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In The Lead - Basel Bull

Tuesday October 30, 2012 09:53

Original publication date: October 26, 2012

There will be no In The Lead commentary for October 29th. Jon Nadler will return on Tuesday.

Following a brief recovery on Thursday gold prices headed back down towards the sub-$1,700 value zone this morning. Overnight lows were seen at $1,699.90 per ounce. The seven-week low of $1,698 per ounce that was (ironically) touched just prior to the relatively dovish Wednesday Fed statement came into play once again, as the final session of this third week of losses in value for the yellow metal got underway in New York. When and if that support zone proves not to hold up under the pressure of the next wave of selling then technicians are targeting the $1,665 area as the next one to be tested –it is the number at which gold’s 100 and 200-day moving averages converge at this time.

Players are continuing to monitor festival-related demand for physical gold out of India as it has thus far not been very robust. In fact, according to the analytical team over at Standard Bank (SA) the first half of 2012 has yielded only 1,816 tonnes of jewellery-related demand globally. That is nearly 160 tonnes lower than what was demanded in 2011. Sixty percent of the first half of this year’s gold demand has come from China (255 tonnes) and from India (262 tonnes). Indian demand in particular was lower by 115 tonnes that what it came in at during the first half of 2011.

The principal factors that have contributed to that sharp contraction in gold demand from the world’s historically largest consumer of the metal range from a major contraction in GDP (down to 6.1% from 9.2%), to a domestic income growth that has not been able to countervail a rising gold price in local currency terms, and to the active efforts on the part of the RBI to curb Indian gold appetite since it is a major contributor to rising current account deficits, along with oil imports.

Thus the Standard Bank team concludes that –on a global basis- “While seasonality should support gold jewellery demand in Q4, it is clear that jewellery demand is unlikely to support the gold price as it did in previous years. Investment demand will have to pick up the slack—and while we do believe that it is possible, it also implies one has to be more patient before rallies become sustainable. The faster the gold price rises relative to income growth, the more negative the impact will be on jewellery demand—this should provide a drag to the gold price.”

Two days ago it was reported that South Africa’s largest gold miner, AngloGold Ashanti Ltd., would begin firing some 12.0000 striking workers (nearly 35% of its total South African workforce). The dismissal of miners comes amid similar action against wildcat strikers at Gold Fields. That firm sacked 8.500 mine workers when a Tuesday deadline came and went. This morning AngloGold was in the news again, but for a job loss of a different kind; that of its CEO, Cynthia Carroll. The firm’s stock has lagged the mining sector by almost 20% thus far this year. Shares of AngloGold rose 3.2% in the wake of Ms. Carroll’s exit.

Spot dealings opened with a loss of $5 in gold and with a bid-side quoted at $1,705 per ounce. Silver lost 1.1% or 30 cents to open at the $31.80 mark per ounce. Platinum and palladium also fell this morning; the former dropped $11 to $1,548 the ounce while the latter slipped $4 to the $597 bid level. Rhodium was unchanged at $1,150 the ounce after having lost a substantial amount in value ($100) earlier this week.

Market observers believe that platinum represents a decent longer-term buy at or near its currently depressed value. TD Securities analyst Bart Melek sees a platinum market that “may end up in a significant deficit this year compared to a previously expected surplus” as the loss of an estimated 600,000 ounces of production makes its impact felt.

Over the past two weeks gold prices have shed more than 5 percent as an absence of fresh bullish price drivers combined with the erosion of post QE3 speculative euphoria conspired to dampen the spirits of the bulls who were all set to celebrate $2K gold before the ball drops in Times Square on New Year’s Eve. In fact, Barrat’s Bulletin from Down Under figures that the yellow metal might close the year out well below the $1,700 mark and nearer perhaps to $1,635 the ounce.

Market background conditions this morning showed crude oil marginally at $85.90 per barrel and copper off by 0.55% a pound, while the US dollar climbed to 80.26 on the trade-weighted index and the euro approached $1.29 in the wake of fresh Spanish woes (record joblessness and more bailout talk). Most market participants were seen focusing on the release of US GDP data and what that metric might imply for sentiment in commodities and in equities as we go forward.

