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Jon Nadler

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TD, Or Not To Be...

By Jon Nadler       Printer Friendly Version Bookmark and Share
Dec 15 2009 9:09AM

Good Day,

Ebbing confidence was the theme on the global economic scene early on Tuesday morning. As has now been the case several times in recent months, when such a fade takes place, the US dollar quickly benefits from the rising jitters. This morning was no different. A fresh, “safe-haven? bid boosted the US currency by another 0.60 on the trade-weighted index, while the euro and gold got clobbered pretty badly in early going. Oil was eking out a small, 41 cent gain to rise to $69.92 amid subdued conditions.

Gold slipped to a low of $1111.40 basis spot bid ahead of the NY opening this morning. This, as the US dollar approached 76.95 on the index, and the euro was quoted at 1.454 and threatened to break over the pivot point that had offered some support up to this point –even if just psychological.

The Tuesday morning NY market open had gold starting out under dollar strength-precipitated selling and quoted at $1113.90 per ounce (a 1.11% decline), while silver lost 24 cents to open at $17.15 per ounce. Platinum fell $19, erasing Monday’s gains, and was quoted at $1429 while palladium dropped $5 to $361 per troy ounce. More Fed and European jitters later knocked the yellow metal to a low of $1110.40 in NY.

No change was reported thus far in rhodium, which was steady at $2040 per ounce. Minor losses were reported in the holdings of gold ETFs on Monday, but it would be difficult to classify them as opportunity-driven sales in the wake of yesterday’s relatively meager gain in prices. Gold holdings on behalf of investors in the thirteen by monitored bullion backed exchange-traded funds (ETF’s), were seen: “Dropping 0.547 tonnes on Monday, December 14th. The drop in joint holdings was the consequence of a 27,386 ounces or 0.85 tonnes outflow in the by ETF Securities marketed ETFS Metal Securities (PHAU). The decline was only partially offset by a 9,801 ounces or 0.30 tonnes inflow in the SPDR Gold Trust.?

Meanwhile, Elliott Wave analysts still envision the possibility of a sharp gold price spike perhaps taking place this very week. EW’s short-term update opines that: “Gold could experience a sharp snapback rally at any time. We are less interested in calling the start of any near-term rally rather than the end of it, where a lower-risk opportunity will exist, in our view. This way we are not trying to position our forecast against the trend, which is down, but, instead, with it. My guess is that once a bounce starts, it will carry gold to at least the $1170 level. On an intermediate-term basis, the current C (circle) wave decline should draw prices beneath the A (circle) wave low at $680 before it ends.? We say, much depends on the reading of the tea leaves prior as well as after the Fed meeting, and the shape that the emerging mini (or not-so-mini) European crisis morphs into. To wit:

The first item out of Pandora’s Box (of worries) this morning was the drop in investor and analyst sentiment as tracked by Germany’s ZEW think tank. Analysts at Capital Economics (UK) reported that: “December’s decline in German investor sentiment suggests that the improvement in economic conditions is relatively fragile. And Q3’s fall in euro-zone wage growth will dent hopes that the recovery will spread to the consumer sector.?

Forbes relayed the words of one ZEW analyst as having said that: "The fizzling out of major temporary growth drivers will lead to a moderation in growth dynamic. Recent reports of banking woes had also rattled sentiment. This was accompanied by the downgrade of the Greek sovereign (credit) rating and the market jitters triggered by repayment problems of Dubai World.?

Capital Economics also pointed out that: “recent comments from other member states like Germany and the EC itself have raised hopes that Greece would receive support if default became a real prospect. Nonetheless, market nervousness over both Greece’s position and sovereign debt in general looks unlikely to fade in the foreseeable future.?

The intertwined problems that Dubai and Greece continue to present are rattling nerves, markets, banks, and sentiment as we head towards the end of this year. These problems are starting to look a bit like the H1N1, as they spread by popping up in places that offer fertile conditions for infection. Bloomberg adds that: “Spain had the outlook on its AA+ debt rating cut to “negative? from “stable? by Standard & Poor’s last week. Greece’s credit was reduced one step to BBB+ by Fitch Ratings, and Portugal’s outlook was revised to “negative? from “stable? by S&P.? Amid such conditions, funds appear to be content to take profits where they are able to, and dress their respective windows with the warm glow of green. Who know? Next year might once again be a difficult one to make money during.

This, then, is what the funds are, indeed, doing. Observers at note that: “Short-dollar positions are getting erased, as the outlook towards the greenback has ameliorated on the back of expectations of a faster-than-expected Fed rate hike. Funds continue to liquidate a huge pile of long positions, as they see that the best for this year is likely behind us. This equally implies that the potential for speculative [gold] bargain hunting is limited into the next weeks.?

Such bargain hunting may run into a plethora, if analysts at Toronto Dominion are proven correct in coming months and years. The National Post’s Peter Koven reported last night that TD threw ‘cold water on the gold party’ with a devastating forecast for future gold prices. Highlights from the article read as follows: “TD economists Derek Burleton and Dina Cover think this [recent $100+ gold correction] is just the start: they see growing troubles for gold in 2010 and they expect the metal to eventually fall back toward its long-term, inflation-adjusted average price of just US$500 to US$600 an ounce.

Starting in 2010, they see gold facing increasing headwinds, the biggest one being the U.S. dollar.  By the end of 2011, they expect the price of bullion to be trading close to US$800 an ounce (you can practically hear the gold bugs retching at that one). Of course, they also pointed out that such a price is way ahead of the average real price between 1983 and 2008, which was about US$580 an ounce.

Looking beyond 2011, they see even less reason to be bullish about gold. They noted that in historical terms, gold has generated little or no return in real terms over extended periods of time, with only a few short bursts where it did really well. And a major long-term drawback of gold is that it does not generate an income stream, unlike dividend-paying stocks. They pointed out that gold has generated a return of 180% from the average price of 1983 to today, far below the returns of the S&P 500 or U.S. treasuries.? That said, the TD team also added that “Since they expect investors to take advantage of the current dip to buy gold, they think prices will likely spike up again soon.?

2010. Last chance saloon, or the road to Eldorado?  Stay tuned. We will be here to report either journey.

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.