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In The Lead - Ad Men

Friday January 18, 2013 10:31

Gold started the new trading week with a relatively choppy session in New York yesterday. Friday’s declines narrowed the yellow metal’s first weekly gain in nearly two months to but about one-third of a percent. Ironically, Friday’s weakness in gold prices was attributed to the same country that boosted sentiment just hours before: China. Whereas China’s rise in reported December exports buoyed the gold bulls, the country’s latest inflation reading unnerved the bullion bulls as it could portend the curbing of existing stimulus by government officials.

There were, in fact, some reservations about the reliability of the Chinese export figures that stoked the commodity bulls in the middle of last week. According to recent analysis tendered by Goldman Sachs, by UBS AG, and by the ANZ Banking Group, the reported 14.1% surge in December Chinese goods exports was not corroborated by physical movements through various ports. Unreliable statistical data coming from China is not a surprising development, to be sure.

A Goldman Sachs analyst opined that “It is possible that local governments may have tried to boost exports data by either making round trips in special trade zones” or by exporting “earlier than otherwise in an attempt to improve the annual exports data,” while another analyst theorized that “rushed shipments and even faked exports to secure tax refunds may have contributed to the stronger growth data.

Bullion’s  advance  to near $1,675 per ounce during the morning hours on Monday was largely being attributed to somewhat dovish comments (we would not so far as to label them as a “stimulus signal”) that were made by Chicago Fed President Charles Evans with regard to the Fed’s maintenance of an accommodative stance while the US economy recovers and while US lawmakers try to address the country’s deficit issues.

Spot bullion traded between $1,661 and $1,676 per ounce and settled at $ $1,667.80 with a $5 gain on Monday. Gold’s recent BFF, the euro, continued to rise against the British pound and the Swiss franc yesterday as global investors continued to be seduced by the prospect that the worst of the eurozone crisis may be behind us. At a quote near $1.336 the common currency also traded at a near ten-month peak against the greenback.

Some have opined that the fact that the ECB stood pat on interest rates last week implies that financial officials over in Europe are all but declaring the crisis that has roiled the Old World for several years now is over. Perhaps conditions are not as “intense” now that we have seen Spanish bonds touch to under 5% and that Greece remains above the water-line and is still part of the EU. However, this morning, the German Federal Statistics Office projected that the country’s economy may have contracted by perhaps as much as half-percent in the final quarter of 2012.

Dr. Nouriel “Doom” Roubini opines that while conditions in the eurozone have shown significant improvement since last summer and that risks have ebbed notably, the structural problems that the EU faces remain very much on the scene. Dr. Roubini notes that While there is a much lower likelihood of disorderly events in the euro zone, there are still significant obstacles to deeper integration, as well as country-specific economic and political vulnerabilities. The biggest obstacle to the formation of a banking, fiscal, economic and political union is that Germany is pushing back against the time line for action, with the initial skirmish on ECB supervision of euro zone banks.”

Meanwhile, platinum’s $27 surge that took place at about the same time on Monday, nearly wiped out the hitherto existing discount of the noble metal vis a vis gold. UBS analyst Dominic Schnider noted that when You have a metal which is more expensive to produce than gold, whose supply is not growing and whose market is expected to be in a deficit, such metal should trade at a premium to gold.” While Mr. Schnider does not expect a $100 platinum-to-gold premium to occur just yet, he did allow for a $50 higher-than-gold platinum price should current strength in the noble metal continue to remain manifest. The last occurrence of such a positive differential in platinum versus gold took place in March of last year.

Speaking of platinum, well, we can now finally discount at least one potential application for the noble metal: its use in the much-discussed $1 trillion US platinum “debt solution” coin. R.I.P. The Washington Post reports that the Obama administration finally put the kibosh on the idea of minting such a coin. Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.”  Back to Plan “A” -which involves actually doing something about the revenue/spending gap and doing so before Valentine’s Day. This is why.

The latest CFTC market positioning COT reports indicate that platinum’s net longs are up nearly 60% from their 2012 average level. In the week ended January 8 nearly 87,000 ounces were added to long positions by specs. On the other hand, gold net-long positions slid by 13% (losing 32.2 tonnes) to a little over 92,000 contracts –the lowest level since mid-August. Silver net-long positions fell by almost 8% (a loss of about 165 tonnes) to roughly 21,000 contracts.

