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In The Lead - BundesBull

Tuesday January 22, 2013 09:31

Gold prices touched a one-month high near $1,699 on Thursday as a slightly weaker greenback and a spike in black gold inspired short-term spec to buy the metal at its daily lows in the morning hours. The yellow metal had suffered a brief swoon on the back of a sharp decline in US jobless claims filings (more on US economic statistics follows below). Spot bullion finished at $1,687 per ounce in New York. Silver gained 24 cents to end the session at $31.73 the ounce.

The midweek-issued EW short-term potential price targets (of $1,710 and $32.50 respectively) remain viable for gold and silver, barring technical failure at overhead resistance levels. This morning's final trading session of the week saw gold advancing a more modest $2 an ounce (to $1,690) and silver up by one penny at $31.75 the ounce. Platinum fell by $8 but remained within striking distance of a price parity paradigm with the yellow metal while palladium dropped $2 to ease to $721 per ounce. Rhodium remained at rest at the $1,150 per ounce bid-side level.

In the markets' background, the US dollar moved to within 0.01 of the pivotal 80 level on the trade-weighted index despite a plethora of bearish calls made against it in the wake of last week's ECB interest rate non-action. Crude oil eased back to $95.36 and copper advanced 0.34% after Chinese reports showed the country's economy growing at 7.9% in QIV of 2012- a number one-tenth of a percent better than market expectations. That is, provided the figures from China are reliable. In any case, the greenbacks advance to the 80 mark showed that the "China effect" was quite short-lived with investors.

In any case, if one were to take a somewhat closer look behind the latest number from China, one might find some "shocking" data (CNBC's words, not ours). The other "Beige Book" (also called the China Beige Book) shows that loan demand in the world's second largest economy has virtually evaporated. Such a contraction in borrowing activity (80% of lending went to roll-overs) means that there is no funding of new growth and that means that this is not a time of strong economic expansion, the 7.9% figure notwithstanding.

Economic growth and/or the lack thereof dominated the financial stories at the mid-point of this week. The Fed's Beige Book survey revealed that the US economy grew at what was labeled a "modest or moderate" level in various parts of the country during December and (very) early this month. The report contained a mixed review on manufacturing activity, with three out of twelve Fed districts showing a decline in such readings. It is safe to assume that Fiscal-You-Know-What worries impacted the final results somewhat. Nevertheless, experts saw rosy tinges in the content of the normally…beige one.

Notwithstanding some of the contents of the Beige Book and the fiscal wrangling still underway on Capitol Hill, departing Treasury Secretary Timothy Geithner sized up the American economy as being close to the final stages of full recuperation from the financial crisis. As we near the home stretch for the current market week, we do have a nice harvest of positive US economic news to relay –some of which support Mr. Geithner's assertions, and some of which made for a nice "risk-on" day in the markets on Thursday.

If you wish to have more proof about the fact that gold and US equities are still (too) closely correlated (something that is anathema to gold bugs, historically speaking), then look no further than the S&P 500 reading of 1,481 recorded yesterday-, or the Dow flirting with a five-year high. The S&P is only some 6%away from its all-time high? Check. Gold is only some 13% from its own record level? Double check. What might be wrong with that close tango dance? A lot. Anyway, back to the US economic stats and how they bolster Mr. Geithner’s angle:

First: Despite all of the dire warnings about how we –by now, at the very latest-would be witnessing our (US) dollar bills melting away in our very hands against a background of massive inflation, on the US reported that 2012’s CPI came in at 1.7% (that, against a 3% inflation level that was tallied in 2011). Go figure. Second: The latest US initial jobless claims filings numbers (down by 37,000 to 335,000) are at their lowest level in five years. Third: The US Commerce Department reported that US housing starts leapt by over 12% last month, to their highest level in five years.

On the other hand, when it came to the economic growth level being envisioned on a global scale by the World Bank, well, the news was not all that positive. Gold prices suffered a midweek setback on the downwardly revised projections that the WB made for world economic growth for 2013. The institution is forecasting only a 0.8% expansion for Japan and a second year of contraction for the eurozone.

China’s and India’s growth expectations were also dialed back by the WB. Ditto those for Brazil and Mexico. Let’s just call those WB estimates for growth as “soft” overall. In rough numbers, that would translate to a global GDP increase of 2.4% this year; one-tenth better than 2012’s number, but well below previous WB calls for a 3% rate of expansion. That should make for some…soul-searching in Davos.

One more item of market interest this week was the rather” contradictory” tone coming from IMF Managing Director Christine Lagarde. You will recall that last week, ECB President Mario Draghi let it be known that interest rates would stay unchanged given certain observed trends in the EU. Well, Ms. Lagarde is of…another opinion (as of yesterday).

