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World Economy Suddenly Repairs Itself, G-20 Declare Dollar Barbaric Relic! Film at Eleven!

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 1 2009 4:19PM

Good Afternoon,

Gold prices made modest advances on Wednesday, while at the same time the trade was seen as waiting for a better sense of direction and some results from the London G-20 summit. In the meantime, the ECB announced that is has sold 35.5 tonnes of the metal under the terms of the CBGA. Proceeds might be used to help the IMF in its struggle to aid...most everyone, but could also indicate that the prospects for better returns are seen in areas that do not involve gold. Precious metals were buoyant at the start of this morning's session, but the moves to higher ground were still seen as range-bound and not as the turning of a new page (see below for SocGen's outlook on gold).

Spot gold dealings were last showing an $6.50 per ounce gain, quoted at $925.00 as participants tried for tests above $930 earlier, but not with much, or lasting success. The US dollar, which started the day on the downside, turned around following better than expected news from the US manufacturing sector. Such news was offset by news of the vanishing of another 742,000 US jobs in March. As a precursor to the next two days' worth of jobs news, the numbers do not bode well. Oil continued to slip lower, and edged closer to $48. OPEC's body language indicates the cartel will be content with crude around the $50 level for the rest of the year. Over in the Dow, the numbers remained positive but were still seen as being at the mercy of the next major turn of events - whatever niche such news might come from. March was extremely kind to stocks (in case one was distracted watching too much financial TV); they had their best monthly climb since 1991. For the moment, the expected sources remain: London (G-20) and Detroit (GM).

Silver was absolutely struggling today. The metal has been having price difficulties for a few days now, and it appears fatigued, at best. Platinum climbed $8 to $1133 and palladium added $4 to $218 per ounce. This pair is stuck in a price rut until the fate of the automakers is official. Someone just needs to put these entities out of their misery and start fresh. What possible choices is the UAW left with now? President Obama is said to be in favor of 'easing' GM/Chrysler into Chapter 10.5 as the list of 'what to do' options runs slimmer and slimmer. Meanwhile, Fiat's debt was downgraded to 'junk' status by S&P - and this is the adoptive parent of Chrysler? (!). Auto sales hit another pothole, with GM's falling 45%. Evidently, consumers -even if they do need wheels- are opting not to purchase a brand that may not be around before the warranty runs out. As with anything else, once the confidence is is the object of that previous trust. The Fed's Sandra Pianalto however, is (fairly) confident that the US economy will be back in the saddle as 2010 nears. For now, 'back in the saddle' means stabilization. We'll take it.

It's now official: there is no state left in the United States that is not in a recession. No April Fool joke, that. One would have to look back as far as 1982 to find a similarly grim and widespread set of economic conditions. Even then, seven states escaped the downturn. This is not to say that things are exactly looking pink, or rosy, over in other parts of the world. Asia has clearly contracted the global economic flu and is showing pretty much the same sorry face to the world as its Western counterparts: Japan's Tankan sentiment index the lowest level since it was created as a tracking tool.

Chinese manufacturing activity continued to shrink faster than its leaders could saturate the public airwaves with words like "stimuli" and S.Korean exports fell for a fifth month in a row. Complicating background conditions, N.Korea still plans to export what it appears to be quite adept at manufacturing; long-range missiles. The country has warned Japan that if it tries to shoot the thing down, well, better not. April 4 to 8 will be an instant replay of the spring of 2006. Or, will it? Nothing is certain.

As far as uncertainties go, Deutsche Bank traders have expresses concerns that gold has not been able to build on the gains it recorded earlier this year. The epic $70 March 18 "debt buyback" rally has given way to indecision and nervousness. That said, support has been relatively solid near the $900 area thus far. So long as we are on the topic of hope, here is a bit of a Mineweb distillation of Societe Generale's take on gold and the likely price path it might take, versus the lunar-orbital prices that are being hoped for (make that, being demanded) in certain forums.

