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" Poor Prospects for Poor Man's Gold"

By Jon Nadler       Printer Friendly Version
May 19 2008 2:59PM

Good Afternoon,

The bulls retained the upper hand in the gold market overnight as the US dollar fell to a two-week low ahead of economic data due this week. As prices firmed, demand in India dipped once again and local prices went to a discount as buyers failed to materialize. Speculative fund buying is currently bolstering gold on a possible route to tests of $915 and maybe $925, however the team at Standard Bank in Jo'burg notes that investor demand remains cautious despite (or perhaps due to) record oil prices. Analyst Edward Morse at Lehman warns that "speculative buying in oil, gold and other commodities was providing "fertile ground for a potential asset bubble," where prices typically plummet once investors exit." Fast turns could still be in the making.

New York spot gold tested higher in an orderly fashion this morning, reaching $914.50 before profit-taking set in and the metal gave up about $10 of its $13 initial gains in the day. Silver rose only 3 cents and once again finds itself just under $17.00, while platinum added $20 to $2148.00 per ounce. Gold regained the favors of one analyst last week, while losing short-term support from another. Denis Gartman reinstated a gold position last Friday seeing further upside potential for the metal, while Ned Schmidt of the Value View Gold Report decided to stand aside while the oil situation sorts itself out.

As far as silver is concerned, the news is less than auspicious at the moment. Despite the incessant chants of imminent price explosions, alleged product shortages, and sinister suppression/manipulation coming from so-called silver gurus, Barclays Capital today gave a bit of a more realistic (if not all that bullish) assessment of the sate of poor man's gold. Mineweb reports:

" In their latest Commodity Investor report, Barclays Capital forecast a "tarnished outlook" for silver this year, asserting that "silver's fundamentals appear to be the weakest within the precious metals complex."

As the major earthquake in China's Sichuan Province renewed concern about base metals supply, Barclays' analysts said they felt power shortages and logistical difficulties posed a much greater risk to base metals production.

Meanwhile, Barclays forecast platinum prices will average $2,100 for the second quarter "as platinum supplies are heavily dependent on South Africa and the delicate power supply situation as well as mine safety concerns leave mine output extremely susceptible to potential disruptions."

The analysts projected "continued industrial demand growth-albeit at a slower rate" for silver, while other forms of demand are likely to remain on their downtrend while mine supply should rapidly accelerate.

"Six years of robust growth have been primarily fuelled by demand from India, China and the U.S., particularly on the back of strong demand from electrical and electronics sub-sector," the analysts noted. "However, this year, although we expect continue growth in industrial applications, we do not expect that growth to significantly outpace the anticipated decline in other sectors.

"This year we expect overall fabrication demand to be mostly unchanged. By contract we expect the growth in mine supply to remain particularly robust."

Noting the large number of major projects and expansions scheduled to come online, Barclays forecast the largest annual silver mine production increase since 1990 for a record 6.5%. "In our view, burgeoning mine output should offset weakness in other forms of supply, leading to an overall increase in supply," the analysts said. "Silver's fundamentals appear to be the weakest within the precious metals complex."

"Investment demand remains the only factor that could provide some partial compensation," according to Barclays. Speculative interest on Comex is already strong, while the three physically-backed silver ETFs now cumulatively hold 6.6Kt, with flows for the year to date up almost 700 tonnes. In our view, silver's poor fundamentals are likely to add to downward pressure on prices."

Despite attempts to substitute and lower platinum content in auto-catalysts, Barclays advises that industrial demand for platinum remains largely price inelastic "and in turn the market is set to stay in deficit, further eroding the lower level of above ground inventories."

Meanwhile the analysts suggested that supply -side interruptions are also likely to spur positive investor sentiment towards gold. "Most external drivers remain price positive particularly given expectations for the dollar to weaken further. Gold prices were buoyed by investor interest and this is likely to remain the key price determinant this year. Physical buying emerging on dips is likely to cushion prices, rather than drive them higher," Barclays concluded.

In the interim, the jury (as well as various officials and scholars) remains at odds regarding the turning point in the credit crisis, the US economic slowdown, inflation, commodities prices, and the effects of all of the above on the global economy. Some see containment, others contagion. According to Bloomberg, there is at least one item that deserves a closer look:TIPS. Sandra Hernandez explains:

"Treasury bond traders are telling Americans to stop fretting about inflation.

