In The Lead – See PM Tallies As Seen By CPM


Precious Metals CommentaryThe midweek trading session in New York opened with lower prices across the precious metals boards as crude oil slipped by a notable amount and as options expiry and month-end related trading book activities became visible. The US dollar remained above the 79 mark on the trade-weighted index refusing to give up too much value ground following relatively dovish comments on Tuesday by Fed Chairman Bernanke.

Standard Bank’s morning report noted that "Yesterday, enthusiasm for precious metals waned as the boost from Bernanke’s dovish comments the previous day began to fade. Evaporating physical demand also pushed gold lower, dragging down the rest of the complex."

The degree to which the gold market is hyper-sensitive to hawkish and/or dovish words (any at all) that are uttered by the Fed goes to show just how much of last year’s rallies were built on the confidence that the Fed will stand ‘pat’ for-basically-ever.

This morning, market participants awaited US durable goods orders and when that data was released it indeed did not disappoint. Driven by strong demand for heavy equipment and commercial airplanes the monthly metric showed its fourth gain in five reporting periods, albeit the actual figure was somewhat lower than what some economists had anticipated (closer to 2.9%).

Spot gold was down $9.60 at $1,671.00 per ounce while spot silver fell 24 cents to $32.35 the ounce. Gold is at a critical juncture on the technical charts as several averages converge at this point, near $1,680 per ounce. The $1,704 overhead resistance level (and eventual $1,730 target that such a development might portend) has not been challenged and several trading houses have hinted at eventual attempts to test either the $1,650, $1,500 or even the $1,550 supports in due course.

Physical gold demand is seen as dissipating above the $1,700 level while possibly re-emerging under the $1,650 area. Indian jewelers remain on the sidelines, arms crossed and brows furrowed, while the government reassesses the imposition of a fresh round of import duty hikes on bullion. The trade has been hibernating since March 16 in protest, but the country’s Finance Minister continues to opine that Indians are spending "precious foreign exchange" to buy the… precious metal.

Less than one month from now India will be in the midst of the second most auspicious gold buying period of the year — Akshaya Tritiya. India’s gold intake is estimated to constitute 32% of global gold demand by the World Gold Council while the CPM Group figures that the country accounts for 12% of gold fabrication demand in the world. A recently conducted survey by Reuters, reveals that the President of the Bombay Bullion Association has projected that 2012’s Indian gold imports could fall to 450 metric tonnes, down 53% compared to the putative 969 metric tonnes that may have been imported last year.

Speaking of significant market statistics, yesterday, the CPM Group’s Gold Yearbook 2012 was released in New York. We will cover the important supply/demand metrics contained in this important publication in-depth in coming articles. For the moment, let’s mention a few unsurprising but perhaps — to some-still eyebrow-raising facts about the gold market as tallied in 2011. For starters, the finding that gold investment demand fell by nearly 6% last year, at a time when we were all told (by certain agenda-driven newsletters) that investors were beating down the door of their nearest coin shop. Evidently, that was not the case.

We mentioned numerous times in these posts that record and/or near-record gold prices present an obstacle that many an investors is basically unwilling to tackle.

CPM’s analysts found that "Such investor hesitance also was seen in gold coin buying patterns over the course of 2011, in Indian demand trends, and in other aspects of the gold investment market."

The research firm believes that investment holding additions will also decline in 2012-if not by much-and that while no major declines in the price of the yellow metal are in the cards this year, neither are new records.

The firm anticipates a possible trading range in gold of from $1400 to $1,900-and-change for the year. This, despite the incessant chants by mining firm CEOs that $2K and $2.5K gold are ‘in the bag.’

Note that high gold prices do matter and that "Investors as a result appear already to be reconsidering purchasing increased amounts of gold at ever higher prices as they have been doing over the past few years. They are instead showing signs of being increasingly willing to hold off on purchasing metal until prices soften from recent levels, a tendency that may continue in 2012 and beyond.

CPM also busted certain other myths that are present in abundance in the gold market newsletter space. One of them relates to gold as an inflation hedge. Aside from the fact that CPM noted that gold is a currency and that all currencies lose value over the long-term and that therefore gold’s purchasing power parity attribute is largely fiction, the firm also pointed out that investors may be placing their bets incorrectly when it comes to gold.

To wit: Quite a few gold investors are piling into the metal in proportions that a far larger than what a prudent portfolio allocation model might suggest, because they are convinced that we will get sharply rising inflation owing to the recent round of global fiscal stimulus. Investors have also bought the line that negative real interest rates are gold-beneficial. It turns out that, historically speaking, returns on gold have actually shown a tendency to decline when real interest rates dipped under -2%. As for the topic of Weimar Republic-style inflation, CPM said that, in the near-term, this type of threat is a non-issue that the anticipated future inflation levels may also not occur.

One of the reasons for such a paradigm has been alluded to in these columns recently; it pertains to M2 and to the velocity of money in the system.

CPM notes that "M2 money supply in the United States, which accounts for a quarter of global gross domestic product, was at a record high level at the end of 2011. The velocity of M2 money supply was at record low levels during the fourth quarter of 2011, however. The velocity of money supply tells us the rate at which money changes hands or the level of economic activity associated with a certain amount of money supply. In other words, it is the number of times one dollar is used to purchase final goods and services included in GDP. It is therefore considered a good indicator of inflation. Low velocity suggests low inflation at present."

As regards the threat from destructive-level inflation,

"monetary authorities are aware of this danger and plan to sop up the excess liquidity that could result when these funds begin being mobilized," CPM said. CPM’s Mr. Christian then noted that actual correlation between inflation and gold prices "is nearly non-existent."

CPM calculates that the correlation between the price of gold and U.S. inflation levels — when looked at on a monthly basis from 1970 to 2011 (!) stands at 7% and that this correlation actually turned negative in the period between 1990 and 2011." That kind of percentage is not exactly one that defines an effective inflation hedge…

Platinum, palladium, and rhodium also headed lower this morning losing $21, $6 and $25 respectively and coming in with bid-side quotes at $1,630, $650, and $1,400 per ounce respectively. Copper declined 1.65% while crude oil fell 1.3 per barrel (to $106.04). Hedge funds speculating on commodities apparently got it ‘dead wrong’ once again as they placed bullish bets on ‘stuff’ precisely when external market conditions turns against them. For an in-depth take on this, you may view this report by Bloomberg’s Alix Steel. China is mentioned therein, and more than once…

Meanwhile, the US dollar charts indicate that the technical setup is hinting at the fact that the two-week long pullback in the currency may have now run its course. Rising durable goods orders may imply added dollar strength and lower odds of another round of QE by the Fed while rising stockpiles of crude is seen contributing to easing inflationary pressures if prices continue to decline. France is thought to be planning tapping into strategic oil reserves in the wake of the latest speculative push to propel black gold prices beyond reasonable levels. One analyst has dubbed oil as the "new Greece" and warns that global economic growth is now at risk from the situation in oil.

Until Friday,

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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