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Good Afternoon,
The midweek New York trading session had spot gold continuing the sell-off that commenced on Tuesday, sinking to lows near $888 before staging a recovery late in the day. Durable goods orders figures for April revealed that excluding planes and autos, the activity level was the best in 18 months' time. Most economists had expected not the 0.50% decline in orders, but more like a 2.5%+ fall.
Crude oil prices took off on words alone once again today. After last week's T.Boone Pickens forecast of $150 a barrel, it was Morgan Stanley's turn to chime in and echo the figure to the markets as 'easily' attainable. Investors flocked to the oil pits like insects to the light on a May evening's early pool party.
Following the MS forecast, black gold promptly gave up probing for $126 and made a u-turn towards $131.00 per barrel at last check. Silver first shed another 30 cents to $17.12 then climbed back to $17.43 with oil. Platinum halved its early $84 loss to $42 and was quoted at $2070 while palladium fell $3 to $438 per ounce. An average of a loss of 2% was still being seen in the base metals complex (ex nickel, which fell 4.4%) .
In other gold-related news, Forbes reports that China, will likely surpass South Africa to become the world's top gold producer this year. Chinese gold production may reach to 300 tonnes according to Hou Huimin, the vice secretary general of the China Gold Association. His remarks came at a conference held by the Shanghai Futures Exchange. Also from China, news that GFMS Chairman Philip Klapwijk expects one more spike to above $1,100 for gold before the year ends. This, on investment demand, a weaker dollar, and the lingering effects of the credit crisis. UBS forecasts today put gold at $900 in one month and $850 in three months. For silver, UBS sees $17.20 in one month and $16 in three months. Read further below to learn why both of those forecasts may have to wait a few extra months.
Someone who might disagree at least in part (as far as the dollar and crisis topics are concerned) with our good friend Philip, is S.F. Fed President Janet Yellen. Marketwatch reports on her remarks about the Fed's actions to stave of a Depression-era "dark scenario" and how the odds of such an event (as well as the 1923's Weimar style hyperinflation alternate outcome) have been minimized:
" The Federal Reserve's frantic action since January to slash interest rates and pour cash into financial markets in return for unwanted securities has paid off, according to San Francisco Fed President Janet Yellen. Although not so clearly explained by the central bank, Fed officials undertook these unprecedented steps in some measure to ward off what they like to call an "adverse feedback loop."
That isn't a term from a heavy-metal concert. Instead, it is one of the quickest ways an economy can stumble and fall. Sharp declines in asset values puts pressure on banks and financial institutions, which are then forced to sell assets and cut back lending. This puts downward pressure on the economy as a whole, and starts the cycle all over again.
The Great Depression was an example of an adverse feedback loop.
In a breakfast speech on the economic outlook, Yellen said that the recent improvements in financial markets have lowered the odds of such a negative event. "[I] am encouraged by what I've seen both from the economy and financial markets to believe we've really minimized the odds of that dark scenario," she commented. A sharp drop in home prices remains "one of the biggest risks facing the outlook" and "one of the key questions going forward," according to Yellen.
The San Francisco Fed president's remarks came in the question-and-answer session following a speech, which was similar to one she gave last week. Yellen said that the road ahead for the economy was particularly uncertain given the financial turmoil, the housing cycle and commodity prices.
She also warned that the central bank would have to pay close attention to inflation.
The Fed's unprecedented lending to investment banks would have to end when the financial turmoil subsides, Yellen said. At that point, the Fed and Congress would have to discuss the ways and means of future Fed lending to these firms. The Fed traditionally has lent only to commercial banks, although it retained the right to lend to investment banks under emergency powers.
"We have to deal with the moral-hazard issue," she remarked. The market may assume that the Fed would use these powers again under a crisis. "We're going to have to work that one out with Congress."
Finally, over at Marketwatch, contrarian and goldbug newsletter-watcher Mark Hulbert frets that newsletter writers have become rather "exuberant" in the wake of, and along with, the last ($845 to $936) up move in gold. Says he:
" In normal times, gold timers become more upbeat as bullion rises and more dejected as it falls.
But these are not normal times.
Just take how gold-timing newsletters have reacted to bullion's decline in recent sessions, which has cost an ounce of the yellow metal more than $30. Far from becoming more bearish in the wake of that decline, as we would otherwise expect, those newsletters have instead become markedly more enthusiastic.
That is not a good sign, according to contrarian analysis, since it suggests a stubbornly held belief that the decline is nothing to be worried about.
Take recent readings of the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the recommended gold-market exposure among a subset of short-term gold-timing newsletters tracked by the Hulbert Financial Digest. During trading on Tuesday of this week, gold bullion fell by nearly $18 per ounce. And far from falling, the HGNSI rose by nearly 15 percentage points, from 33.9% to 48.2%.
It's unusual to have any jump in bullishness whenever a market drops by 2%, much less this big a jump.
Contrarians are therefore not surprised by gold bullion's continued weakness in trading Wednesday. At late morning, gold was down another $6 per ounce.
Contrarians won't again bet on a sustainable gold rally until gold timers become a lot more discouraged."
Well, that could all change and turn on a slick oil-encrusted dime, any given day now. Let's first see what the inventory level numbers show tomorrow and how the markets react. Gold's first challenge is to recapture and sustain closings above $900 once again as well as not break the 12 day old above-$900 streak. However, Mr. Hulbert - as well as the perma-bulls may have valid reason to worry. Mineweb's Barry Sergeant quotes the Bank Credit Analyst - hot off the presses:
" While many who speak on gold tend to the bullish side in times of good and bad, hunting the world for the slightest positive sign that the gold price will rise into eternity, it was on Tuesday that the Bank Credit Analyst issued a decisive recommendation: "Precious Metals Downgrade To Neutral".
Precious metals were heavily sold off on Tuesday, but found temporary support in overnight Asian trade, as mentioned. Referring to the recent bounce in precious metals prices, limited downside in the dollar against the majors, and rising risks of an oil correction (which may have set in on Tuesday), the Bank Credit Analyst said on Tuesday that it was "an opportunity to downgrade the sector from overweight to neutral. We expect ranges to emerge in gold, gold shares and silver prices. Gold should outperform silver in this environment as the latter is more dependent upon investment demand. Stay long the gold/silver ratio (GSR)".
Analysts say that technical factors support the fundamental case for a neutral weighting on precious metals. Gold prices, according to the Bank Credit Analyst, "may well have a washout below the $850/oz support level before the cyclical bottom is in place.
Gold shares could return to their tight range of 2006 and the first half of 2007, as they lose ‘market share' to ETFs (exchange traded funds). The GSR could see a wave of buying if it moves back above the 200-day moving average". The next upleg in precious metal prices is seen as taking time to develop, although the Bank Credit Analyst "would buy gold for a ‘trade' on a washout below $850/oz. The bullish exception may well be platinum, although we hope to buy from lower levels".
Whether or not the 'washout' scenario brings gold to Ned Schmidt's envisioned possible $775 per ounce or not, remains to be seen. However, there is mounting evidence that one rally from the lows of $845 does not (yet) a (full) comeback make.
Happy Trading.
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
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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.
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