While they believe that the recent gold sell-off may have been “overdone” analysts at Standard Bank (SA) do acknowledge the fact that “the latest CFTC data revealed that net speculative length for COMEX gold fell as investor confidence was rattled by indications in the FOMC minutes release of 3 January (the CFTC data covers the week ended 8 January) that the Fed might end quantitative easing sooner than markets had been expecting.”

Overall, and largely on account of such Fed policy-related jitters, the spec fund niche slashed its bullish commodity bets to its lowest level since the middle of last year in the latest CFTC reporting period. According to Marketwatch, the minutes of the December meeting released earlier this month reveal that some Fed officials want to end the bond-buying by mid-year. Not one of the Fed’s senior policy makers saw the program lasting until 2014.” Hawks in flight are not a friendly sight for commodity bulls.

The Fed’s Mr. Bernanke, speaking to an audience at the University of Michigan’s Gerald R. Ford School of Public Policy, said on Monday that the federal government’s debt limit must be raised in order not to get into a situation where Uncle Sam’s bills are not paid. The Fed Chairman reminded his listeners that raising the US’ debt ceiling is not tantamount to new spending, but, rather, that it ensures that the government remains able to pay its existing obligations. At this juncture, the US Treasury will run out of further wiggle room sometime between February 15th and March 1st.

Mr. Bernanke said plenty of other things as well to his UofM audience. The short list of mentioned items includes: a) the Fed does have the tools required to make an exit from its accommodative policies, b) the Fed does not believe that significant inflation will arise out of such policies; c) the Fed is, and will be watching closely, whether easy money courtesy of the Fed has given rise to any asset bubbles, and d) the US economy is on the mend as is the US labor market. The Fed Chairman also noted that his institution is weighing and monitoring the “costs” of the bond-buying program currently in force.

This morning’s spot price dealings opened with massive gains in platinum (up $30) and with the noble metal once again trading at a premium to gold (spot offer indication was $1,697 after touching a high at $1,710 per ounce). Gold move $12 higher to reach $1,681 the ounce. Silver was somewhat the laggard 8this morning with a gain of 10 cents and a bid-side quote at $31.12 the ounce. Palladium remained static at $705 on the bid. Rhodium was flat a $1,125 per troy ounce.

Background markets showed crude oil falling 40 cents to $93.71 per barrel and the US dollar advancing 0.17% to 79.65 on the trade-weighted index. The economic reports from the US offered a “hot/cold “scenario once again this morning. While US retail sales notched a 0.5% gain in December and ignored the Fiscal You-Know-What wrangling in Washington, the Empire State’s manufacturing index experienced its sixth consecutive monthly contraction in the same month.

Late Monday EW market analysis noted that silver is (or at least “was” –as of Monday) currently “stronger” than gold and that in order to play catch-up with the white metal gold might (if it manages to extend its bounce) target the $1,710 level in coming sessions. However, a breach of the recent $1,625 low could indicate that gold continues to extend its slide that began in October. Meanwhile, silver could be targeting the $31.50-$31.90 resistance area, while it too, must not break the January 4th low lest it resumes its trend towards a possible $26 per ounce initial target.

The physical gold market still awaits a decision by the Indian government as to whether or not a fresh hike in gold import duty levels will become reality in the near future. Finance Minister Chidambaram is slated to present India’s Budget for the fiscal year 2013-2014 at the end of February. It could also be the case that the new budget might contain additional means by which India’s large-scale gold imports might be curtailed. For example, we might see proposals to mobilize some percentage of the “idle” gold from India’s households and/or temples.

Then again, it is interesting to learn just how such a huge stash of gold has materialized in India. While no one will argue that centuries of tradition have played a role in gold occupying a prominent spot in the Indian cultural psyche, the largest surge in gold imports into that country has taken place in the past eight years or so. Memo to file: Thank you, gold mining lobby. Read on:

It is an open secret that, up to 2004, the amount of gold normally sold on Akshaya Tritiya seldom amounted to more than 5 metric tonnes. Enter the World Gold Council and…an Indian soap opera star. In the years following a series TV and newspaper ads featuring the leading lady of the most popular Indian television soap, gold sales on Akshaya Tritiya (and not just that day) grew exponentially. The actress was featured in ads that reminded viewers how auspicious it was to buy bullion on that particular Hindu holiday: very, very auspicious. Why buy a TV/BMW/condo/share of stock when you can do this?

