In The Lead – Poll Positions


Precious Metals CommentaryChina’s central bank decided to allow the country’s currency to trade in a wider band against the US dollar starting today. The PBOC’s move was greeted with positive comments by IMF head Christine Lagarde, as well as by US Treasury officials; however they also noted that China must still make further efforts to allow the yuan to appreciate and thus further reduce global trade imbalances.

Some observers have construed the permission to expand the trading range of the Chinese currency as a sign that the country’s leadership believes that the economy can indeed pull off a soft-landing. Others see the gesture as merely another one of China’s familiar and strategically-timed concessions that normally occur prior to important international summits.

Gold prices lost nearly $17 on Friday and they basically erased Thursday’s Fed-oriented, optimism-based move. The yellow metal finished the week at $1,658.50 the ounce. Silver lost nearly 90 cents on Friday it closed at $ 31.50 per ounce, at an important support shelf. On Sunday evening, spot gold bullion commenced trading overseas with a loss of $8 per ounce while silver declined 20 cents. The US dollar advanced 0.11% to rise to 80.14 on the trade-weighted index.

As Reuters puts it, "heady [gold] forecasts of $2,000 per an ounce are receding fast as the [US] economy stabilizes." The news agency’s most recent price poll shows only one forecaster in 33 still expecting gold to average the $2K level this year. Previously, 5 out of 45 price prognosticators had projected such a price average for the yellow metal in 2012.

The median Reuters’ poll gold number came in at $1,750.00 the ounce for the year and at $1,700 for Q2. Speaking of things "heady" and of things "receding fast," at least one $2K gold predictor lost more than just a bet on the call that gold would be trading at that magic number this very morning. Such is the risk of playing Nostradamus with the market…

Meanwhile, the Wall Street Journal’s Liam Pleven reports that gold’s twelve-year rally is "under threat" as since "late February, hedge funds, pension funds and other money managers have slashed by 39% their futures-market wagers that gold will rise. In the same period, they increased by 87% their bets that prices will fall."

One of the money managers which have cut their gold positions (while at the same time not declaring gold as being in a ‘bubble’) is Schroders Private Banking. The institution did not declare gold to be in a bubble, and it did opt to maintain a portion of its clients’ monies in bullion, even as others offer differing takes on gold’s worth and on that of mining shares by contrast.

Schroders got started in 1800 and became known for its private banking activities in the 1960s. Today, the firm manages nearly a third of a trillion dollars on behalf of institutional and well-to-do retail investors the world over. The private bank noted that it would be virtually impossible for UK inflation to average five times what it is today in order for gold to show a buying power that it exhibited over the 300 years from 1630 to 1930.

The head of Schroders’ asset allocation team, Robert Farago, remarked that gold’s relative pricing power recently hit a record high above 500 (when computed on against a base of 100 in 1930) and that the achievement suggest that "gold is expensive and that it is therefore likely to fall in price."

The Journal’s Mr. Pleven ascribes some of the diminished shine of gold to the aforementioned [by Reuters] economic stabilization but to other factors as well. Among such agents of sentiment change are India, whose gold imports face serious headwinds by a government that is apparently fed up with its swelling current account deficit, and even the hitherto thought to be gold-supportive central bank sector.

The WSJ article quotes the research firm GFMS as cautioning in its report issued last week, that, as regards the CBs, it is “improbable [that] they will top their 2011 purchases by much if at all, and, as such, the vast bulk of fresh bullion demand will have to come from investors.”

GFMS noted last week that such demand by investors must top $10 to $12 billion each month, or, about 2,450 tonnes per year, in order for the yellow metal to be able to just tread water at, or near, current price levels. If in fact such large-scale demand by retail investors were to materialize, one Seeking Alpha contributor cautions that perhaps those who would participate should take a look at at least two incorrect reasons for investing in the metal; inflation-hedging and safe-haven-seeking.

GFMS also indicated in its annual review of the gold market that the same fundamentals about which we have been expressing concern here in these articles for the past couple of years now are indeed lining up in a precarious manner for prices unless massive investment demand comes to save the day. Specifically, GMFS cites increases in gold mine output, extremely anemic jewellery fabrication demand, and the shifting tectonic plate in mine hedging activities.

As most of you know, the 80’s and 90’s were characterized by robust levels of producer forward-selling — a phenomenon that at once added new supply of gold to the market and kept a high level of pressure on price advances. That paradigm shifted dramatically over the past decade-plus and it has resulted in a significant amount of physical demand in the marketplace by the very sources that produce the metal. We have estimated mine de-hedging to have probably contributed on the order of $400 to $600 to the price of gold in that period (with at least an equal amount likely added by the advent of gold-based ETFs).

Now, the tables appear to have turned once again. Whereas we once saw hedges to the tune of 3,000 tonnes right around the time when gold was headed for cycle lows near $250 an ounce, we only saw about 150 tonnes left on the books in 2011. In fact, last year turned out to be the first year in more than ten during which miners began to hedge again.

This kind of rare shift in the situation has prompted certain questions among analysts and firms such as GFMS. While the firm’s spokesman did not yet identify an "appetite for strategic hedging against a fall in gold prices" among mining firms (some of their CEOs are in fact the most vocal "gold to da moon!" soothsayers), he did caution that “Producer hedging cannot be a source of demand in future. It can only be a source of supply. The question is: how much supply?” That is something we do not have an answer to. Perhaps the better question might be: "How little in the way of new supply would be needed in the market for gold to "feel" the pressure?"

This morning’s New York-based dealings had gold opening at $1,646.50 per ounce down $12) and silver starting the session at $31.47 per ounce (down 3 cents). The weakness in prices was attributed in part to growing anxieties surrounding the debt situation in Spain and to the perception that, despite the PBOC’s yuan trading decision, the world’s second largest economy is possibly wobbly. The euro briefly dipped under the pivotal $1.30 mark this morning and that development certainly did not help gold.

CFTC reports continue to show that net long positions in gold are being liquidated. 19 tonnes were shed in the latest reporting period on Comex. Long-silver specs unloaded 210+ tonnes from their logbooks and added 110+ tonnes to short positions. The gold and the silver markets are — in the words of Standard Bank analysts — "positioned for weakness." Not helping silver at least is the projection by Scotia Mocatta the India’s imports of the white metal might drop by nearly one-third this year.

Platinum traded down $12 and was quoted at $1,568.00 while palladium climbed $1 to the $643.00 mark. Speculative market positioning in PGMs shows bearishness on the rise once again in platinum as the net longs experienced the largest decline since last September. Palladium did not fare better either, losing more than 156K ounces’ worth of long positions.

In the background, copper was trading 0.16% lower and crude oil was quoted at $103.17 per barrel; a gain of 34 cents, out of the gate. Dow futures indicated a better trading day ahead as investors appeared to cheer the quite decent and better-than-anticipated (up 0.8%) tally for March US retail sales reported by the Commerce Department. This week will be laden with statistics, mainly on the retail and housing fronts in the US. We will be here to report on all that and much more.

Until Wednesday,

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal 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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