In The Lead – Payrolls Payoff


Precious Metals CommentaryPrecious metals underwent a mini-meltdown on Thursday and approached key support levels once again despite an only modest gain in the US dollar on the trade-weighted index. We could call yesterday a "sell everything" or "risk-off" kind of day all we would like to; the reality is that the relatively weak economic data coming from the US economy failed to undermine the greenback, it failed to make more than a 62-point dent in the Dow, and it certainly failed to ignite fresh QE3 hopes and lift gold and other precious metals at all.

Spot prices settled the afternoon session in New York with losses of $18 in gold (at $1,635.80), 58 cents in silver (at $30.07), $28 in Platinum (at $1,531), $9 in palladium (at $658). Another big decliner on the day was black gold which lost $2.77 to end at $102.45 per barrel. Reports had OPEC "trying" to see that crude oil is "pushed" towards the century mark as the cartel is exhibiting some demand-related jitters at the moment.

Given the situation in Europe and possibly in China as well, that comes a little in the way of a surprise. This morning the specs turned the aforementioned OPEC wish into reality by selling enough crude on the floor to have it slip beneath the $100 per barrel mark for the first time since February. The achievement comes just a few weeks ahead of the start of the so-called US "driving season."

This morning, the concluding session of this week offered…more of the same ahead of the release of the US Labor Department’s non-farm payrolls figures. Gold slipped to lows near $1,625 whilst silver traded at a $29.75 per ounce low. Platinum and palladium touched the $1,525 and the $655 bid levels, respectively.

On the institutional front, JP Morgan Asset Management has recently reduced exposure to gold by 5% in its holdings. Royal Bank of Scotland trimmed its gold price projections for the current year to $1,725 and while it still envisions a peak in gold near $1,800 in Q4, it also expects "a period of steady decline" in the value of the yellow metal thereafter.

RBS notes that "as the road-map to a more normal macroeconomic environment is in sight and given gold will still be near its historical highs, we believe that investors will rotate into other asset classes."

Cycles, apparently, have a tendency to…repeat themselves.

There is an area in the metals’ niche that RBS feels optimistic about, however. Albeit RBS reduced its outlook for palladium prices this year by 9% to $725 per ounce it expects the noble metal’s price to trend upwards until 2015, “moving into the four-figure territory in 2013 or 2014” and breaking through its January 2001 all-time high of $1,125 per ounce, sometime in 2015. The bank maintained its 2012 price outlook for platinum at $1,650 per ounce.

Speaking of noble metals, the latest annual survey by Thomson Reuters GFMS indicates that the group is likely to continue to receive support from investment demand, especially in the latter half of this year, and going forward thereafter as well. GFMS belies that platinum might trade in the $1,475 to $1,775 price range while palladium could oscillate between $575 and $775 the ounce. This year and into the next one, the official palladium inventories in Russia are thought to become exhausted.

Last year’s platinum surplus narrowed by 12% to only 735.000 ounces-still a substantial number- while global investment demand for same grew by an equal percentage and fabrication demand gained by 7%. There is a risk that-unless a tectonic shift occurs in South African output for platinum (read: larger declines in production) — the surplus in the platinum market could become "hardwired" according to GFMS’ Paul Walker. We have had surpluses in platinum since 2005. Herewith, a graphical representation of the T-R GFMS "snapshot" of the supply/demand paradigm in platinum:

As for palladium, the T-R GFMS consultancy revealed that last year’s gross deficit — while 50% smaller, at 313.000 ounces — still enabled the noble metal to achieve a record annual price average of $734 per ounce. Palladium auto-catalyst demand surged by 5% to an 11-year high, global fabrication demand advanced by 2% but significant declines were noted in Chinese jewellery demand for the metal. At the end of the day, however, a deficit is a deficit, and that is something that the gold and the silver markets cannot offer to investors as an inducement.

Meanwhile, physical gold offtake appears to be continuing on the tepid side despite dips to what were thought to be bargain levels. The most recently available reports from Reuters News indicate that India’s festival-related demand in late April totaled perhaps only 10 tonnes and that such a tally was some 50% under that recorded last year.

New estimates project that the world’s historically most gold-loving country might only take in about 650 tonnes this year. The so-called "love trade" in gold by India could be turning into the "let’s just be friends" trade at that point. There are those within the country who still believe that the huge sums of money that India’s inhabitants have sunk into gold over recent decades is counter to its economic interests and that it has added significantly to its current account deficit while seriously hampering economic growth.