The Dow did not have a very good week at all thus far, and this morning some of the intense shine came off of Apple as its latest quarterly earnings missed expectations. Stocks struggled this week despite the best showing in durable goods orders in 2.5 years, the best new home sales levels since early 2010, and despite a decline in the number of initial jobless claims noted yesterday. Risk aversion is suddenly back in fashion. Analysts opine that the greenback may further benefit from investors not wanting to take risks with but a few weeks to go before year-end, especially if they prove to be disappointed by the GDP numbers.

Such disappointment should not really manifest itself given the fact that healthy consumer and government spending managed to lift the GDP level in the US to the 2% mark last quarter. Consumer spending was the standout contributor to the better-than-expected GDP number, albeit there was quite jump in government spending (up 3.7%) and investment in housing (up 14.4%) as well. Economists had anticipated only a 1.7% rate of US economic expansion for the trimester in question. The US dollar edged up in the wake of the data release but did not hold on to those gains for long, and subsequently gold turned positive. Options expiry and pre-weekend book-squaring activities played into gold’s turnaround to a large extent.

As expected, bullish commodity spec sentiment did receive a modest boost on late Wednesday and yesterday after the Fed’s statement that it anticipates interest rates to remain at artificially low levels until mid-2015. To be sure, once again dissenting Richmond Fed President Jeffery Lacker noted that such a stance on the part of the US central bank –even if the economy improves as the Fed says- is “inconsistent with the [central bank’s] goal of keeping inflation low and stable.” Mr. Lacker has consistently felt that the Fed is creating too much of a good thing and that the absence of a clear calendar date to be targeted for the initiation of its exit from accommodation is not a wise course of action to adopt.

Much hard money newsletter noise has recently been made about gold and its role in the international banking system. The focus by the writers has mostly been on central bank purchases and on the putative Tier One asset status to be conferred upon gold by the Basel Committee. Well, not all is what it appears to be. Central bank purchases have not been overly large compared to historical levels seen in recent years and the massive gold purchases that certain banks are envisioned as making immediately in the wake of gold’s attaining Tier One status are simply wishful thinking. But, hey, don’t take our word(s) for the above. Let’s look at a cogent take on these matters by the good folks over at CPM Group New York.

In their May 31 Market Alert, the researchers at CPM bravely expose certain myths and misconceptions surrounding gold and banks –central or otherwise- as follows:

There is an aura of desperation in the internet gold press, as those who still expect gold prices to rise grasp for any-thing that could be interpreted as being potentially bullish for gold. The collapse of the euro, a stock market crash, a Chinese ‘recession,’ and other potential catastrophes are pointed to with glee. Other potential developments within the gold market are being trotted forth by gold marketing groups as reasons to believe gold prices inexorably must rise sharply in the near future.” Commercial agenda-driven propaganda in the gold niche is nothing new; the latest such desperate move attempts to denigrate the long-standing, bullet-proof, government-guaranteed Perth Mint Certificate Program.

Fortunately, investors know better than to buy such bedtime stories. They have however almost bought the stories related to central bank gold purchases (little more than active reserve management) and to the Basel guidelines (little more than mere proposals and not an epic shift in the market). Let CPM dissect those issues for us now:

On the subject of the so-called recent ‘massive’ central bank purchases, CPM Group notes that in fact “even with the two large purchases (one million ounces by the Philippines and 954,000 ounces by Turkey) included, the gross and net purchases by central banks in the past two months are not really that out-sized compared to purchases over the past several years. In fact, they are pretty much in line with gross and net purchases by central banks in recent years. In other words, there is not that much new here to revel at.”

As for the Basel Committee’s re-rating of gold, CPM Group reminds us that First, one must point out that it is not at all clear that the Basel Committee on Bank Supervision, which sets these guidelines, will re-rate gold. Even if it did, the purpose on the part of commercial banks in seeking this change is not to allow them to buy more gold. They want to use their existing gold deposits — deposits their clients have made with them of gold — as Tier One assets for the purpose of meeting the tighter liquidity ratios. They are not planning to buy more gold. It would be highly unlikely that any bank would purchase any gold, transferring funds to gold from currencies.”

Until next time, always read between the lines. 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 August 6th, 2012

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