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In The Lead - Statistics! Lies! Heresy! More Statistics! Truth.

Friday May 18, 2012 09:32

Gold prices rallied by more than 2% on Thursday and by nearly 1% early this morning as the US dollar appeared to slow its upward progress on the trade weighted index. Nevertheless, the dollar –trimmed gains and all-was still up for a 15th day in a row (!) in pre-market action. The jump in gold was characterized as mainly a “short-covering surge” and that kind of “profile” probably should not have come as a big surprise to certain players, given the low RSI and extremely low Daily Sentiment Index levels that we had mentioned in Wednesday’s commentary. The bottom line is still that May has thus far greeted gold and silver players with ten down days versus two (perhaps three after today) to the upside. Sell in May? Ummm…yes, and then some…

There was also a mild “QE3 hope” overlay present in the marketplace to help gold recover from the deep loss it incurred on Wednesday. That kind of optimism came from players reading certain things that smacked of potential QE into the FOMC’s just-released meeting minutes, and from just plain reading the numbers related to the Philly Fed manufacturing index and the US’ leading economic indicators (both only so-so). Follow-through action remains essential in order to be able to begin talking about the bear tide having turned. On the physical side, Chinese demand softened notably after the price recovery dampened buying appetite according to Standard Bank’s daily report.

But –as Reuters reports – “with the euro and U.S. stocks in decline and Greece still on the brink of leaving the euro zone, many traders saw the gains as little more than a "dead-cat bounce", slang for a small but temporary rally that follows significant declines. Milko Markov, an investment management analyst at SK Hart Management LLC, said about yesterday’s action that: "When the move to the upside is so elastic, it suggests a lot of people caught at the wrong side, but also confirms the medium negative trend."

Similar sentiment was manifest in the comments made by UBS analyst Edel Tully this morning when she noted in a report that “To see a return of gold reacting positively to macro stresses is indeed refreshing, but it is still far too early to make any firm conclusions from here that gold has indeed turned the corner. Follow-through buying will have to kick in to encourage investors to jump in.” The good news? Nothing (in the markets) goes straight up or down. Ever. Not for long, anyway.

Spot New York dealings this morning showed gold trading at $1,588 per ounce on the bid-side, silver quoted at $28.38 an ounce and platinum and palladium modestly higher as well. The former gained $6 to open near $1,455 and the latter climbed $2 to $603 an ounce. The PGM market is once again manifesting fears about supplies, following the break-out of hostilities between two rival mining unions at Implats’ Rustenburg mine (the world’s largest platinum mine). One worker seriously injured and tensions remain high. Standard Bank reports that “As of this morning, the company reported that “everything is calm” and that the incident had not affected production.”

On the negative side for PGMs there are reports that the slowing Chinese economy is swelling the number of unsold automobiles on the country’s dealership lots. Automakers Honda, Chery, and Geely are now carrying an estimated 45 days’ worth of inventory and the development comes as a warning sign that not all is well with the economy (read more about all that, below). In a country that normally sells a new car every 2.3 seconds, the total vehicular sales tally fell by 1.3% in the first four months of 2012 and that could turn out to be the worst such showing since 1998. Caution: bumpy road ahead.

More PGM niche-related news for you today: India’s Geological Survey announced that nearly 20 million tonnes of “platinum-group elements” have been found in exploratory surveys across that country. Major PGM findings were reported from the Eastern State of Odisha and Southern States of Karnataka and Tamil Nadu.

Background market indications showed the US dollar steady near 81.40 on the index and the euro mired close to the $1.272 level against it, while crude oil gained 22 cents to rise to $92.75 per barrel. Dow futures pointed higher albeit the past week has not been kind to that market and we won’t even mention what European shares (or Asian ones for that matter) have been subjected to of late.

The latest blows to the EU’s financial system came from Moody’s which downgraded 16 Spanish banks and from Fitch’s which downgraded Greece’s sovereign debt rating to CCC (read: “poor quality with possibility of default”). Germany’s Finance Minister said that-as he sees it-the upheaval in the region’s financial markets might drag on for another two years. The G-8 meets today in the US and will try to once again “do more” to put out the fires in the system.