Chinese buyers who are thought to be more apt to purchase gold under rising trend conditions have apparently tempered their buying as well since the local equity market has risen about 11% since the start of the year and has repaired nearly half of the damage it sustained last year. Such conditions have left the physical side of the gold market looking with a yearning eye towards the official sector.

Still, the risk of a hard-landing in China remains with us at this juncture. Eclectica Hedge Fund manager Hugh Hendry sees China as being an even bigger threat to the financial world than Europe currently might present. "Everyone is focusing on Europe," he notes.

However, "very few people are really paying attention to the risks from China."

The jobs figures released just an hour prior to this writing came in at a level (115.000) that was under that which had been expected by economists. Of course, the data release immediately created an opportunity for a mini relief rally (up $10) in gold and (up 35 cents) in silver. However, we note that the upward revisions for February as well as for March in jobs gains were relatively robust. The former was bumped up to 259.000 from 240.000 and the latter was lifted to 154.000 from 120.000 reported earlier.

Notably, the US general unemployment level number was shaved by another tenth of a percent to 8.1%. The headline number may have been a ‘disappointment’ but the revisions being made to previous figures offered a healthy counter-balance to be sure. Overall, the data indicate a ‘pause’ in the US recovery but not one that would impel the Fed to tender a nice fat little QE3 package. S&P futures initially dipped on the Labor Department news but recovered all of their losses within about ten minutes of having digested the news.

Anyway, number crunchers can now show that a net quarter million jobs have been created under the Obama presidency as against the more than five million that were lost owing to the financial crisis. For an election year, even that relatively small metric constitutes powerful ammunition and it does defuse Mr. Romney’s previous allegations on the subject.

We close the week out with an observation by the team at Standard Bank (SA). The topic involves that around which the recent gold price paradigm has been gyrating without exception; the Fed and interest rates. The SB team approaches the matter from the perspective of what the so-called US Taylor Rule currently implies. The Taylor Rule provides an indication of where the Fed funds rate should be given US unemployment and inflation.

SB’s analysts note that "currently, the US Taylor Rule signals that the Fed funds rate might be too low — having pushed even deeper into positive territory since March. Whether this is a bearish signal for precious metals in general, and gold specifically, depends on how the Fed reacts relative to what the Taylor Rule suggests. Should the Fed start raising rates, it could mean a rise in real interest rates, which would be negative for investment demand [in gold]."

All of this brings us back to the core case for gold. After all of the doomsday noise is cast aside, and after all of the agenda-driven sales pitches are discounted, we are left with: Why Gold? Well, don’t take the case for a core, 10% insurance position from us. Let’s hear from MoneyMorning’s editor John Stepek. Here is the take-home Gold 101 lesson to memorize — and Mr. Stepek encapsulates better than many a recent pro-gold argument. Conclusion: forget about the price of gold — just own a little bit. Without further ado:

"We like gold. But as we’ve also noted a number of times, [both here and in MoneyWeek magazine], you shouldn’t have all of your money in gold — and certainly not in gold mining stocks. We all have our own views on asset allocation, and what’s right for you will depend on your own circumstances. But I’d see10% as a reasonable sort of holding. Gold is insurance. It’s there to diversify your wealth. But it’s also there to ensure that even in a worst-case scenario, you’d still have something of value in your portfolio.

Gold is not like cash in the bank. Its nominal value can go up or down. If you’d piled all your money into gold at the 1980 peak, you’d still be sitting on a loss in real terms (i.e. after inflation). Just as if you’d piled into stocks at the height of the tech bubble. That should be obvious to anyone who can look at a price chart, but with descriptions like ‘safe haven’ often bandied about, it bears mentioning.

The point of gold is that it offers you some protection when most other assets are going down. Gold’s ultimate advantage over any other asset is that its value cannot fall to zero. It can’t go bankrupt. You can’t say that for any other asset.

So when people are fretting about the state of the global financial system, and the integrity of all other assets, that’s good for gold. Once confidence returns, and other assets start looking more attractive, that’ll be bad for gold. The point is — as with any asset – to make sure that you aren’t over-exposed to gold, so that even when the bull market in gold ends, the rest of your portfolio is benefiting from the return of the good times."

Have a pleasant weekend.

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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