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Feeble Friday Finale

By Jon Nadler       Printer Friendly Version
May 2 2008 3:16PM

Good Afternoon,

Friday's gold market action saw a bit more stability in prices, following an early morning dip to fresh four-month lows on the heels of US unemployment data. The metal subsequently only hung on to a sub $5 gain for the rest of the day and was trading near $855 per ounce at last check. However, gold's three-week old string of losses (the longest in one year's time) did not appear to show many signs of coming to a complete end (the metal lost 3.6% on the week) as some overseas markets returned from the May Day hiatus to find a badly bruised metal trying to swim against a rising dollar and against a liquidation syndrome in many another commodity. A convincing break under the 1980 high of $845 may yet usher in further nervous sales in lieu of the bargain hunting one would hope to have emerge at this juncture. Several analyses written since yesterday allude to a possibility that the precious metal may dip beyond its 200-day moving average of $822 and fall to $780, $750 or the $700 to $732 level from which its meteoric rise began last September.

The better than expected US jobs data and the unexpected 1.4% jump in March factory orders swiftly knocked gold down toward the $840's early in the day, but the metal regained a bit of composure as news of a renewed liquidity injection effort by the ECB, The Fed, and the Swiss National Bank lifted speculative spirits in the bull camp. Silver rose 27 cents, to $16.42 and the noble metals also climbed prior to the week's end, with platinum adding $36 to $1901 and palladium gaining $9 to $418 per ounce. Whatever type of label this recession ends up wearing eventually, it looks like it has a fairly shallow profile in its initial stages. The dollar maintained a .32 gain at 73.52 on the index following the unemployment report, while crude oil continued to rise, and was seen near $115.50 per barrel following Turkish attacks on Kurdish positions inside Iraq. We still expect a bit of stabilization and mild recovery as well as some better Indian offtake over the next four/five days but conditions remain fragile and trigger fingers nervous. Watch that $845 figure.

VM Group London today issued a projection for an extremely wide trading range over the next 18 month, of from $700 to $1300 - but the latter is predicated on a catastrophic aggravation of the credit crisis. Much, therefore, depends on the glass half-full/half-empty perspective that investors might adopt with regard to that issue. Thus far, since the Bear rescue, that outlook has been quite obvious, as the bets indicate expectations that the sky will remain in place. The doom and gloom clubs on the other hand, will keep rooting for a violent death of the dollar, and an implosion of the global financial system and preach with certainty that the end is near (just as they did in 1980, 1987, and 1999). Further, all kinds of price suppression theories will once again be floated to explain gold's fall from grace as if its speculation-driven rise was a result of a call to arms to the masses by the inventors of same. You see, gold was somehow 'permitted' to rise to $1034 by the same nefarious forces that are "bashing" it now. In order to wipe your wealth out. Makes sense. In a parallel universe, perhaps.

I took the liberty of stealing a telling paragraph from a peer writer, Steven Jon Kaplan, for today's closing food for thought (since he stole one of mine yesterday, we are now even). Steven writes, (referring to my comment on the gold EFT's price effects):

"Whenever any given asset class is enjoying an artificial boost from a particular financial instrument, whether it be exchange-traded funds or anything else, the media always treat it as a one-way street. However, the same forces that led to amazing gains in prices are now at work in reverse to lead to equally astonishing plunges in prices, for exactly the same reasons. Whenever exchange-traded funds in particular are buyers, new shares of that fund are continually being created, which continue to put upward pressure on prices as these funds are forced to buy in the open market. Whenever exchange-traded funds are sellers, shares are destroyed as supply is dumped onto the market at a crushing pace.

Therefore, the effect of these funds will be to create much greater volatility in both directions. This is excellent for well-informed traders, who can now make substantially bigger profits both on the long and on the short side than they could have done a decade ago. It is also why the huge fund buying in crude oil is just beginning to lead to equally dramatic fund selling, which will cause the price of a gallon of regular unleaded gasoline to drop below $2 per gallon [not a misprint!] in most areas of the U.S. before the end of 2008.

The most dramatic effect of exchange-traded funds has been in the area of agricultural commodities, in which these funds became the predominant players in the market by the end of February 2008 once they controlled more than half of the total world supply. We are now seeing the flip side of that incredible accumulation, as these same funds are on the verge of unloading at an all-time record pace. Since the markets are not equipped to handle such rapid selling, the prices of agricultural commodities will soon accelerate their recent gradual decline. Meanwhile, the myth of global shortages continues to be exploded, as India's total food production is at a record high."

Let's see what the new week brings. Perhaps not yet $2 gas, but you never know what else could become cheap or expensive these days. Americans have been seen discarding behemoth SUV's in droves while suddenly discovering that small is beautiful. Airplanes are flying slower in the sky to save fuel. Now we will all get better views of the Grand Canyon.

PS - Happy 25th Birthday to Barrick Gold.

Happy Trading. Pleasant weekend.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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