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Correction: Kitco Precious Metals and U.S. Economic Review - Week Ending January 11, 2008
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Dear Reader: Please note that last week's article as well as this morning's release had errors in the table specifying Kitco Index values across all metals otherwise referred to as Table 2 found at the end of each article. I extend my sincerest apologies for any inconvenience this error has created.
Kitco Precious Metals and U.S. Economic Review – Week Ending January 11, 2008
Gold
Spot gold on the NY Market maintained the momentum set on Friday, December 21st, nearing the $900 per ounce ceiling and closing at a high of $894.90 last Friday. Both the London AM Fix and the NY Market close would rise above their average from the week prior by around 3%. The average NY Market closing price would be $3.23 per ounce higher than the London AM Fix, suggesting improved sentiment for the metal through the day’s trades. Annual gains were strong at 42.4%, 7.9 percentage points higher from last week’s review. Its average London AM Fix would rise well above its 10-day (two-week) to 120-day (6-month) moving averages. Moving averages across all metals considered in this review can be found in Table 1 at the end of the article.
Last week, we saw that gold was influenced by expectations of an interest rate cut by the Federal Reserve, South African supply shortages of 12.7%, beginning of the year asset reallocation, and an observance of buying opportunities for gold below the $880 per ounce level.
Investors continued to reevaluate the U.S. economic position in order to determine the future direction of interest rates, the U.S. dollar, and overall economic growth. Details on updated economic statistics can be found in two tables at the end of this article.
Monday began with positive signals of a moderate federal funds interest rate cut with secretary Paulson’s remarks on the economy, housing, and credit markets. According to Paulson, although resilient, U.S. economic growth will continue to be affected by both the housing recession and credit market. The news had depreciated the U.S. dollar. Pending home sales data released by the National Association of Realtors indicated a monthly drop of 2.6% in November. The index stands at 87.6, 19.2% lower than November of 2006. The housing sector continues to be closely watched by the U.S. Treasury and Federal Reserve members for signs of improvement or additional duress. January 16th will bring the release of the latest Housing Market Index by the National Association for Home Builders, an estimate for housing demand and economic momentum.
Further affirmation of an interest rate cut came in on Thursday and Friday with the Bernanke’s and Mishkin’s speeches see sources at the end of this article. Bernanke’s speech gave investors an indication of a 50 basis point cut with his statement that “we [Federal Reserve Open Market Committee] stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks”.
Mishkin’s speech last Friday gave more support for an interest rate reduction. According to Mishkin, “the disruption in financial markets poses a substantial downside risk to the outlook for economic growth, and adverse economic or financial news has the potential to cause further strains… [furthermore] the easing of the stance of policy in response to deteriorating financial conditions seems unlikely to have an adverse impact on the outlook for inflation”. However, Mishkin warns of increasing inflationary environment, leaving us less certain of a strong 50 basis point reduction in his following remarks: “nonetheless, we will continue to monitor incoming data on inflation and inflation expectations, especially given the potential risks to price stability that are associated with the rapid increase in energy prices and the depreciation of the dollar… [and we must be] prepared to take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks”.
Again, expectations of an interest rate cut helped to fuel and support the price path of gold as well as many of the other metals in this review. The federal funds and discount rates will be announced this January 30th.
Last week we also saw a decoupling of gold and oil prices starting on Wednesday with WTI crude oil prices falling from their high of $97.91 per barrel to $92.69, a clear indication that current demand and a slow economic environment was simply not able to support that high price level. Furthermore, world crude oil prices have been projected by EIA to fall by late 2008 through 2009 (a 6.4% fall in WTI prices was projected over 2008 to 2009) and even continue through 2010 with an expected increase in oil production from Non-OPEC suppliers. Two-thirds of Non-OPEC production is expected to come from Brazil, United States, and Russia. The forecast is strongly dependent on projects starting up on time. Delays are difficult to predict and will yield the continuance of higher prices beyond late 2008.
Finally, data released last Friday on the U.S. trade deficit indicating a real annual fall from November 2006 to November 2007 by $3.1 billion positively impacted the value of the dollar, as the USDX had increased by 0.11 points by the end of the day. The weaker dollar is expected to enhance the demand for U.S. exports; thereby, narrowing the deficit and marginally improving the U.S. economic position. This slight improvement in the dollar had no bearing on the continued upward trend in gold. 
Silver
Silver’s price path closely resembled that of gold, suggesting a carryover in sentiment to this market. The metal brought in a strong performance last week. Its average AM and NY closing prices rose by 3.9% and 4.2%, respectively. The NY Market closed last Friday with a high of $16.23 per ounce, an increase of 7% from Monday. There was no significant difference between its average London AM Fix and its NY Market close, suggesting no significant departure from the initial sentiment set by the fix. Annual gains posted a very strong increase of 25.6%, 6.9 percentage points higher from last week’s review. Its average NY Market close and London AM Fix would rise comfortably above its 10-day to 120-day moving average.
