In The Lead – Buffeted By Buffett


Precious Metals CommentaryThe midweek trading session in New York opened to and continued to witness additional long liquidation among holders of gold, silver, platinum, and palladium positions. The US dollar’s vault to above the 80.00 mark on the trade-weighted index and the euro’s slippage to under the pivotal $1.30 level stoked the bears. They lost no time in pouncing on the already weakened prey and they clawed their way to much lower price levels right at the opening bell.

Spot gold traded at lows near the next support shelf at $1,580 with losses of about $22 an ounce and technicians see very little in the way of support until the $1,527 area. Silver dipped another 80 cents to reach $28.60 per ounce. Platinum and palladium lost about $8 apiece, with the opening quotes on the bid-side coming in at $1,498 and at $613 per ounce, respectively. In the background, we had the USD at 80.09 on the index, crude oil losing 65 cents (to $96.37 pbbl) and copper off by 1.3% while the euro scraped along at $1.296 amid Greek political uncertainty.

Major technical (not to mention psychological) damage was incurred in the gold and silver markets on Tuesday as the turmoil in Europe attracted safe-haven seekers to the US dollar and compelled everyone (and we mean everyone) else to sell whatever was handily available; stocks, commodities and risk assets in general. When viewed on a strictly time-related basis, the US dollar’s seventh consecutive advance against a basket of major currencies is the longest such streak since… 2008 — a year that many precious metals investors do not recall with fondness. Spot gold succumbed to aggressive waves of speculator selling before the midday hour in New York and fell sharply (by more than $42) to reach lows near the $1,595 level on the bid-side.

Whether or not this breakdown, from a previous congestion pattern that had many convinced that it would resolve to the upside (and then some), results in an eventual test of the $1,527 support zone or perhaps an even deeper slump toward $1,400 per ounce remains to yet be determined. The fact however remains that Tuesday’s wounds were inflicted without a noteworthy gain in the US dollar, without a major slump in the Dow, and without a slide in the euro under the $1.30 mark. That leaves something to conclude about the previous weakness in the metal; one that had been perhaps masked by the string of boring, sideways trading sessions that had preceded yesterday’s rout.

The additional problem for gold was the fact that — to the extent there were a sufficient amount of news items to worry about out there (Greece, France, the EU at large) — bullion failed to act like the safe-haven asset that it is supposed to be. Relatively bullish news regarding China’s rise in gold imports in recent weeks was totally disregarded, as something on the order of 14,000 lots of bullion were sold in but a few minutes on the exchange in the morning. While we do not look to China to become the savior of the gold bull market, news that places it in competition with India should have been able to put a smile on the faces of the bulls. It did not.

Once again, as was the case in 2008, when pushing came to shoving, the shoving was taking place into the direction of the greenback. Also for the first time since 2008 gold closed beneath its 300-day moving average; normally a bearish item that would be left to Dennis Gartman to ring the alarm bell about. Mr. Gartman, however, abandoned long positions quite some time ago even as he was roundly ridiculed by the perma-bulls for jumping the golden ship.

The yellow metal, in terms of the futures market, finished its lowest closing level of 2012 at this juncture,giving up its year-to-date gains. Bearishness levels received a boost with open interest on the rise and the addition of fresh short positions. Sentiment was certainly not helped by the reiteration of remarks connected to gold as an asset class that should not be compared to "productive assets" by mega-investor Warren Buffett who appeared on CNBC. One might call Tuesday’s event the "Buffet buffet" as a matter of fact.

Now, some folks have accused him of hating gold, but aside from certain recent unfortunate remarks by Mr. Buffett’s partner, Charlie Munger ("Civilized people do not buy gold"), Mr. Buffett’s pragmatism is actually quite understandable. His math is not incorrect either, as it turns out, despite other computations that have been made to the contrary. If one buys an asset with the objective of long-term capital appreciation, one buys so-called "productive" assets. Such an approach does not/should not exclude a core gold holding; one that is set aside with the objective of capital preservation and portfolio diversification in mind.

Meanwhile, spot silver prices not only broke decisively under the $30 round figure (to a four-month low) but threatened to also demolish the $29 – $29.60 zone as well whilst appearing to be headed (eventually?) towards their $26 per ounce previous nadir. Various newsletter and commentary sources still keep writing about the silver ‘mega-thrust’ (putatively, yet to come) and about how silver might be the best investment you can make (putatively, also a future prospect) but the sad reality remains that, since one year ago, the white metal has had nothing but a surfeit of volatility to offer and that it has presented numerous occasions of abject disappointment to overenthusiastic investors.

The silver market’s fundamental positioning indicates that after all is said and done on the supply minus demand side, we are still left with a surplus on the order of 3,415 metric tonnes (according to Barclays Capital); an overhang that must be mopped up by investment demand lest prices are to clear at notably lower levels. The trouble is that, according to Bloomberg News,

"there are signs investment demand is weakening, with sales of U.S. silver coins tumbling 40 percent to the lowest since February last month, data on the U.S. Mint’s website show.

In addition, Bloomberg notes that,

"holdings through ETPs declined 1.4 percent since March 7. Demand also may be weakening in China, the second-biggest user after the U.S., with March imports 36 percent lower than a year earlier, customs data show. Stockpiles in warehouses monitored by the Comex in New York, which traded a daily average of $9 billion of silver this year, expanded 21 percent since the start of January, bourse data show. Inventories reached 142.1 million ounces (4,421 tons) on May 1, the highest level since September 1997."

Sadly though, the average retail investor has been left with little more in the way of market ‘analysis’ than some shopworn ‘explanations’ about some kind of phantom anti-metals "cartel" that is constantly thwarting his or her financial interests. Come on folks, we can do better than that. Charts and supply/demand fundamentals would be a good starting point, for example. Or, one could just ask one, commodity uber-guru Jim Rogers about what he currently thinks about silver or gold. There is a time for everything. That includes remaining on the sidelines and spectating.

Apparently, for Mr. Rogers, the time to take stock and reflect on matters has now also come. Says he in an interview with NDTV Profit:

"I own all commodities. I would avoid gold and silver right now. Once the commodities correct, gold goes down, I would certainly buy more of it. As far as other commodities are concerned, like agriculture, crude, I don’t prefer buying anything right now. I would prefer to sell the euro."

Until Friday,

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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