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Kitco Precious Metals and Economic Review - Week Ending February 8, 2008

By Wendy Lynn Ip      Printer Friendly Version
Feb 11 2008 9:13AM

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Kitco Precious Metals and Economic Review - Week Ending February 8, 2008

Gold

Spot gold had fought to keep itself in the $900 per ounce region after recording losses on Monday and Tuesday of last week. The London PM Fix would lose a total of $27.25 per ounce and gain it back plus some by Friday, ending the week at a PM fix of $916.25. This would be the highest PM fix for the week. The gains from the recoup would not be enough to bring its performance higher relative to the week ending February 1, as its average PM fix would fall 1.9%. Last week’s average PM fix was a little over $920 per ounce, around $18 per ounce higher than this week’s average. The early week bout of profit taking, some to cover margin calls from last week’s poor performance in equities following ISM’s Non-Manufacturing Survey index value near the U.S. recession of 2001 level (Business Activity Index at 41.9 points for January 2008 and 40.5 points for October 2001), had taken its toll and brought the weekly PM under its 10-day moving average. Table 1, at the end of this article, details the 10-day (two-week) to 120-day (6-month) moving averages for all the metals in this review.

With this said and loss taken into account, monthly as well as annual gains are still significant. The average London PM Fix for gold in December of 2007 was $803.20 per ounce; the average AM was $801.79 per ounce. From December 2007 to January 2008, the average AM and PM fixing had increased by over $90 per ounce. Given the results from last week, the average price is now a strong $100 per ounce over December 2007. Furthermore, real annual gains are still significant, pulling in a solid 33.8%.

With prices in the $800 per ounce region, investment demand would help gold’s end-of-week rebound. Last week, gold continued to roughly follow WTI crude oil price path. Crude oil prices can serve as a daily indicator of the robustness of consumer demand (expected overall economic well-being) as well as an indicator of inflation, two factors that help to formulate investor expectations as well as current purchasing decisions. In addition, gold had run counter to the value of the dollar, as represented by the U.S. Dollar Index, USDX; however, gold’s relation to individual currency values against the dollar was found to be non-significant in the past week. For further discussion, please refer to the section entitled “Additional Details on Metal Performance? below.  Lastly, poor results from ISM’s Non-Manufacturing Index for January 2008, 41.9, released last Tuesday did not affect the USDX, as market participants have already factored a recession into their valuations. Last week, the U.S. dollar gained mainly from the weakness in the euro, as a sell-off of the currency took place when data results on the eurozone’s service sector  pulled in a low 50.6 points in addition to news the from the European Central Bank’s president, Trichet, indicating a clear economic slowdown in Europe. Many expect that this trend in the euro will continue.

Silver

Spot silver’s price path on Kitco’s 24-hour charts bared close resemblance to gold last week, as it also had fought to recover losses incurred on the first few days of trades. The metal had fallen by $0.71 per ounce in its London PM Fix by Wednesday. It would recoup only $0.47 per ounce of its PM price by the end of the week. Even with this early week loss, silver’s London PM would continue to outperform its previous week’s performance as well as its 10-day to 120-day moving averages.

Silver’s monthly as well as annual gains are significant. The average London Fix for silver in December of 2007 was $14.27 per ounce. By January 2008, the average fixing had increased by $1.83 to $16.10 per ounce. Given the results from last week, the average price is now a good $2.49 higher than December of 2007. Lastly, real annual gains remain significant, pulling in a solid 19.3%.

Platinum Group Metals

Platinum group metals decoupled from the price path of gold and silver last week. Supply concerns as mentioned in the past several weeks remain center stage. Along with these supply concerns come expectations of future price growth leading to a heightening of current demand.

Platinum’s London PM Fix would reach a high of $1,860 per ounce last Friday, a clean $105 per ounce higher than what was achieved in the previous week. As was found in all of the metals, platinum’s monthly and annual gains remain significant. The average London PM Fix for platinum in December of 2007 was $1,485 per ounce. By January 2008, the average fixing had increased $113 to $1,598 per ounce. Given the results from last week, the average price is now over $316 per ounce higher than December of 2007. It is no surprise that real annual gains remain solid, pulling in 47.6%.

Palladium also performed strong last week, achieving a high of $432.50 per ounce in its London PM Fix and gaining over $68 per ounce from its December 2007 average of $351 per ounce. Real annual gains also remain significant at 19.7%.

Lastly, the sleepy metal surprised us all with a gain of nearly $1000 per ounce within a two week period, hitting $8,075 per ounce just last Friday. As it stands right now, there is no telling just how far rhodium will go under the current and expected supply issues, even in wake of a partial input trade-off in the production of catalytic converters for low-diesel vehicles by enhanced use of palladium. Rhodium’s average price for December of 2007 was $6,812.50 per ounce, $795 per ounce less than last week’s average of $7,607.50. It also comes to no surprise that real annual gains would pull in a firm 24.5%.

Well, this wraps up this weekly review. Until next time, take care and I wish you all a very good week.

Wendy

Additional Details on Metal Performance

From Table 1, gold and silver’s London PM Fix price path was very similar last week. A review of Kitco’s 24-hour charts would also confirm the case. There was very little relationship among price paths of platinum group metals to that of gold both in of their PM fixings as well as on an overall market minute basis; however, the relationship between the platinum sister metals remains strong. Last week, gold seemed to take virtually no influence from any individual currency valuation. There was a counter cyclical observation between silver and CAD, HKD, and CHF, implying that as these currencies gain in value against the U.S. dollar, a pulling out of interest in silver was also observed. The expected pro-cyclical relationship was observed between most currencies and the platinum group metals, implying that as these currencies gain in value against the dollar, a rise in interest in these metals is also observed. The negative relationship between silver and currencies could also be a signal that consumers are trading off silver for physical platinum.

U.S. Statistical Update

The major shocker last week came with the updated data from ISM, Institute for Supply Management, which sent equities on the U.S. market plummeting. Global stocks would follow. The ISM’s Business Activity Index, a component of overall Non-Manufacturers, fell to 41.9 points in January 2008. The last time the index fell to the 40’s region was during the recession of 2001 when the index hit 40.5 in October 2001. The 12-month average for the index stands at 54.7 points.

Average Deviation = Standard Deviation 

The term, average deviation, as used in this article 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.

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