Platinum Group Metals
Platinum and palladium continued to roughly follow gold in their London AM Fix and on the NY Market, as seen on Kitco’s 24-hour spot charts. In addition to key factors influencing gold, platinum supply issues from Russia as well as from South Africa would continue to support a higher price path, see additional sources below for details.
Profit taking at the onset of the week would take a toll on platinum’s prices; however, it would recoup its losses by Friday. Platinum’s NY Market close would reach a high of $1,559 per ounce. Its average London AM Fix would gain $10.37 per ounce, very similar to last week’s review. Platinum’s NY Market close would not deviate by much from the London AM Fix, an indication of an overall zero net change in sentiment during the day’s trades. Its average price hovered comfortably over its 10-day to 120-day moving average. Annual real gains continue their significance at a very strong 36.9%.
Palladium departed from platinum, gold, and silver last Monday as it reacted positively to the latest results on supply shortages from Aquarius Platinum. The full release of results will be due out this January 24th. Palladium’s NY Market close reached a high of $376 per ounce, $3 more than the high in the week prior. It has continued its upward trend that was established during the week ending on December 28th. Its average London AM Fix and NY Market closing continue to rest above its 10-day to 120-day moving average. Annual real gains have improved, posting a strong 12.2% increase, 2.3 percentage points higher from the week prior.
Finally, rhodium trades would surge to seek a higher equilibrium at $7050 last Thursday. The surge was prompted by enhanced demand from the automotive industry in light of future supply and rising price concerns. Its average price increased by 1.8% from the week prior. It will be interesting to see if growth in its price path continues throughout this week. Its average price continues comfortably above its 10-day to 120-day moving average. Annual real gains continue to be significant at 22.3%.
This wraps up this weekly review. Until next time, take care and I wish you all a very good week.
Wendy Ip
Additional Details on Metal Performance
U.S. Statistical Update
Average Deviation = Standard Deviation
The term, average deviation, is nothing more than a reference to the common statistical measurement of the spread between all values within the data set from its average. This common measurement is called the standard deviation. Here, the average is calculated as the arithmetic mean, which is the sum of all observations divided by the total number of observations in the sample. To clarify this point, suppose that we have two observations for the price of gold {750, 800}. The mean would be equal to: (750+800)/2 = 775. Now, suppose that we want to measure deviations from this average in order to get a better idea of the spread between a single observation and the average that we just found. Suppose that we have 100 observations. To discuss each observation and how it deviates from the average one by one would be very time consuming, as we can imagine. So, what we need is some kind of numerical value that summarizes these kinds of deviations, and tells us something meaningful about what’s happening with the data relative to its average (the spread). This is where the standard deviation comes in handy. To calculate it, we need to know how to calculate the variance of a set of data, since the standard deviation is nothing more than the square root of the variance. Now the variance is the squared sum of deviations of each observation from its average divided by the total number of observations in the sample. Let’s use our above example to find the variance. First, we need to calculate the deviations of each observation in {750,800} from the average {775}. This will give us a new set of data: {(750-775), (800-775)} = {-25, 25}. Next, we need to square these observations. This will give us {(-25)^2, (25)^2} = {625, 625}. [Please note, all superscripts have been proceeded by ‘^’ as an indicator that the following text is in superscript. For example, squaring the number 25 is indicated as (25)^2 and the square root of 25 is simply indicated as (25)^1/2]. Lastly, we obtain the variance by summing the squared deviations and dividing that by the total number of observations: (625+625)/2 = 625.
Now, to find the standard deviation is very straightforward from here. We only need to find the square root of 625, which was the variance. In our example, the standard deviation is: (625)^1/2 = 25. This makes sense, as we’ve seen that each observation in {750, 800} had deviated from its average by 25. Lastly note that the smaller the standard deviation, the smaller the overall spread between each observation and its average.
Additional Sources:
Gold: Mine safety issues hits gold output
Enhanced Liquidity: Monetary Policy Issues: January 4th, 2007, Monetary Policy Release – Auction on January 14th
Economic Briefings: Paulson on Monday, January 7th, Bernanke on Thursday, January 10th, Mishkin on Friday, January 11th
Oil: Short Term Energy Outlook - EIA
Platinum Group Metals: Zubkov one-liner bowls platinum hat trick,Aquarius Platinum shortfall in output in Q2 2007, Audit issues at Aquarius, Strong demand helps rhodium to record high
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Copyright © 2007 Kitco Inc.
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