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Fed Finale = Gold Overture

By Jon Nadler       Printer Friendly Version
Dec 17 2008 4:21PM

Good Afternoon,

Yesterday’s Fed rate cut-induced euphoria gave way to sober and more defensive plays among investors. By this afternoon, oil prices slipped to under $41 as OPEC failed to convince traders that its output cut would be effective in generating higher prices in the face of fast-slumping global demand. Stock markets turned negative as financials and utilities dragged and as investors once again showed a preference for Treasurys, gold, and little else as they seek to preserve capital.

The Fed cut rates to a ‘range of from zero to a quarter’ and promised to deploy everything in the way of deflation-fighting weapons available to it, should the conditions show further deterioration. Levels of confidence in the global economy fell this month as the US-led recession spread to the rest of the world and made for an ugly year-end picture for many a hitherto immune country.

The US dollar continued its sharp correction, slipping to just under 79 on the trade-weighted index and gave indications of a growing de-couple from oil (if not yet from stocks). The greenback fell by the most against the euro since that currency was born in 1999. Against the yen, the American currency traded at near 13-year lows.

Gold prices naturally made significant gains in the wake of the aforementioned conditions, with spot bullion trading as high as $882.50 an ounce early in the session. Light profit-taking was then seen developing in the afternoon, with prices easing back to $868.60 per ounce at last check. Caution remains visible and neutral-to-defensive plays are advised by deflation-watchers. Mr. Dennis Gartman comes to mind. Inflation-scouts are at the top of their form in the meantime. Rooting hard.

Silver was up by 17 cents, quoted at $11.38, while platinum added $3 to $866 and palladium fell $2 to $176 per ounce. Carmaker Land-Rover Jaguar was seen fighting for its survival and sought talks with would be surrogate parents.

The Madoff scandal continues to rock New York and parts of the rest of the financial world as more victims come forward end confess exposure. HSBC was the latest such entity to tally a potential $1 billion exposure to the alleged Ponzi scheme. The coma in which US regulatory agencies have been in, while such wild goings-on were unfolding is simply unbelievable. Looks like Mr. Cain made at least one spot-on statement in his fall campaign. Cox has got to go.

Analysts now estimate that perhaps as many as a third of the more than 10,000 hedge funds still roaming the planet will go the way of the velociraptor and become a memory. That die-off could entail an amount of assets to be liquidated that is still in the estimation stage – but it surely will not be small change. Thus, the uncertainty will persist and could fuel further gains in gold, according to a Mineweb/Thomson Reuters story currently featured on our homepage:

“Sealed off by grey concrete walls and barbed wire, the workmen in protective glasses and steel-toed boots at this smelter cannot work fast enough to meet demand from the nervous rich for gold.

This refinery near Lake Lugano in the Alps is running day and night as people worried about recession rush to switch their assets into something that may hold its value.

"I have been in the gold business for 30 years and I have never experienced anything like this," said Bernhard Schnellmann, director for precious metal services at the refiner Argor-Heraeus, one of the world's three largest.

"Production has dramatically increased since the middle of the year. We cannot cope with demand," said Schnellman, wearing a gold watch on his wrist.

Spot gold hit a record $1,030.80 an ounce on March 17. It fell below $700 in late October, partly because investors sold their holdings to cover losses in equity and bond markets hit by the credit crisis, and is now around $830 an ounce.

The trigger for the price to rise again could come from a much weaker dollar, making gold cheaper for holders of other currencies, and a renewed aversion to paper assets as governments and central banks pump large amounts of cash into the economy, stoking inflation.

Smoke billows as the molten gold, like glowing butter, is poured. To cool it, the worker drops it into water. It hisses as it hits. Once hardened in moulds, the gold bars are embossed with the refinery's seal. Workers wearing white gloves stack them into boxes like domino pieces.

Though Switzerland is not a gold miner, it is home to some of the world's largest refineries, which process an estimated 40 percent of all newly mined gold.

Argor-Heraeus is part-owned by the Austrian Mint and a subsidiary of Germany's Commerzbank. Commercial and central banks are its chief customers and it says it processes some 350-400 tonnes of gold and 350 tonnes of silver per year.

Customers buying gold bars, which can weigh more than 10 kg each, have to wait roughly a month, taking into account the year-end holiday season.
For those buying coins or ingots, which can fit into the palm of a hand, the delay is six to eight weeks. A year ago, these small products could be had within a couple of days.

Worries about the banking system globally have boosted worldwide demand for physical gold, the Gold Council said.

"Many (people) are afraid of leaving their money in banks," said Sandra Conway, managing director at ATS Bullion in London, which sells bullion and gold coins to institutions and the retail market.

"It's difficult to quantify, but I would say our turnover over the last three months has certainly doubled compared to the previous three months," she said.


Other Swiss gold refiners also say business is booming.

"Since the summer we have experienced a sharp rise in demand for certain gold products. The one-kilo bar has become very popular," said Fiorenzo Arbini, in charge of health and safety at Pamp, another large Swiss refiner.

"People used to buy certificates, now they want physical gold."

Schnellmann said the Argor-Heraeus smelter is operating at full capacity, three eight-hour shifts a day. Conquering the backlog by hiring is difficult, because each candidate has to undergo a security check.

Gold refiners were established in Switzerland to supply the watch industry and, later, jewellery-makers in Italy. Switzerland's largest banks stepped in to replace a void in gold trading while the London gold market was shut after World War Two and again during a brief closure in 1968.

The former Soviet Union, another top gold producer, chose Zurich banks to handle most of its gold sales in the 1970s and 1980s.

"Gold has an image of being the asset of last resort. This could be viewed as old-fashioned but this is how enough people with enough money to matter think," said Stephen Briggs, a metals strategist at RBS Global Banking & Markets.


India, China and the Middle East remain the biggest gold importers, particularly for jewellery. But demand for physical gold has exploded also in Europe, the Gold Council said.

In Switzerland, home to the world's largest private banking industry, demand for gold bars and coins shot up six-fold to 21 tonnes in the third quarter of 2008, more than in any other European country.

Retail investment in gold rose 121 percent in the third quarter of 2008, an important contributor to the overall increase in global demand, the Gold Council said.
In that period purchases of gold bars by retail investors, who often buy through commercial banks, rose nearly 60 percent, notably in Switzerland, Germany, and the United States.

There was a surge of interest among professional investors shortly after the collapse of Lehman Brothers in September.
Private bank Julius Baer in October launched a fund to invest exclusively in gold bars stored in highly secured vaults in Switzerland.?

Hoping to be back in time from travel to cover both updates on Thursday.


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.