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Water Glass Tempest

By Jon Nadler       Printer Friendly Version Bookmark and Share
Aug 13 2009 4:21PM

Gold prices benefited from overnight advances in most commodities as well as from a spirited lift in the global equity markets. This morning, the precious metals were advancing on the back of a much softer (down 0.36 on the index) US dollar and on the initially strong morning rise in crude oil values. Far from being a rise that should be interpreted as calling the Fed's bluff, these rallies actually reflect the fact that speculators are taking the Fed's pronouncements more like gospel - at least as regards economic growth and the blessing of the return to risk appetite. Anyone have some grains of salt handy?

New York spot gold dealings started Thursday's session with a hefty 1.26% gain, rising by nearly $12 back to $960 per ounce. The recovery in gold comes amid conditions that show the gold ETFs as largely 'absent' from the party, and that the majority of positions are to be found in the futures pits, among momentum spec funds. Go ahead and call that kind of price action as being based on a healthy and sustainable base. We will abstain.

The gold-oriented ETFs have, in fact, been losing balances of since early June. The afternoon hours had gold trading at $953.70 and holding on to a half-sized $6.50 (0.69%) gain after crude oil pared its own gains and was only ahead by 70 cents on the day. Bullion will once again require sufficient attention from buyers in order to vault to and/or above the $965 area. Key support is pegged around $955, or right about where the market was last seen trading on this Thursday.

Silver popped 38 cents higher on the open this morning, then added 6 more pennies to that gain, coming up to $14.97 per ounce by this afternoon, as expectations of improving industrial demand turned into large bets in the entire industrial metals sector. The question remains whether silver will try for an attack on $15.50 or fall back towards the very low $14s after this fund play comes to a close. Platinum was not/could not be far behind in this stampede; it rose by $26 to $1265 an ounce, while palladium added $5 to climb to $276 per ounce.

Overnight markets took the Fed meeting announcements to be sufficiently upbeat in nature in order to allow for a resumption of risk appetite. The 'leveling' in the economy that the Fed observes translated into two scenarios that speculative money loves to hear at the moment: a) that interest rate hikes are perhaps still one year away, and b) that growth -even the slow and uneven variety- means that commodities could continue to party on. But, we’ve heard that tune before. Several times this year, as a matter of fact.

Witness stock futures, which bolted higher this morning. Witness the dollar, which was partially abandoned in favour of lower-hanging fruit to be found on other asset trees. See crude oil, which, despite poor fundamentals, piled on another $2 after its opening, to rise to over $72 per barrel. If nagging little numbers such as falling US retail sales (despite the famous CFC auto program), rising unemployment claims, and falling US import prices just weren't there to throw a damper on things...

As it turns out, they did. The surprise fall in sales at US retailers in July went straight to the Dow’s jugular today, and by the afternoon hours, the pre-opening futures gains turned into a pretty anemic performance by the index. The market advanced by a mere 23 points. Mounting job losses, upward-inching foreclosures, along with non-ringing cash registers made yesterday’s ‘leveling’ talk by the Fed come into question today. Or, at least, confront current reality. Risk appetite was therefore curbed somewhat by the time 3 PM rolled by in New York.

Overnight, Asian markets rose on the heels of Wednesday's gains in the Dow, and after what was a fairly unequivocal Fed signal that the bottom of the economic barrel has already been gouged, and that the next direction can/should only be up. Commodity-related bets blossomed overnight, as Asian speculators threw all kinds of money at firms involved with aluminium, copper, and coal production. Similar findings came in from Euroland this morning.

The string of conflicting statistics that is still being issued by various governments took a positive turn today. A surprise return to economic growth in Germany and France was seen in the numbers offered up today, literally just hours following reports that showed the region's economy still shrinking and lagging behind the US in its comeback.

Thus, we started the day off with the matter of perspectives and glasses half-full and/or empty. Depending on one's view of the state of fullness of glass containers, one may throw short-term money at various assets. At least until the next batch of not-so-hot news hits the wires, or at least until the margin of profit becomes too enticing not to let go of a long position. Morning perceptions were somewhat up-ended by today’s statistical realities.

Current gold market realities have Mineweb’s Lawrence Williams presenting a similar lineup of golden-coloured water glasses in various stages of fill, to his readers today:

“For virtually all of the past month, gold has been trading between $930 and $970, finding it impossible to break out in either direction.  The perceived strength of the dollar has been the primary driver and with the biggest European economies, France and Germany, showing signs that they may have turned the corner with both recording growth in their second quarters, while the U.S. economy is still seen as declining, albeit at a much slower rate and possibly bottoming, the dollar is experiencing another spate of weakness in the currency markets. 

Occasional spurts in dollar strength see the gold price declining to near the bottom of its recent trading range, while dollar weakness sees upward surges and we have been in one of these in the past couple of days with gold again approaching $960 at the time of writing.  This has been quite a sharp run up and could have legs if the dollar weakness continues, but we'll have to wait and see if the price rise again runs out of steam before it hits $970.

There are external factors, other than the dollar, which could be affecting the price both adversely and positively. Some are well known but when the occasional news item points them out again, there tends to be a positive - or negative - outcome for the price depending on how the particular piece of news is received. 

For example Switzerland has announced it has completed its gold sales programme to sell 250 tonnes of the yellow metal (over the past two years) all within the auspices of the Central Bank Gold Agreement (CBGA) - something seen as positive by the market notwithstanding that the sales were actually completed sometime back.  Another fillip may have come from South African gold production being down 12.2% year on year in June, but again this hardly news as the world's former No. 1 gold producer has seen output in regular decline bringing it down to No. 3 over the past two years and no signs of any pick-ups out there.

Meanwhile, on the negative side for gold, paper gold (such as the gold ETF) has been slipping back from its peaks, although by only a relatively small amount percentage-wise which has been a huge reversal in trend after amazing growth in the first few months of the year.  This suggests that fears of a second stock market meltdown as was seen in the Great Depression in the 1930s, are diminishing and investors are again more prepared to take their chances in the general stock market, and in the riskier commodity field, where potential gains are seen as greatest. Whether they are right to do so remains to be seen as we could yet be in a sucker's rally!

Other factors affecting the gold price at the moment include the perception that Indian demand is beginning to pick up a little after a very slow year with the wedding season approaching, although a poor, and late, monsoon may put a bit of a dent in this  Prospective buyers may be beginning to come to terms with the higher gold price levels too. Inflationary fears also remain supportive for the gold price.

Another recent supportive factor has been the new CBGA where the amount of gold participating banks can sell has been reduced by 100 tonnes a year. While this is a significant amount it is a reflection of reality as gold has been somewhat rehabilitated in the eyes of some central bankers and recent sales from this source have been well below even this reduced sales level.

Nevertheless the dollar is, as we have said many times in these columns, the principal price driver but whether this weakness is sufficiently strong to propel the gold price through $970 and upwards, given some of the countervailing fundamentals, remains to be seen. It may well be ‘onwards and upwards' for gold but the upwards side may yet be a little muted and slow. But gold confounds. We shall see.?

There are also other possibilities…

Speaking of glasses and liquids, dire conditions are developing in India as regards water. The next gold is blue, and it flows. Satellite imagery confirmed that areas that are home to more than 100 million Indians are losing groundwater at a rate that could lead to potable water shortages and/or crop production problems sooner than anyone cares to believe. This is all taking place in a country where 75% of the surface waters are contaminated and unfit for essential use. Couple this with the weakest monsoon season in half a decade, and the framework of a crisis in the making, is quite complete. No one should underestimate the possible fallout from such a development.

A Good Evening to All.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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