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Weapon of Demand Destruction

By Jon Nadler       Printer Friendly Version Bookmark and Share
Dec 29 2009 9:36AM

Good Day,

More sideways action was on tap for late Monday and early Tuesday in the metals markets. Gold meandered in a $10 channel between $1100 and $1110, unable to make a convincing break in either direction although a still lower (last seen at 77.38 on the index) dollar offered an opportunity for speculators to try a push for the upside. In so many words, nobody was interested. With a little more than two sessions to go in 2009, taking on fresh positions is probably the last thing on players’ minds. Other things yellow appear to hold more appeal (champagne, eggnog, the sands on a faraway beach…).

New York spot dealings opened amid lackluster conditions on Tuesday, with gold showing a $1.80 drop, quoted at $1105.10 basis the bid, and with silver posting a four penny loss at $17.43 per ounce. Platinum fell $7 to $1478 on the heels of profit-taking following its recent robust gains, and palladium and rhodium held steady at $388 and $2340.00 the troy ounce, respectively. The greenback held steady against the euro (at 1.444) at the loonie (at 1.0388) while market news was basically absent from the scene. Absent as well, were Indian buyers of gold overnight.

Our sources at offered the following look under the gold market’s technical hood early this morning: “Charts for February COMEX gold futures (GCG10) remained underpinned as the contract held above the $1,100 an ounce support mark. That said, there’s decent resistance between $1,107-$1,109 an ounce intraday, followed by Yesterday’s $1,114.50 an ounce high. These levels need to give way before gold may encounter fresh support from buy-stops en route to $1,120, and gold could keep in the neighborhood of the $1,100 mark over the next few sessions.?

Observers over at are a bit less sanguine about the prospects for a major push to the upside in the near future, as they note that: “The number of long speculators in the market now, although beginning to fall back from last week's highs, is still not far from record highs - the number of open contracts have fallen back a little in the past few days, as some of the speculators may be beginning to sell with the recent weakness.  After the large drop of the past week there are likely to be lots of margin calls going out, requiring many speculators to put up more money or liquidate their long positions by selling their contracts, a potential source of downward pressure in the coming days.? 

There is still a nearly half-million contracts’ worth of open interest in this market, which, albeit not as large as the nearly 600K contracts that were seen nearly one year ago, is still quite a mountain of money. The ‘problem’ continues to be the same one we have been pointing to since, oh, about the beginning of September: some 70% longs in the makeup of this pyramid.

Consider said mountain of betting paper against the stark reality on the ‘ground’ in the gold market: virtually every area of physical demand was way down in Q3 of 2009. This, as reported by the World Gold Council in its latest statistical roundup. These figures do not represent some insignificant variations, or seasonal anything. The only way to label these numbers is with a recycled sticker, one borrowed from last year’s oil market. It reads: “demand destruction? in plain English.

Here is a brief list of gold demand areas and their respective declines in tonnage terms, in Q3 of this year, versus the same period in 2008:

Jewellery Consumption: -30%
Industrial and dental:      -11%
Identifiable Investment:  -46%
Net Retail Investment:     -31%
Bar Hoarding:                 -36%
Official Coin:                   -15%
Other Investment:            -26%
ETF & Similar:                  -72%

Total Identifiable Demand was off 34% on the quarter. What was ‘up’ in the period in question? Why, the price of gold, of course. If these are the makings of a ‘bull’ market and not of another type of market that begins with the same two letters (‘b’ and ‘u’) - we don’t know what to add. One can easily find a plethora of commentaries based on the reading of which, one would conclude that demand for gold has “never been better? and that there will be very little left available for those who dither during this “M-o-A gold bull markets.?

The reality is that the gold market absorbed some 800 tonnes last quarter, as against the better than 1200 tonnes of offtake it witnessed in 2008, as prices were rapidly declining from the March “Bear Stearns Peak? of $1034 per ounce en route to the late October low of just under $700. No window dressing required. This is how markets work. Until hijacked by certain grey predators of the deep.

Stay tuned for more of the same: the slow unwind, that is. The $1100 level remains at the centre of this week’s radar. Only some unwelcome geopolitical developments can shake this market out of its late year-end doldrums.

Have a nice day.



Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
Direct: 1 (514) 875-4820 ext. 1360
US & Canada Toll Free: 1 (877) 839-8036
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