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Bassackwardation

By Jon Nadler       Printer Friendly Version Bookmark and Share
Feb 17 2011 12:39PM

www.kitco.com

On-going and spreading societal unrest in North Africa and the Middle East (Libya, Yemen, Iran, Bahrain all experienced varying degrees of turmoil over the past 24 hours) offered support to gold prices on Thursday, as did a weaker US dollar during the night. The greenback however recovered a bit following the release of US CPI and jobless claims data early in the New York trading session. Freshly-filed jobless benefits applications experienced a modest (25,000) jump during the latest reporting period being tracked by the US Labor Department. However, such filings have been on a downward-pointing curve ever since they peaked above the half-million mark last August.

Meanwhile, US consumer prices rose 0.4% last month but the Fed remains relatively ‘calm’ about such figures as it sees very little in terms of wage pressures to the upside. Nevertheless, the release of Fed meeting minutes yesterday indicated that Federal Reserve officials were confident that the economy was on firmer footing and that they anticipate better US GDP numbers ahead.

Some of what the Fed expects from the US economy in coming months was reflected in this morning’s Philadelphia Fed factory index figures. The metric showed a jump to the highest level of manufacturing activity in the region since 2004. The gauge’s reading was 35.9 this month, and was far larger than what economists had anticipated (namely a more modest rise to near 21).

Thus, it should come as no surprise that, at the Fed’s January meeting, some of the policymakers were noted to be “wondering” as to whether the central bank could now scale back its $600 billion QE2 program. The meeting summary saw “a few members [who] noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program.”

No change in the cards for US interest rates just yet, but, as was noted yesterday, some 70% of investors do envisage the Fed beginning its “mopping-up” operations before year-end. The same could be said about the UK, where the recent reading of 4% inflation levels has “paved the way” for interest rate hikes and prompted BoE policymaker Andrew Sentence to…sentence low interest rates to an early execution. See the sterling jump against a basket of nine other currencies this morning, even as Mr. King remains reluctant to start lifting rates.

Spot gold trading opened with a $5.60 per ounce gain this morning, and the precious metal was quoted at $1,381.20 on the bid side. Silver added 11 cents to open at the $30.59 level on the bid side and it later touched and then backed off of the $31.00 round figure resistance point. For a fourth time now, silver is bumping up against major resistance walls thought to reside between $31 and $31.50 an ounce. More on silver market physical ebb and flow follows below.

Platinum started with a $1 gain this morning, quoted at $1,830.00 the troy ounce, while palladium retreated by $3 to the $836.00 per ounce mark. Rhodium offered nothing to get excited about as it remained at $2,430.00 for another trading day. Crude oil also remained largely static, marking time at the $85-per-barrel level, while the Dow showed lethargic trading action and was hovering near 12,280 at last check.

Finally, we have had some “straight-setting” of the “record” in the silver market. Much bullion dealer and newsletter-driven hype about silver investment item shortages, backwardation in silver, and such, has been on display in various forums and blogs. It turns out that, to the extent there is any tightness in supplies of certain silver products, “they are limited to higher purity metal in specific forms and locations, at most.”

The findings by New York-based metals research and consultancy firm CPM Group (a firm that ought to know a few things about silver given its extensive silver-producing clientele) noted that “there is talk in the market of shortages of 100-ounce investment-sized bars and coins, but its investigations dispute this.” CPM Group said it surveyed three bullion dealers in the first week of February about the supply of these metals. Conclusion: You want to buy silver? You can do so, and with relative ease. Just bring lots of dough…

CPM researchers found that “There were hundreds of thousands of ounces in 100-ounce bars available for immediate delivery, and NWTM said it was steadily producing more each day.” CPM added that “the rest [of the “urban myths” regarding silver “tightness” and exclamation marks regarding backwardation] is noise.” Nothing new. At all.

Something that was new this morning, on the other hand, were the fourth quarter 2010 and full-year 2010 gold market supply/demand statistics, as provided by the World Gold Council. We will let other tea leaf readers highlight all of the positives (which they certainly will) but continue to focus here on some of the under-the-hood realities which no level-headed gold investor ought to let be swept under the rug at this (price) juncture. The gold market remains in a potentially precarious situation if one does take all notable factors into account.

To wit: During 2010 (a year during which we were constantly bombarded with declarations of ‘record’ investment demand) it turns out that global…investment demand [such as bars, coins and exchange-traded products] was labeled as “more or less stable,” dipping 2% to 1,333 metric tonnes.

However, the net tonnage differential between 2009 and 2010 for the entire investment demand category shows a clear contraction on the order of 14.3% - more than 271 tonnes lower. Demand for gold in exchange-traded-fund (ETF) and similar products however, came in at only 338 metric tonnes last year, and it was down 45% from the previous year. Will you read about that in the next installment of your “How to Survive TEOTWAWKI” newsletter? Doubtful.

You are also unlikely to encounter the dissection of figures related to jewellery demand in various parts of the world. Much will be made of the 135 tonne increase in Chinese full-year gold jewellery demand. Good thing it was higher, too, because of one adds up the nearly 80 tonnes of such demand that were lost in the rest of the world (including important regions such as the Middle East, Europe and the US) the market needs “ChIndia” to pedal as hard as possible in this sector of demand. You can see here why this is so:

As well, market inflows of scrap gold remained well above their historical levels, virtually tying their record 2009 inflows and coming in at 1,653.00 tonnes during the past year. Record-high prices were cited as the catalyst for that development. Meanwhile, during a year when we were being guaranteed that the official sector was going to turn into a ‘massive’ buyer of gold, the world’s central banks bought…al of 87 metric tons of gold more than they sold.

The good news is that the world’s central banks did not come to market with the amounts of bullion they had been selling over two decades, on a yearly average basis. The potential to mobilize some official sector gold-even if not a lot-from reserves remains very real, however. The percentage-in-reserves that $1,400 gold has now yielded on the balance sheets of many a ‘budget-squeezed’ and ‘credit crisis-bruised’ central bank is sure to raise some questions and engender some vigorous debates in 2011 and 2012, at various policymaking meetings, here or there. Stay tuned. The odd of sales by the IMF and the plight of poor nations, and such, that’s a whole different topic, for another day.

While central banks collectively were net buyers for full year 2010, selling of gold still outpaced purchases during Q4 of the year. Finally, for 2010 as a whole, (again, this was a year during which there was no shortage of “peak gold” alarmism being pumped into the marketplace) total mine supply of gold rose by 9% to 2,543 metric tons, according to the report- data for which was compiled by the London-based consultancy firm, GFMS. Also noted were huge drops in producer de-hedging (a process which is thought to have added much to gold’s hefty price gains over the past decade).

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Metals Inc.North America

 

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