Consumers expect prices to rise 5.2 percent in the next 12 months, according to a monthly survey by the University of Michigan in Ann Arbor, the most pessimistic they've been since 1982. Treasury Inflation Protected Securities, or TIPS, show traders anticipate inflation of about 2.95 percent by January, in line with its average of 3.1 percent the last 20 years.

The disparity has never been wider. While consumers grapple with gasoline above $3.70 a gallon, record rice prices and the escalating cost of wheat, TIPS say the commodities market is a bubble about to burst. A commodity slump would worsen losses in the $500 billion TIPS market, where investors lost 2.35 percent in April, the most since December 2006.

``There's a lot of people who just don't believe the economy's going to stay strong enough to keep prices of things where they are,'' said Chris McReynolds, who trades TIPS in New York at Barclays Plc, the largest dealer of the securities. ``Part of what's going on here is a lot of people view this price rise in oil, a lot of commodities, as being somewhat bubbleish and that they'll come off again very quickly.''

Crude oil, which traded at $126.93 a barrel, has doubled in the past 12 months. The Reuters/Jefferies CRB Index of 19 commodities including coffee and corn has surged 31 percent in the 12 months ended April 30. Yet in the same period, consumer prices rose by 3.9 percent, the slowest pace since October, the Labor Department said May 14 in Washington.

``What has not been going up is housing prices, what has not been going up is electronics, what has not been going up is apparel,'' said Gang Hu, a TIPS trader at Deutsche Bank AG in New York. Consumers ``buy food everyday, they buy gas everyday. As a result, if you ask them have you seen inflation, they will say yeah, because every day they are informed there is inflation.''

Short-maturity TIPS have the most to lose from an ``imminent economic downturn,'' Hu said.

Before this year, the public and the TIPS market were most at odds in June 2007, with consumers projecting 3.4 percent inflation and TIPS forecasting a 1.48 percent rate. Consumers have been right: inflation has averaged 4.1 percent this year. Consumers are responding to a jump in the cost of food and oil, even as prices of less-frequently purchased items like cars, plane tickets and hotel rooms fall.

``It's almost ingrained in the psyche of the market that people think ultimately inflation will recede because the economy's slowing down,'' said George Goncalves, chief Treasury and agency debt strategist in New York at Morgan Stanley, one of the 20 primary dealers of U.S. government securities that trade with the Fed.

Regular Treasuries are also pointing to a slowdown in price gains. In the last six months, yields on 10-year notes traded below the inflation rate for the first time since 1980. Over the past two decades, yields averaged 2.87 percentage points more than inflation."

Stay tuned for more twists and turns, as the primary impetus is still coming from the oil pits. However, take note of the second rise in LEI numbers pointing to a recession that does not fit the standard definition of one - and the ensuing upward pop in the greenback.

In closing, we wish to extend our sincerest feelings of sympathy to all of our friends in China as they commence a three-day mourning period for those who fell victim to the terrible quake in Sichuan.

Good Day.


Dear Reader,

As many of the 20,000 or so of you who read my daily articles already know, I am not a believer in gold and silver manipulation theories or allegations of price suppression schemes. There is a small but vocal group out there that would beg to differ. Over the years, colleagues whom I respect have recounted incidents while warning me about the tactics employed by certain individuals belonging to this clan. The essence of the advice was to consider the source, and not to take anything they say personally. I was told of their unprofessionalism, ignorance, and hostility towards anyone who dares dissent with their intuitions. Based on the sage counsel of my colleagues, I have chosen not to engage these persons in direct debate.

On Friday, I was the recipient of an e-mail - out of the blue- from one such individual. Below, the complete text of said e-mail:

" From: []

Sent: Fri 5/16/2008 10:08 AM

To: Jon Nadler


Subject: Challenge

Attachments: Mr. Nadler, You are without a doubt the dumbest person I have ever come across in my life. I notice that we both have work shops [sic] at the Cambridge House resource conference in June. I called Joe Martin to let him know I was going to challenge you to a debate at that time ... and wondered it [sic] he could set it up. I doubt that your coward ass self will accept this challenge, however, I will put it out there. It is time for you to put up, or shut up. BILL MURPHY "

Based on the outrageous nature of the above, I am more convinced than ever that it would be a futile endeavor to accept this man’s “challenge.?

Speaking now as an armchair psychologist, my hunch is that anyone who resorts to such a manner of "communication" and behavior in the course of doing business is either unhinged or hypertensive, but in either case, in need of an intervention. I will, however, let you be the judges.

Jon Nadler

Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco 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 Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.