The heavy fall in gold prices has, of course, once again, given rise to a plethora of allegations about the market being manipulated by unnamed (okay, sometimes even named) evil sources working for the ‘Gubmint’ or for Mr. Bernanke, or for Dr. Evil, or for Auric Goldfinger. Well, here is something this author thought he’d never report on; a major ‘defection’ in the pro-gold camp over to the manipulation-skeptic side.

None other than noted financial newsletter writer and gold advocate Doug Casey wrote a brilliant piece that appeared on LewRockwell.com in which he dissects the possible manipulation-related questions and concludes that they are little but rhetorical. Mr. Casey advises his readers to buy gold “even at current prices” but he instructs them to do it for “the right reasons.” Fighting “manipulation” is not one of them.

As Mr. Casey sees it, the “arguments about gold manipulation are more redolent of religious belief than economic reasoning.” Wow. That kind of straight talk, will hopefully not earn Mr. Casey the kind of e-mailed death threat that this author “enjoyed” last week, but it is sure to swell the “inbox” that he gets to read every day. Evidently, he did not realize that talking in “The Church of Gold” is strictly verboten. For his courage, applause is due.

Meanwhile, Business Intelligence Middle East notes that gold has not only experienced what it calls “heavy falls” since February, but that “Since mid-Q3, when equity markets turned on better US economic data, the price of gold has essentially followed risk appetite.” You have, no doubt, seen numerous headlines on the Kitco news site over the past half a year that have linked gold’s daily trials and tribulations to “risk-off” type of sentiment manifest in the markets.

Thus, we come to learn from Barclays Capital, the amount of total assets under management in commodities overall declined by $6 billion in April. The large shrinkage was principally caused by the flight of investors’ money from precious metals ($4 billion got up from, and left that space) and from energy (about $2 took flight there). Notably, agriculture-related assets under management remained largely intact, underscoring confidence in the basic fact that eat we must. Eating gold or drinking oil, on the other hand, is a tricky proposition. We should look forward with keen interest to Bar-Cap’s summary for the May metrics in this niche given what has taken place in precious metals prices this month.

Well, the latest quarterly gold demand statistics from the World Gold Council are out and the data set presents a muddled picture in several key areas. First, it must be noted that global gold demand dropped by 5% in Q1 of 2012. The only way to see that statistical development as a positive one is to frame it in terms of dollar value. In terms of tonnage taken from the marketplace, the decline is…a decline and one cannot spin the fact.

Fear not, The Telegraph, over in the UK, found a way to publish a headline that will be the only one in heavy rotation on numerous gold-oriented and bullion dealers’ websites in coming days: “Global Demand For Gold Grows 16%” –That’s one way to present the fact that gold demand actually…fell. You know, kind of like that famous utterance by a former US President: “It all depends on what your definition of the word “is,” is.” Stretch Armstrong has nothing over The Telegraph when it comes to the truth.

Ditto the demand for gold bars and coins: it fell 17% on the quarter. Ditto the demand by India: the country’s total gold demand fell by 29% in Q1, its jewellery demand fell by 19% on the quarter, and its investment demand fell by 46% on the period. Ditto the demand in Saudi Arabia (down 40-50%) where more than 500 (!) gold shops closed their doors in the past three months. Actually, global gold jewellery demand fell by 6% on a year-on-year basis and the only bright spot in the baubles’ space was the offtake from China (it gobbled up 156.6 tonnes of gold for ornamental purposes).

Speaking of China and of India, and the perennial stories of “ChIndia” growing in competition with Jack’s storybook beanstalk (i.e. to the sky), the developing realities ‘on the ground’ in both countries appear to be anything but confidence-inspiring for commodity bulls who seek salvation from these two nations’ demand levels for ‘stuff.’

Case in point number one: China. Standard Bank’s team of commodity analysts reminds us that “Chinese construction remains an important source for much of China’s commodity demand such as iron ore and copper. This has also been a key growth area over the past few years for the Chinese economy as a whole. Property investment accounted for around 14% of China’s GDP last year and weakness in this sector remains a concern.”

The SB market observers added that “given that monetary policy remains tight, private sector construction remains vulnerable to a lack of financing. But it is new construction that is important for commodity demand. On the back of slower sales we continue to expect construction growth to slow. In fact, the massive growth rate in new construction that we have witnessed between 2008 and 2011 is unlikely to repeat itself any time soon.