"Investment bank Societe Generale is calling gold down to below $800 by the end of this year as a stalling in investment [demand] is unlikely to be offset by an equivalent recovery in jewellery demand.  The fact that prices fell very sharply when investment faltered over the turn of February and March is cited as a potential precursor to more of the same later in the year. 

The latest quarterly Commodities Review from the bank notes that in late March the major Exchange Traded Funds held 1,589 tonnes of gold, which was a twelve-month increase of 656 tonnes [since then they have added a further 14 tonnes], but that more significantly they had acquired 390 tonnes since the turn of investor appetite in mid-January. 

Between then and early February there were only nine days on which there were net redemptions and six of these were concentrated between February 24th and March 6th. During that period, just four tonnes were sold from the funds, but the loss of this inward investment momentum took 10% off the price over that period plus a further three days. 

Noting that investment activity is clearly not the only price driver in the market, the bank points out that it is currently "one of the few bullish influences".  Absorption of 198 tonnes into the funds in the first three weeks of February accompanied a price increase of $80 or 9%, and then flat activity in the two following weeks saw that gain wiped out, highlighting the importance of sustained investor purchasing if international prices are to remain high. 

At the retail level, coin demand has been extremely strong  (although it is much smaller than ETF or Over the Counter investment activity) with US Mint figures showing sales of gold in American Eagle coins running at nine tonnes in the first twelve weeks of the year, more than three times the amount in the full first quarter of 2008.  This coin demand had helped to put substantial pressure on refinery capacity earlier in the year, but this has now changed as a result of a supply-side response to high local prices.

The bank comments that the "flood of old gold scrap" from jewellery means that refineries are now well-furnished with gold supply and the liquidity in the market is reflected by low lease rates - although rates have generally been low for some considerable time, with market demand showing up more in terms of extended waiting lists and elevated physical premia. 

The supply-demand analysis suggest that the surplus of physical supplies over fabrication demand and bar hoarding will be as much as 635 tonnes this year as jewellery demand will remain depressed in the face of high prices and the economic environment. 

The banks review contains an in-depth analysis of the regional and global economic background and is relatively sanguine about the state of the Indian market (given the global environment); consumption in general in the country is holding up well, with seasonally-adjusted consumer spending in the fourth quarter of 2008 running at its long-term trend of 6%, up for m3% in Q3. 

Industrial production was hit by the OECD downturn but was down just 2% year-on-year in December.,  The bank is looking for growth of 4.2% in India and 6.8% in China this year, roughly half the rates of 2007, but substantially better than the rate of growth in the OECD economies that are mired in recession. 

Even so, the Indian jewellery market has been hard hit with local Indian prices averaging almost Rp14,500 per ten grammes between the start of the year and late March.  They are currently just over Rp 15,100 per ten grammes and the study points out that while the market is gradually becoming used to these prices, the price range over the quarter was a wide 24% and that had a negative impact on sentiment.  There were times in the quarter when Indian jewellers stocked up into price weakness; at other times there were reports of resting orders in anticipation of lower prices.  

The bank points out that India acts as a microcosm of the price-elastic jewellery market as a whole and suggests that demand will improve when price volatility ebbs away.  For the time being, however, it remains slow and well-supplied by scrap return. 

This is a key feature behind the high tonnage that the market is expected to have to absorb if international prices are to remain high.  Industrial fabrication is under a cloud and dehedging has dropped substantially - although so have central bank sales.  Societe Generale questions whether investors, who have so far been up to the task of absorbing all the metal that the market can throw at them, can sustain this level of activity.  For the short term, further investment activity is likely and higher prices are expected to come with itFor the longer term, though, the investor is expected to "take his foot off the pedal" and this will put gold prices under substantial pressure."

In case you do not wish to dig through the archives for these articles, a few words of a pre-emptive nature:

  1. Yes, SocGen has also been bullish on gold before.
  2. Yes, SocGen's outlook has been used by perma-bulls to bolster their case, on more than one occasion.
  3. No, none of the above implied you should be without your gold insurance.
  4. Yes, the study brings back into focus the five pillars of the gold market, without which there would be no gold market. One such pillar or two have had ample airtime in these columns: India, and scrap supplies.and
  5. Charts (to the extent you believe in them as valid tools) are said not to lie.