While the IMF chief’s remarks were apparently directed at all economic policy makers, it was hard to miss the obvious target and subtext in the words: “We stopped the collapse. We should avoid the relapse. It’s not time to relax.” As for the EU, Ms. Lagarde advised that “Clearly continued, if not further, monetary easing will be appropriate in order to sustain demand in the region.” Memo to Mr. Draghi: “Counting pre-hatched chickens = not advisable.”

And now, for something completely…the same: a fresh review of gold market fundamentals. Yes, they still matter. On Wednesday, Thomson Reuters’ GFMS statistical consultancy unit released an update to its 2012 Gold Survey. While some perennially bullish gold analysts proclaimed the GFMS findings as great news, it must be noted that there are certain “bottom line” items in the Survey update that should give cause for some concern.

Bottom line item #1: Global gold investment fell by 1.2% to 1,614 metric tonnes last year. In part, this retrenchment in gold investing was owed to a spike in the yellow metal’s volatility; such unanticipated price gyrations drove some investors away from the precious metal. 

Bottom line item #2: A sizeable contributor to the drop in gold investment in 2012 was the sharp (19.7%) decline in physical gold bar offtake. A total of 961 tonnes of this type of gold was taken off the market by investors last year.  

Bottom line item #3: A similar fall-off in demand was noted in the area of official gold coin fabrication. Growth in metallic as well as imitation coins was described as only “modest.” This type of ebbing in physical demand was probably attributable to a rising level of individual investor caution.

Investors turned skittish following not only a drop in the yellow metal to lows near $1,525 by mid-year but also as a result of subsequent lack of clear price direction and on the heels of a handful of episodes of heavy gold selling after the Fed repeatedly disappointed the bulls in the latter part of last year. You will recall that –in the projections of some newsletter scribes-2012 was supposed to be the year during which gold would vault above its 2011 peak of $1,920 and surge to well over $2,000 an ounce.

Bottom line item #4: Aggregate global gold demand, including fabrication and central bank purchases, shrank by 0.7% last year to the final tally of 4,484 tonnes. Bottom line item #5: The global jewellery market also witnessed a pullback in tonnage- on the order of 4.4% (to a total of 1,885 tonnes), principally as a result of a steep drop in Indian demand.  India’s jewellery fabrication dropped by 11% to 593 metric tonnes.

Meanwhile, the country that was supposed to fill the demand gap being brought about by India, did not step up to the job. China’s jewelry demand declined for the first time in nine years last year. GFMS opined that “Chinese jewelry demand was undermined by a lack of clear price direction and a slight slowdown in domestic economic growth.”  

Over on the supply side of the market, the expansion in mine output appeared to have stalled last year; it rose by only 0.2% to a total of 2,842 tonnes. However, that tonnage still marks a fresh record for global mine production. Make that: bottom line item #6.

The conclusions-despite a still-bullish tilt on the part of the report’s issuers (GFMS still sees gold recovering into the $1,800s before mid-year)- are the same as they have been before: waning demand against increasing supply. The current gold market thus continues to be (over)dependent on continued ETF, central bank, and hedge fund purchases in order to clear the surplus being left on the balance sheet. Estimates are that investment purchases from these sources need to average $500 million per business day throughout the year in order to accomplish that tall order.

Curiously, some hard money financial advisories, which had been extremely critical of central banks and their attitudes towards gold in recent decades, are now lavishing praise upon same and appear to have found new BFFs in them. Whatever it takes, folks. Who knows, pretty soon we might read kind words about gold ETFs as well, eh?

Remember the story about how Basel II was going to result in massive institutional gold buying and in a moon launch for gold? Sure you do. Too bad it was just a bunch of “Basel Bull. “ But, hey, you know what they say: “There’s more where that came from.”

This week’s similar “offerings” from the conspiracy and perma-gold-bull camps focused on the Bundesbank gold repatriation story. The news (at last count, it resulted in 3,700 Google News results) was rebroadcast ad infinitum, then dissected into its minute details, and then it was “frosted” with a large number of totally speculative conclusions that added up to one and the same thing: this is “epic” and/or “pivotal” and this is “a watershed moment” (never mind that it really…isn’t) and it will lead to a moonshot for gold as well as to the end of the central bank world as we know it.

Okay, so it turns out, this is all to be filed under the category of “Bundes Bull.” You could, if you simply wanted to, just read the official Bundesbank press statement instead of heaping helpings of conjecture and innuendo.

One commenter noted (in all seriousness, but without a shred of evidence on hand) that It is believed that the Bundesbank may have repatriated the gold in order to be prepared for a systemic crisis and currency crises,” and that “This is an important development as it shows how gold is reasserting itself as an important monetary asset. This could lead to a further increase in investment demand in the coming months.” Oh, really? Don’t think so.

Perhaps this is the kind of news that certain physical gold dealers have been aching to read, in the hopes of selling more of the metal. In fact, some of the “conclusions” that were drawn from the news story read very much like an advertisement for that which some gold dealers actually sell: “The Bundesbank’s gold repatriation shows the vital importance of either taking possession of physical gold or storing bullion in an allocated format with the strongest, non-financial and non-banking counter parties in the world. Allocated storage should be sought in locations where there is little risk of expropriation or nationalization.”