March and April this year have seen the weakest seasonal month-on-month growth rates since at least 2008,” and they concluded that “As a result, we do not expect commodity demand from the construction sector to accelerate anytime soon, and may be looking for stronger demand only towards the middle of next year. With this morning’s news from China that property prices in all but 24 out of 70 cities being tracked by the country’s National Bureau of Statistics fell for a second month in a row, even that view may be a tad too optimistic. Newly built home prices in China have fallen by an average of 0.94% last month.

Case in point number two: India. Commodity Online (an India-based website) offers a total of one dozen reasons for being less than sanguine about the country’s prospects for the type of growth that investors have previously been assured would be seen for decades to come. Just a few of the reasons being cited:

  • An S&P downgrade to ‘negative’ of India’s sovereign debt. The agency is now factoring in what it calls the likelihood of diminished growth prospects, slow fiscal reforms, and a worsening external position.

  • A crash in the Indian Rupee to a historic low against the dollar (one of the main reasons Indians steered clear of unaffordable gold this spring – counterintuitive as that might seem.

  • Declining export growth related to troubles in the EU and elsewhere.

  • A soaring trade deficit boosted in large part by gold and silver (and oil) imports.

The Washington Post analyzed the situation in India noting: “India is struggling to balance its books partly because citizens keep buying gold. The country’s current account, the difference between the value of its imports and exports of goods, services and financial transfer payments, is running at a deficit of about 4 percent largely because of high import bills for oil and gold.”

We now turn to the silver market and to the release of the latest and much-anticipated Silver Yearbook by the CPM Group New York analytical team. The firm’s latest survey of the silver market contains some eye-opening revelations insofar as the fundamentals of the white metal are concerned. For example, much to the chagrin of those who would still like to claim that silver is a monetary metal and that it could be regarded as some kind of stand-in for gold among less wealthy individuals, the reality is that of the 50 billion ounces of silver which have been produced over the past five centuries, only some 5% ended up being held by investors in the form of bullion or coins. The industrial and jewellery niches have consumed the remainder of the ounces. Case closed.

We are now in a paradigm in which only about four central banks hold any silver at all (roughly 1,200 tonnes) and wherein silver, as money, no longer plays a role. This occurred despite the more than 133 million ounces of the metal that global investors demanded from the marketplace last year and that it was the fifth highest such level of offtake that CPM is aware of. CPM now looks for investors to add less silver to their portfolios in coming quarters, largely owing to the fact that the relatively high price of the metal means that fewer ounces will be required to fulfill specific dollar allocations in such baskets of wealth.

As such, CPM notes that albeit 2011 was a pivotal year for silver (having traded at the half-century per ounce mark), that same year might also come to constitute a turning point in the white metal’s fortunes. While the market witnessed a record level of trading activity in 2011, CPM does not expect such fervor to continue this year, or for silver to break above last year’s highs, and it expects the precious metal to decline further throughout the remainder of 2012.

On the supply side of the silver market, it was noted that 2011 witnessed a tally of 995.1 million ounces in terms of newly refined market economy contributions. Of the total, some 700 million ounces of silver were added to the market by the world’s mines; a 4% increase over 2010. China and Mexico were strong sources of supply and the two countries stand as the top players in the field. This year will mark the first time in history that the one billion ounce mark in silver supply will be attained.

Scrap silver supplies experienced a 1.7% decline last year as Indian secondary sales dried up. On the fabrication side, demand climbed by 2.2% driven for the most part by robust offtake by the photovoltaics (solar panels) sector. Electronics-related demand did not fare badly either, gaining 4.3% last year. On the other hand, silver’s usage in photography continued to decline; its demand was 7.5% lower than that seen in 2010. If this trend continues, CPM expects fewer than 100 million ounces of silver o be absorbed by the photographic applications sector this year.

We thank CPM Group for their continued insightful work and hope that you take the time (and a little money) to secure your own copy of the seminal Yearbook right here at their store. Talk about “value investing…”

Have a nice weekend.

By Jon Nadler
Senior Metals Analyst – Kitco Metals

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

Week of April 23rd, 2012

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