Finally, the 'sure thing' that practically everyone is betting on -hyperinflation- is not baked into this cake. Not even remotely. Visions of 'naked dollar printing' have newsletter vendors tripping all over themselves as to who can guess the highest rate of inflation coming from the Fed's current maneuvers. Far from being afraid of deflation, they. The Weimar Republic is being assembled (in their minds) as we speak. Reuters reporter Frank Tang brings us the range of sentiment in the debate, and we expect he should be able to open some very tightly shut eyes. Perhaps we are hoping for too much. Roll the dice:

"Buying gold remains atop a short list of investment portfolio protection strategies against resurgent inflation as the U.S. Federal Reserve cranks up the printing press to jolt the economy out of recession. Still, a frenzied gold rally because of hyperinflation panic is unlikely as the Fed has the ability to rein in money supply when the economy recovers. The bull run of gold may not be a one-way street. 

"This Fed is not an inflation biased... but a measured, well reasoned, rational central bank that knows that it has injected a huge sum of permanent bank reserve into the system, and that it will remove them eventually," said Dennis Gartman, independent investor and publisher of the Gartman Letter.  "And hence, gold has not gone to $2,000 an ounce," Gartman said.

On Monday, spot gold traded at about $920 an ounce, about $50 below its one-month high $966.70 on March 20. On March 18, gold rose nearly $70 in a one-day knee-jerk rally after the Fed said it would buy a combined $1.75 trillion in Treasuries and other government bonds. Last week, the Obama administration said it would buy up to $1 trillion in toxic bank assets, sparking inflation fears. Fund managers said the Fed's strong resolve to boost the economy should quash deflation worries, which surfaced in recent months to dampen gold every time it attempted to rally above its all-time high of $1,030.80 on March 17, 2008.

"That was a fairy tale for yesterday. Deflation is not going to happen on Bernanke's watch," said Axel Merk, portfolio manager of the $310 million Merk Hard Currency and Asian Currency Funds in California. Indeed, a closely-watched gauge on inflation expectations in the government bond market also shows that long-term inflation expectations are rising. The "break-evens," or yield differences between regular U.S. government bonds and Treasury Inflation-Protected Securities, known as TIPS, have sharply widened following the Fed's move to buy long-dated government debt.

"There are just not a lot of alternatives for global investors. You will see more and more investors moving into gold as a safe haven, and you will see more institutions putting money into commodities indexes," said Brian Hicks, a portfolio manager at Texas-based U.S. Global Investors, which manages over $2 billion fund assets.


While gold stands to benefit from higher long-term inflation, the metal's price action will most likely be a tug of war between inflation aversion and recovering risk appetite as governments vowed to boost the global economy. Indeed, gold has become increasingly correlated with the U.S. Treasuries market, which is also considered a safe haven investment, and Treasuries prices showed that investors needed time to contemplate the long-term implications of the Fed's moves.

Benchmark 10-year Treasury Bond yield, which moves inversely to its price, has now partially erased losses after it plunged nearly 50 basis points on March 18 -- the biggest one-day fall since 1987 -- in the shock and awe following the Fed's announcement. Market watchers noted that the Fed was able to curb inflation by hiking interest rates after the 1981-1982 recession.

Jeffrey Christian, managing director of CPM Group in New York, said a sharp increase in printed money now did not necessarily mean hyperinflation later. He expected gold prices to trade between $800 and $1,200 this year. "When the Fed sees inflationary pressure, it will start selling bonds and suck the money out of the system, and we probably will be able to avoid hyperinflation," Christian said."

That giant sucking sound you (will) hear is a Guvmint-sized Hoover springing into action. Or, it could just be Paul Volcker testing the interest rate bellows...

Happy 4.01.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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