In The Lead – On The Bias(es)


Precious Metals CommentaryFriday’s initial tilt in the precious metals markets was to the downside as the US dollar continued to strengthen and it reached 79.30 on the trade-weighted index. Gold spot prices fell by about $11 to the $1,706 area as the euro slipped to near $1.32 (once again, below its 100-day moving average despite assertions by European officials that the ‘contagion’ has been ‘contained’) against the greenback and as crude oil moved lower as well, nearing $108 after reports the Saudi Arabia refuted news about a pipeline explosion having taken place.

US gold and silver coin sales experienced a fairly dramatic decline last month as shown in the latest figures from the Treasury Department’s US Mint. Only 21,000 ounces of gold coins were sold to its primary distributors, down by 106,000 ounces from January. Silver coin sales fell by over 75% to 1.49 million ounces from the near-record 6.1 million ounces recorded in January.

HSBC analyst James Steel attributes the decline in sales to the run-up in prices the markets experienced during the month: "The sharp decline in coin sales shows some consumer retrenchment in reaction to the higher prices."

Still, it can also be argued that such sales by the Mint to its distributors are "leading’ in nature as the dealer community stocks up on what it believes will be forthcoming demand. In that sense, January’s offtake can be interpreted as indicative of what dealers expected to move into investors’ hands in February, while last month’s small purchases could be pointing to very slow retail sales during the current month.

The Bernanke-triggered "flash" metals’ 5%+ price debacle that occurred in the final trading hours of February is also likely to keep more than a few retail buyers uncertain about what to do (or not to do) in March. Sadly, the interest levels among retail buyers tend to intensify only after a metal has had a sizeable run and when they are suddenly fearful of missing the proverbial "boat." Finally, while on the subject, it is worth noting that while the February sales numbers do come on the heels of a very strong showing in January, the numbers are also significantly lower than those that were recorded one year ago.

For example, in February of 2011 gold coin sales totaled 92,500 ounces while silver coin sales came in at 3.24 million ounces. We already mentioned the fact that overall investment in the USA in precious metals last year appears to have declined by about $1 billion dollars from the previous year. There is a hint that some kind of potential ‘saturation’ is afoot in the US market following a period of more than a decade’s worth of rising metals prices.

Surveyed metals retailers still indicate fairly low levels on telephone inquiries and relay a feeling of uncertainty among small-scale would-be buyers. This is taking place despite what would normally be regarded as price-supportive background geopolitical developments such as this one.

The most commonly posed question by such prospects is: "Do you think the metals might fall some more?"

At this juncture, that is very likely the $64K question of the day/week/month.

UBS analyst Edel Tully opines that "gold’s incredible 2012 rally was being held up by the fickle speculator community, known to run for the hills at the first sign of danger."

That first "sign" was flashed courtesy of Mr. Bernanke on Wednesday on Capitol Hill. Ms. Tully then looks at the bargain-hunting that emerged in the wake of gold’s $100+ plunge and remains tentative:

"Our hesitancy right now stems from the fact that the buying on this break has been one-sided so far. And it’s not just the physical market that has been staying out of the action; the same applies for ETFs. So, for now, gold’s short-term destiny is in the hands of the spec community, a group known for its fickleness."

The "specs" have clearly been in the driver’s seat; this is a fact we (and others such as Ned Schmidt) have been trying to bring to your attention since at least September of last year. For the small investor, this is not a very encouraging paradigm, to be sure. This market needs the physical component to kick in lest it is prepared to clear at a lower price equation.

Silver dropped 75 cents (2.1%) in New York this morning, to the $34.76 bid level, while platinum and palladium also lost a bit of value. The former traded at $1,693 – now within striking distance of parity to gold- and the latter shed $5 to ease to the $711 per ounce mark. The on-going labor action at Impala Platinum has now resulted in the loss of at least 120,000 ounces of platinum production, not to mention the three lives lost in various melees. Platinum has now made a better than 20% move to the upside in the year to date.

Analysts at Standard Bank (SA) inform us that US automobile sales surprised to the upside last month; more than an annualized 15 million units rolled off of dealer lots in February. This could be the first time since 2008 that the US auto scene will witness a back-to-back monthly period of above-14 million per annum sales levels. Rising consumer confidence, falling unemployment, and the 13K Dow may all have contributed to the robust sales statistics. The US car niche is indeed performing beyond expectations and just as well, since European auto sales slipped by nearly 10 percent in January on a year-on-year basis.

Chinese car sales metrics showed a worrisome decline on the order of 26% in January (again, on a year-on-year basis) but some of that drop is attributable to the hiatus that occurred owing to the Chinese New Year celebrations. In all, the SB analytical team opines that the surge in Car sales in the US and Japan (up 4% in February) still favors palladium as we head into the current month. While the team sees value in palladium at or near $600 they also feel that sustaining prices much above $700 –for the moment-might be a bit of a difficult proposition in the noble metal.

We close out this week with a bit of… science. It turns out that how good or bad humans are at making investment decisions and rationalizing them is often a matter of interest to cognitive neuroscientists. Brain researchers and most of the rest of us have often scratched our heads trying to figure out just why it is that many (okay, most) investors sell at bottoms and buy when Uncle Harry is doing so (at the top). CNBC commentator and author of the "Apprenticed Investor" Barry Ritholtz identifies three cognitive biases that contribute to our collective (financial) undoing:

1. Talking your book. Often the principal motive of hedge fund managers when queried about the future price of gold. Mr. Ritholtz notes that "This is a classic example of seeing the world through a lens of your own holdings. You want them to succeed, you root for them to go higher, and this bias impacts your view of everything that occurs around the positions."

2. Looking for Confirmation. Here, Mr. Ritholtz has an easy time with the arguments and counter-arguments: "How many times have we seen a particular point of view reflected not by the facts on the ground, but by the inherent bias caused by specific holdings. The most illustrative example these days is inflation- as spotted by holders of gold. Arguments, counter-arguments:

"The Fed is causing not just inflation, but hyper-inflation! It’s coming; it’s here, look at the price of everything going higher!" (Except, not so much in the data)

"But medical care prices are skyrocketing!" They have been going up for 2 decades, long before QE.

"Look at Gasoline prices!" Does US/Israeli/Iran saber rattling have anything to do with that? And, gas is still cheaper than pre-crisis peaks.

When you own a specific position, it’s not just that you see the world differently — you actively hunt out information that confirms that position, while ignoring data that contradicts it.

3. Expressing Political Views via Portfolio. Mr. Ritholtz warns us that "This is a set of people who see the world not through the lens of their portfolio holdings, but rather through the holdings of their political views. The danger of this perspective is to you, the investor. These folks do not care about economic expansion, earnings, or your portfolio gains. They are only concerned with the next election."

Mr. Ritholtz concludes that we are well-advised to recognize these biases in ourselves and that investors"should always seek out different investing perspectives from their own. This includes reading economists with differing views, and portfolio managers more bullish and bearish than they — if for no other reason than to understand the other side of your investing thesis."

Therefore, thanks for reading these musings as well.

Have a pleasant weekend.

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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