How did this kind of campaign work out for the mining lobby? Well, Indian jewelers sold 17 tonnes of gold in 2004, then 38 tonnes in 2005, and then 44 tonnes in 2006. Tomes have been written about whether or not advertising engenders (artificial) demand and we have not the space to get into that debate here, but you get the point. Let’s just say that the Countrywide Financial ads that inundated America’s TV screens –oh, about every other minute back in, say, 2006- created not only demand for loans, but eventually the subprime crisis itself.

There are some schools of thought that attribute the heavy gold inflows into India to the fact that many (some say most) large real estate transactions are settled with gold as regards the cash component of the deals. Nevertheless, whatever the cause-effect situation might be, the “blips” being made by gold on the Indian government’s fiscal radar have not gone unnoticed. Also not unnoticed (by anyone with a stake in this market) has been the meteoric rise in lending against gold that has occurred in India since 2008.

Kitco columnist Nigam Arora notes that, formerly, Gold loans were provided by money lenders and pawn brokers for several centuries. In recent years the gold loan business has shifted from pawn brokers to financial institutions. There has been a big rise in the number of institutions lending against gold. In addition to the banks, nonbank financial companies (NBFCs) have become major players in lending against gold. To handle the large demand for loans against gold, NBFCs have increased borrowings from the banks on a massive scale.”

Thus, cautions Mr. Arora, “What happens to gold is extremely important to the Reserve Bank of India for two reasons. First large imports of gold at elevated prices are causing large trade deficits. The deterioration in current account deficit due to large gold imports has become a drag for the Indian economy. Second, there has been tremendous increase in lending against gold in India. If gold prices were to fall a lot, it would wreak havoc on the Indian financial system similar to the havoc caused by collapsing house prices on the American financial system in 2008.”

As The Economic Times’ Sugata Ghosh put it in an incisive article over the weekend: In India, which mines the least gold but consumes the most, the gold rush has rattled the officialdom. A rise in gold prices has pushed up gold imports to 11.5% of imports in 2011-12 from 6.8% in 2008-09. and gold imports have similarly climbed to 9.4% of savings in 2011-12 from 5.3% in 2008-09. New Delhi and Mint Street fear that unbridled demand will raise the dollar against rupee (since more and more dollar will be spent to buy what they think is an "unproductive asset") and there will be inevitable chaos if the country continues to live beyond its means for too long.”

For now, the items on the watch-list include the level of physical offtake surrounding upcoming mini wedding-season dates and the government’s budget presentation. When it comes to the bigger/longer-term picture however, there is at least one Indian analyst who –despite being 86 years of age-is still dispensing opinions on the market. Mr. Madhusudan Daga has been watching markets since 1947 and had this to say about gold (and silver) to the ET reporter: "I'm no longer as bullish on gold... I would rather bet on silver. Today, gold has become an international currency and there will be interventions by governments... I doubt whether it will continue to rise the way it has.”

Mr. Daga might have seized on something with his tempered gold price views: two of the most spot-on gold price forecasting institutions – Danske Bank and Credit Suisse Group AG - have issued opinion that the yellow metal will likely peak this year and trend lower next year. Danske Bank sees an average gold price of $1,720 in 2013 and $1,600 in 2014. One battle-hardened, veteran New York gold trader told this writer recently that with a possible $200 upside and a $500 downside, the yellow metal is not “in the zone” to the extent it was in 2011.

On Sunday, Goldman Sachs Group also reiterated its previous projection that 2013 will be the year in which gold would peak. The gain that gold achieved last year was the smallest in four years. That said, Credit Suisse’s Tom Kendall reminded investors that “Gold’s still going to have a very solid role as a diversifier in portfolios. It’s the more short-term speculative investors who are going to gradually drift away from gold.”

Until next time,

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 December 17th, 2012

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