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Fantasy Island

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 22 2009 9:08AM

"Due to travel schedule we will return with the daily commentaries tomorrow, April 23rd"

Good Morning,

Gold prices were stalled under the $885-$890 area overnight, but then again so was the US dollar (at 86.50 on the index) and crude oil (near $48.50 per barrel). Indian demand for the metal continued to be reasonably lively overnight, but remained at risk of stalling as values get nearer to $900 per ounce. Our sources on the ground indicate that the flow of shoppers is decent, but that many have placed standing orders under $865 an ounce with their stockists ahead of the 'big day' of buying coming on Monday. They may get their buys filled, we are just not so sure about the timing at the moment.

Spot gold started the New York mid-week session with a near $5 gain, quoted at triple-eight dollars per ounce. Silver added 6 cents, opening at $12.12 (rhyming numbers everywhere). Platinum regained $18 of its recent haircut, and climbed to $1171 an ounce, while palladium rose to $228 with a $7 gain. Enough uncertainty on Earth on this Earth Day, to keep short-term specs on the boil. Here is how it shapes up this morning:

Earnings releases are today's trading diet, and participants will be focusing on those, plus the reverberations of Mr. Geithner's Tuesday assessment that the stress-tested banks have more than enough capital and would not come under serious concern scenarios until/unless really 'stressful' conditions arose somewhere, sometime. Morgan Stanley reported losses that were larger than expected, and the Acting CFO of Freddie Mac was found dead in his home near DC- the victim of an apparent suicide.

Nineteen vessels remain hijacked at sea by Somali pirates, and the prospects of an invasion [of the military kind] of their country has now risen exponentially. The world racism conference underway in Geneva, found that intolerance of foreigners could rise to worrisome levels should certain governments fail to act during this global economic slump.

In metals-related news, appearing on Bloomberg overnight, the Head of the Chow Sang Sang Group (HK) Mr. Vincent Chow said that his firm was expanding its presence (store-wise) in China, but was 'consolidating' in HK as conditions were not as buoyant as those seen among the Chinese middle class buyers, (specifically for gifts and ornamentation).

Mr. Chow reaffirmed gold's role as a store of value, and as an alternative currency or form of savings. He was less than ebullient about the price prospects for silver, saying it is 'just...silver' and that ' for cars.' Mind you, Mr. Chow did not envision any sustained four-digit gold values, either.

Another guest on the same program, Mr. Marshall Mays, the Head of Emerging Alpha Asset Management noted that some gold investors have become traders. They are selling into current spot prices now, when it has become so easy to walk into the nearest souk or bazaar and become price-savvy in a flash.

Mr. Mays totally rejected allegations of manipulation by central banks in the gold market. He noted that the central banks have "effectively been out [of this market] for a decade now" and that the purveyors of tinfoil fairytales are ripping off the poor individuals who do not know better, and who still read such implausible theories. Mr. Mays noted that in a high inflation environment [and just about only then] gold can serve as a good hedge.

However, at this time, Mr.. Mays observed, gold is "not a screaming buy" and that it will not likely become the currency of the realm in our lifetimes. While he also added that [all] fiat currencies are at risk when trust in busted, Mr. Mays said that perhaps only at double-digit inflation levels will be significant/global leakage of wealth into gold. Such a pattern itself would still be cyclical and will/may not last long at all.

In the interim, ill-informed Pharisees continue to spew nonsense about imminent confiscation of precious metals, putative disastrous findings in the US banks' stress-test results, and about the 'concentrated' shorts in the market, bla, bla, bla. Such drivel is making the daily e-mail and forum rounds. Sadly.

Consider this little snippet by WIRED's Stephen Marche for just a moment. Okay, deep breath, focus:

"The world is falling apart around us, and we are repulsed and attracted in equal measure by the idea of secret workings behind the collapse: We crave having someone to blame but recognize that our craving is fantastic. So we cower in conspiratorial delusions that we know cannot be true. "Human kind cannot bear much reality" T.S. Eliot wrote.

The reality we cannot bear to look at [no $2,300 gold prices] however, isn't hidden groups of powerful men controlling everything but the more terrifying truth that there are no hidden groups of powerful men controlling everything. It's our deepest form of escapism to imagine a world in which we are powerless, because it excuses our selfishness. The real nightmare is that no one is to blame for the state of the world but ourselves. No one can rid us of our lazy, self-indulgent fantasies."

Time for Mark Hulbert's Marketwatch-hosted contrarian analysis. No surprises. Except for some. Probably the same ones who sent out the 'shattering' findings on the "Turner Radio Network' (no, not THAT Turner) about the bank stress-test fiasco. You know, the bogus one. Take it away, Mark:

" Gold's recent weakness has certainly surprised many. But its behavior may not in fact be all that inscrutable.

Chart of 38099902

The reason that bullion's decline has been so puzzling: One would have thought that the yellow metal would have risen in the wake of the obviously inflationary implications of the banking bailouts that are being undertaken globally. But, far from rising, gold has fallen over the last couple of months.

There no doubt are many causes of gold's decline, many of which have been widely noted among the gold trading community. But relatively few commentators have focused on the role that sentiment played in the decline. I find that curious, because sentiment is acknowledged in other arenas to have a powerful impact on the market's short-term direction. Why should gold be exempt from the conclusions of contrarian analysis?

When I last wrote about gold market sentiment, at the end of March, I noted that gold timers had recently begun to see the glass as half full rather than half empty, stubbornly holding onto their bullishness. I wrote that this was not an encouraging development, since "typically, gold does not thrive when the gold timers are stubbornly holding onto their bullish positions."

Contrarian analysis does not always work out this well, needless to say. But it does so enough of the time to justify including it in our arsenal of short-term analytical tools. What does contrarian analysis have to say now about gold's prospects?

Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. Its recent reading was 3.5%, which means that the editor of the average gold timing newsletter was recommending that its subscribers allocate 3.5% of their portfolios to investing in gold and gold-related investments.

To be sure, this 3.5% average exposure does not reflect excessive bullishness on the part of gold timers. The HGNSI's all-time high, for example, is 90%. Still, I nevertheless consider the HGNSI's current level to be a source of some concern. That's because, given gold's recent weakness, I would have expected the HGNSI to be even lower. Relatively speaking, in other words, the HGNSI may still be too high for comfort.

For example, the HGNSI one month ago stood at precisely where it stands today, even though bullion on March 23 was trading for nearly $70 per share more. It's a worrisome sign that a decline of this magnitude led to no net increase in bearishness. On a positive note, the HGNSI has dropped from where it stood at the end of March, when I last wrote about gold sentiment. This sentiment index stood then at 30.2%. So sentiment is moving in the right direction.

The question, though, is whether it has moved far enough. My hunch is that, until gold traders become more pessimistic, it is not unlikely that the gold market will remain confined to a relatively narrow range."

And, so it goes. Also heard overnight: steel is melting down - offers at discounts under spot are the order of the day. Copper, let's not talk about it. Industrial metals? First we have to have industries functioning.

Until later, keep the aluminium headgear handy. Someone has to be responsible. Someone. Anyone. We are but 15 minutes away from the alleged daily "9 o'clock gold dump.' Take cover.

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.