jon Nadler of Kitco: “However, in spite of this exemplary performance over the past decade the vast proportion of society remains blithely unaware of what is unfolding in the gold and silver markets. This stems from many sources, the first being the relentlessly negative press from the mainstream media on the subject. How many times does the public have to be subjected to the views of the likes of Jon Nadler of Kitco and Jeff Christian of CPM Group, to name but two? They are not true analysts but purely… Read more »