In The Lead – Reassessing QEuphoria


Precious Metals CommentaryFriday’s spot metals dealings opened to the downside amid mild profit-taking and amid incipient signs that pre-weekend book-squaring was underway.

Despite all of the bullishness on display for the better part of the week (highest in nine months) and despite the possibility that further advances towards somewhat higher price targets could still be in the works ($1,700-$1,730 gold was once again raised as a distinct possibility in EW analysis issued this week), there are those in the spec crowd who have not yet hopped on the bull wagon in the market.

Similar takes are available for a quick read among more level-headed market commentators as well; no need to dwell on the supply-demand metrics that drive them to such conclusions.

CFTC positioning data that runs through Aug. 14th showed that the gold market’s net-long position fell by another 4% to its lowest level since 2008 and that physical demand — as reflected in US Mint gold Eagle sales fell by 49% in July and have only amounted to 21,500 ounces this month. Indian gold imports are expected to fall by 50% from September to December as compared to last year’s similar period. In fact, this week’s advance in gold to a local record high price prompted Indian consumers to… sell their gold as dealers reported the scrap spigots once again turning to the "on" position after months of quiet.

Spot gold opened with a loss of $6 at the $1,665 bid level while silver dropped 27 cents to start at $30.31 the ounce. Platinum gave back $6 to open at $1,532 and palladium fell $19 to the $635 mark. Standard Bank’s daily market missive notes that this week’s gains in silver and the PGMs are very likely quite exaggerated and that based on the amount that gold has moved (3.5%) the white and noble metals should have tallied less of a rise.

Silver, for example should have risen by less than 5% as opposed to the 9% gain it actually showed. Platinum and palladium were clearly driven by the South African supply disruption stories and their 8.4 and 9.9 percent gains were well above the level that might have reasonably been expected — again, given gold’s percentage move- at about 2.6% and 3.1% respectively. Such is the nature of thin and heavily short markets however- but only on occasion.

No changes were noted in rhodium at $1,125 per troy ounce. Over 20% of the world’s platinum production was idled in recent days as various worker groups took time off to mourn the 34 comrades who were lost last week in major clashes with police. South African President Jacob Zuma has now appointed a judicial committee to investigate the killings that took place at miner Lonmin’s Marikana property.

Background markets showed the US dollar advancing by 0.27 to 81.67 on the trade-weighted index and the euro falling back to under the pivotal $1.25 mark against the greenback. Crude oil was stable near $96 per barrel and copper was static near $3.45 at last check.

Well, commodities (as tracked by the GSCI metric) may or… may not have entered a new bull market a couple of days ago. Yes, we must begin with an ambiguous statement such as that one, owing to the fact that the build-up to, and the post-parsing period of, the FOMC meeting minutes yielded a sufficient amount of divergent opinion and lack of clarity to make for a still uncertain situation in terms of giving an "all-clear" signal for the bulls.

Mind you, an avalanche of commentary that declared the advent of just such a green-colored light did follow after the issuance of the Fed’s latest notepad entries. Various hard money publications writers wasted no time in once again reassuring us all that mega-inflation is now all but guaranteed, and that so is $4,500 per ounce gold. $2,000 gold is thought to "already be in the bag" according to the same.

On one side of the market’s ring we have the bulls that see an imminent QE gesture by the Fed and they believe that they saw the much-awaited monetary easing’s "writing on the wall" in the FOMC meeting minutes the other day. Once again weak manufacturing data out of China also stoked QE-flavored hopes among the bulls. Such players were responsible for a 2% advance in the price of gold, to its highest level since mid-April.

Two days into this putative bull phase however, we note that there are those who see a host of different clues about the Fed as wells as about the state of global economics. They beg to differ on the recent bullish verdict and they are treading cautiously in the minefields of the markets. For example, Nicolas Berge, a trader at Geneva-based hedge fund Absolute Capital Group which invests in commodities futures cautioned that

"market expectations on monetary easing might be too high and that could lead to pullbacks.”

As regards the Fed and the possibility of it making additional purchases that would expand its balance sheet, the near-certainty on display in the hours immediately following the release of the FOMC minutes dissipated somewhat late yesterday and this morning. There were signs of such tempering in risk appetite already being seen in the Dow on Thursday.

The index fell by over 100 points as participants reassessed the content of the Fed’s meeting minutes in the wake of St. Louis Fed President Bullard’s statements made on CNBC. Thus, virtually nothing has changed this week. Markets such as gold are still being shaped almost exclusively by "Fedspectations" and are subject to disappointment every time such anticipation is not met with action.

Mr. Bullard remarked that the Fed minutes were "stale" as they were three weeks old, and that he and his colleagues were already contemplating recent economic data (this week we saw housing and durable goods numbers that corroborate his view) that could make additional Fed bond purchases unnecessary. When asked if a major new program was to be unveiled by the US central bank, Mr. Bullard said

"I don’t think so. It would be unusual for the Fed to take action based on this [recent economic] data constellation."

Mr. Bullard’s words promptly derailed the hitherto overeager bulls.

Albeit not receiving a lot of media coverage, the story that Citigroup’s Private Bank has decided to withdraw up to $500 million from long-time gold bull and prominent hedge fund manager John Paulson’s flagship Advantage Fund, should also be taken into account by ebullient bullion bulls at this time. It was noted last week that as of the last required filings,

Mr. Paulson’s bets recently showed a 44% level of asset concentration in the gold and gold mining niche. Perhaps such a "skew" was a bit too… rich for the folks who are tasked with guarding the wealth of the mega-wealthy. Back in May, Citigroup’s private bank advised its clients not to add [any more] money to the Paulson funds, according to a person familiar with the matter.

Among the aforementioned skeptics, we can now also count… the Aussie government. Say what? The country that is known as the largest commodity exporter (as a percentage of GDP) not believing in the commodity boom lasting forever? Well, yes.

The fact is that Australia’s resources minister went on record two days ago as saying that "the boom in commodity prices is over. No one can deny it."

Quite a remark from an official of a country that has been kept recession-free for more than two decades as a result of the… commodities boom. The minister in question, Martin Ferguson, as well as the other non-believers we mentioned above, have likely been watching the price of iron ore and not that of grains of late, when they came to such conclusions.

Iron ore? Well, it turns out that the commodity that is not a component of the Goldman Sachs Continuous Commodity Index has been bucking the trend and it is scraping along at the lowest price levels since 2009. Analysts at Denmark’s Saxo Bank opine that while other commodities are rising on the back of expectations of monetary easing and drought-induced fears, iron ore is actually priced to reflect the current state of the global economy (read: slack). Former engines of seemingly insatiable demand such as China have slowed their intake of metals to the point where mining giant Vale (which just happens to be the largest iron ore producer) has remarked that "China’s golden years are gone."

Speaking of "golden" and of "China" we must also note here that the much-ballyhooed launch of gold-dispensing ATMs almost one year ago (an event that — on a global basis-some came to regard as the surest sign of the popping of the gold bubble) turned out to be a dud as oppose to a splendid pyrotechnic spectacle. China’s first gold-vending machine had its plug unceremoniously pulled by the Beijing Agricultural Commercial Bank which noted that its customers have "lost their appetite for gold." At the same time, China has also suspended plans to install other such ATMs across the country. Oops.

Until next week,

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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