more articles by

Jon Nadler

Click to enlarge Click to enlarge


My Big Fat Greek Rescue?

By Jon Nadler       Printer Friendly Version Bookmark and Share
Feb 9 2010 9:18AM

Good Morning,

A slew of stories related to the early departure from a Sydney summit by the ECB’s Jean-Claude Trichet gave rise to speculation that something of a big announcement could be in the making regarding Greece this week. The euro found a bit of hopeful energy in the unfolding saga and players were certainly looking forward to whatever the man nicknamed “Mr. Euro? might have to say on the subject that has been obsessing markets for the better part of the past two months. The US dollar was thus the subject of a quick profit-taking sale or five, and sank by 0.50 to 79.94 on the trade-weighted index this morning, as the New York metals markets opened.

Gold market players took advantage of the aforementioned conditions to quickly try and execute some badly needed repairs and pushed the metal to a high of $1080 prior to the opening of the New York session this morning. Short-covering emerged above the $1074 level but there are plenty of nerves still manifest and perceptions that the proverbial deceased feline rebound is what is being witnessed here and now. Indian buyers decided once again to cross their arms overnight, and were seen as awaiting subsequent easier-on-the-eye gold price tags. Chinese physical offtake was still quite decent as locals stock up ahead of the Year of the Tiger next week. Questions remain for the period thereafter.

New York spot metals dealings opened with a good pop in all of the major metals we track here at Kitco. Spot gold offered a $15.30 gain on the open, starting the day off at $1076.70 per ounce as against the gains in the euro (last seen at 1.376) and the losses in the greenback. Silver climbed 35 cents to open at $15.33 an ounce.

Platinum rose $25 to the $1495 level, while palladium added $10 to reach $414.00 per troy ounce. Rhodium was bid at $2230 this morning. White metal ETF holdings continue to offer a boost to prices as the latest tally (for last Friday’s ounce flows) comes in to us from PLATINUM: Combined holdings: +21,657 (+21,657) ounces or +0.67 tonnes, totaling 28.74 tonnes.
PALLADIUM: Combined holdings: -190 (-190) ounces or -0.01 tonnes, totaling 47.02 tonnes.

In all, it has been a good day, thus far. Closing price levels (with attention focused on, and around the $1074 pivot point) will be on the minds of participants, as will any possible ECB/Greece-related microphone time in Europe. On the radar still, is Chinese bank lending statistical data.

Polled analysts expect to hear that loans made by Chinese banks last month may have amounted to as much as the total of the previous quarter (!) – a situation which could spark more aggressive reining-in action by the country’s officials. That, would not be a very commodities-friendly development.

While Marketwatch’s Peter Brimelow observes that dyed-in-the-wool gold bugs continue to chant ‘buy’ slogans even in the face (or especially because) of last week’s bloodletting in the markets, some of the very analysts he polls find that: “The chart damage done last week was horrible.? Martin Pring noted in his Weekly InfoMovie Report that gold "has completed an upward sloping head and shoulders pattern and has just violated the major up trend line...that suggests to me... a more protracted correction."

But wait, there is more: The Australian-based service The Privateer's famous $US 5X3 point-and-figure chart turned down and now looks dreadful. Others, meanwhile observed that: "The HUI chart stinks -- not much more can be said than that. It has to get back above 400 to generate the least bit of bullish enthusiasm."

Citigroup (CIRA) analysts released a commodities strategy research paper last week, and, boy, are they likely to be on the receiving end of some irate commentary. Curiously (not), the Citi folk have seized upon the same developments on the fundamentals side and trading positions-make up in this market which we have been pointing to (with some alarm) oh, at least since September the 1st of last year.

Namely, the research paper indicates that this gold market has recently been dominated by, and has become severely addicted to, investment (read: mostly speculative) whilst: “There is no support at current prices from mine and scrap supply (which is rising), or fabrication demand (which is plummeting), in our view.

Furthermore, the report identifies the degree to which the gold price surge in November and up to early December was almost exclusively a US dollar-based event, and how, therein lies the rub (or the makings of what we have seen since the second week of January). Citi says: USD weakness and increased money supply has been the main driver of investment demand and speculative flows, we believe, and any strength in the USD is the main risk to prices.?  

The Citi analysts go on to point out that: “The strength of investment demand over the last few years has been reflected in physical bullion and ETF demand although both are showing signs of dissipating. Investment in physical bullion has slowed sharply. ETF holdings are stable at high levels, as concerns about a global banking crisis abate.?

Most importantly however, the paper points to the same mountain of speculative paper positions which has been identified in these columns quite some time ago, and about which alarm bells have clearly been rung here:?Non-commercial net long positions are at 5x the average levels seen over the last 17 years. We see this as the major risk to gold near term.?

The report concludes that: “While long-term drivers of physical gold investment remain, we believe the level of inflows seen in the last 3 years are unlikely to be sustained given the worst of risk aversion and USD depreciation appears to have passed. Recent speculative activity in gold seen through increased paper trade and a surge in CFTC net long positions is a greater risk if USD show signs of strength as we believe these positions could be quickly liquidated.  

The study also contains a price projection table that shows average per ounce gold prices through mid-2014 and indicates a semi-annual progression in gold prices, as follows, starting with this year’s mid-year projection: $1,124 / $1,162 / $1,121 / $1,071 / $1,020 / $971 / $920 / $871 / $820. A gradual slope, that, but one that returns to the “long-term? figure, which is indicated as “$700? – by Citi’s analysts.

Tomorrow, we will bring you the supportive as well as potentially outright bullish factors that the Citi report has identified. Yes, there are some. And, we might add, that, regardless of the above (unless you are a major market ‘playa’) the core “one-tenth-of-it-all? insurance gold position that we have always and forever advocated for anyone with assets worth protecting against the unforeseen, remains as essential as water and air.

Happy Trading. Back to the Trichet and Beijing broadcast channels for now.

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.