Just for argument’s sake, let’s suppose that a US poll were to be conducted and that America’s denizens would be asked “What percentage of US gold reserves should be held in custody off shore?” We think you know that answer, folks. It is a very “round” number (circular, in fact). Now, when it comes to the actual facts related to this “pivotal” story, the Bundesbank “move” is a…big yawn that occurs now, before we all go back to sleep. Read on:

Fact: The Bundesbank insisted that its decision –in no way-reflects any security or accessibility concerns related to the 1,500 tonnes of gold it is currently storing at the NY Fed and at the Banque de France. In fact, the institution is only moving 374 tonnes (not 450 as some sources reported) from Paris and 300 tonnes from the Big Apple back to Germany. If the BB were that concerned about such issues, why wouldn’t it move the entire 1,500 tonne stash from New York?

Fact: Germany is not the first nation (or the last) to repatriate its gold from abroad. The list of countries to bring (some or all) of their gold holdings home includes (among others): Venezuela, Iran, and Libya. Those countries had ample reason to distrust the safety of their gold in offshore locations- given the “antics” that their leadership was (and is in some cases) up to. The fact that the Bundesbank is leaving 80 (EIGHTY) percent (!) of its US-domiciled gold with the Fed, at the Fed, in New York, should suffice to forever silence those who claim this is a “gesture of distrust in the US” or the Fed by the German central bank. We are sure it won’t.

Fact: The German central bank had good reason to keep at least a portion of its vast bullion reserves (second-largest after the US’) as “far away to the West as possible” during the tense Cold War era. For much of that turbulent period, the country stored 98% of its gold with other trusted custodians. Now, that era is long gone. Why shouldn’t some (or most) of the gold held by the German central bank rest within the borders of the fatherland?

Fact: The announced move of some 54,000 twelve-and-a-half kilo gold bars from the French and American vaults is a long-term (target: 2020) project, not some desperate flight away from potential disaster. In the Bundesbank’s own words: “a phased relocation” is what will take place here. Thus, by 2020, The German gold reserves should end up looking something like this, in terms of locations:

  • Frankfurt (31%, currently)  50% by Dec. 31, 2020
  • New York (45%, currently) 37% by Dec. 31, 2020
  • London 13% no change
  • Paris (11%, currently) 0% by Dec. 31, 2020 (Hmmm; maybe it’s the French they do not trust?)

Fact: Kitco News’ intrepid reporter Debbie Carlson quoted Commerzbank’s commodities analyst Carsten Fritsch (apparently a German as well) as saying that “Between the political pressure and that it’s been 20 years since the Cold War ended, the sentiment in Germany is that holding so much gold outside of German was no longer needed. He also said there would be no market impact since they’re not buying or selling. “I don’t think it’s that big a deal… it’s happening over seven years. There’s no rush.”  

The political pressure that Carsten Fritsch was referring to, was in part the action by a German activist group called “Gold Action,” which lobbied hard (thank you, Ron Paul) for the audit and the repatriation of the country’s gold, and included at least one member of Germany’s parliament. Now, if there were no rush to…jump to certain (obviously erroneous) conclusions in the gold market space as well, every time a story about gold makes it to the headlines. Nah, that’s wishful thinking….roughly of the same kind that expects the Bundesbank gold relocation to make an iota of difference to bullion prices, anytime soon.

Next time you stumble upon the “game-changing story of the day/week/year/decade” bring your own shovel. Wait; we already know the next earth-shattering headline to be soon making the rounds: “US Mint runs out of 2013 silver coins.” Reminder: “There’s more where those came from.” Promise. You only have to wait ten more days.

Bloomberg News reports that “Sales have been suspended before. The mint stopped selling most American Eagle coins made from precious metals in November 2009 because of depleted inventories. It said in May 2011 that its San Francisco facility would start producing silver American Eagles to meet demand at “unprecedented high levels.” The Austrian Mint said in February 2011 it would stop making silver coins for general circulation after prices surged.

Meanwhile, and before you overpay for some silver “unobtanium” coins, you’d be wise to consider the fact that UBS views the coins’ sales level as more “a function of seasonality than anything else [meaning fear and panic a la 2009].” Indeed, this temporary halt in sales is not the result of panicky investors cleaning out all available supplies of silver (which is not the same thing as the supplies of certain coins). Far from it.

Silver shortage? What silver shortage? In fact, with an anticipated surplus of 207 million ounces (!) of silver in the marketplace this year, silver investors better continue to manifest very high levels of interest in the white metal –including those shiny little Silver Eagles. Every single sold unit helps. And, as of this writing, if you are interested, Kitco’s store page appears to have them in stock. End of shameless self-promotion.

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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