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Numbers - It's All Just Numbers

By Jon Nadler       Printer Friendly Version
Feb 18 2009 9:18AM

Good Morning,

Gold prices remained relatively firm overnight, as spec talk of gunning for the 1K level kept buyers at the helm. The seven-month high at near 976 was welcomed by many physical holders, but did attract a portion of them to the sales tables. A 1000 level was achieved elsewhere in gold - in tonnage terms, by the gold ETF. The gorilla in the gold market room is taking on...gorilla-sized proportions, making the average 800-pound one seem like a gnat.

New York gold trading was off to a bit of a rocky start this morning, with prices slipping to $960.70 per ounce quite soon after the opening. The nearly $9 decline was not seen as a deal-breaker, as options expiry approaches next week, and as anxiety levels around the world show very little in terms of abating. Maybe when spring springs hope, conditions will be regarded as less Armageddon-ish.

Silver prices fell 8 cents to $14.03 and platinum dropped $2 to $1085 per ounce. Palladium was quoted at $217, up $1. US carmakers are begging for another 36-40 billion and GM at least, is shedding brands faster than it burns through its original stack of doled out taxpayer money. Saab, Saturn, and Pontiac will soon be brands you will reminisce about, rather than drive.

The World Gold Council's (creator of the aforementioned vehicle) tracking statistics indicate that identifiable investment demand during the fourth quarter of last year amounted to 304 tonnes, excluding ETF-related offtake. In so many words, global investors showed an appetite of about 2.6 million ounces per month more in the final stretch of 2008 than was seen during the same period in 2007. Little surprise then, that some mints around the world -accustomed to selling an average of about 300,000 ounces of bullion in round form on an annual basis for quite some time- were stressed out and encountered production and shipping delays.

The US Mint ended up selling 860,500 ounces to investors last year, and of that figure, 413,000 ounces were sold in the last quarter of 2008. While the more than 24 tonne 2008 figure is certainly impressive, consider a few other numbers for perspective of the proper kind, especially when reading about 'unprecedented' demand in many a newsletter.

For example, in just one month (Nov. 1986) the Mint sold 626,000 + ounces to investors. That year's total was nearly 1.8 million ounces - and it was sold in just three months. Let's chalk that anomaly up to the frenzy surrounding the coins' debuts. However, during the following epic year of market crisis (1987) the Mint sold 1,253,000 ounces to coin buyers. In 1998, almost one million more ounces of gold were moved by the Mint as compared to 2008's total.

As the world of gold bugs was preparing for the End of Days (Y2K) in 1999, more than 2 million ounces were sold by the Mint. Conclusions? Draw your own, but we see a developing pattern of crisis anticipation and mania buying, followed by a return to more normal levels for the remainder of the time. Kind of like a...cycle, you know? Angst followed by calm, followed by complacency, followed by new angst. Disbelievers can simply click on:

and learn the facts for themselves. Others, can continue to place faith in dealer hype, E-bay, and the quasi-Biblical tone of the subscriptions they receive from gold 'gurus.' There is always a choice.

Of course, the caution flags we raised yesterday were swiftly fired at as 'anti-gold propaganda.' Well, there is a choice to be made in that interpretation as well. The first condition however, is to accept the fact that this writer has never abdicated the firm conviction that you must hold a life insurance policy for your basket of wealth. Perhaps 10 or 15 percent is tantamount to being 'anti-gold' to you, but that is your take on matters.

However, when it comes to The Globe and Mail's Alan Robinson, after this morning's piece on gold, he will surely become the next target of conspiracy club hate-mail, and will either be vying to wrest the Moron of the Year award from your truly, or be labeled as an MSMer. Which, he is. But, your choice is to accept 'news' dispatches from little more than goldbug forums as 'the truth.' Take it away, Alan:

"The price of gold has soared as investors seek a refuge from market turmoil, but one analyst says anyone betting on a U.S. recovery would do well to take some profits in the precious metal.

"We think the sun will shine again and we think the tremendous and unprecedented stimulus that is coming from all over the place will stabilize the U.S. economy," said Vincent Delisle, a strategist with Scotia Capital Inc.

Gold rose 2.7 per cent yesterday, reaching a seven-month high before ending the day up $25.30 (U.S.) an ounce to $967.50. It peaked yesterday at $974.20. As recently as mid-January, gold traded at $806 an ounce. Gold is breaking all of the rules that work in normal times. Typically, the metal weakens when the U.S. dollar is strong, but yesterday both rose sharply. It also tends to move in sync with the price of oil, but this year gold has been climbing higher while oil weakens.

The historical correlation between gold and West Texas intermediate crude is a positive 81 per cent, compared with the negative 53 per cent since the beginning of 2009, he said. The risk of inflation that normally sparks gold buying is pretty much absent.

"These relationships have broken down in the past few weeks and these are anything but normal times," Mr. Delisle said. And that might not be good for gold, which has taken on the role of safe refuge in times of turmoil along with the U.S. dollar, the Japanese yen and U.S. Treasuries. The S&P/TSX global gold index has been strong during the past few years and this year the index has performed well. The gold miners now account for a record high of 12.5 per cent of the S&P/TSX, and Scotia Capital, which has been overweight the group, now recommends a 10-per-cent holding.

Over the past 30 years, gold stocks have accounted for about 7 per cent of the value of the S&P/TSX.

"If you want to buy low and sell high, you need to be a bit of a contrarian," Mr. Delisle said. "This is really a tactical move on our part. We think the market is exaggerating the pessimism."

Gold, in terms of weaker currencies such as the euro, British pound and Canadian dollar, is at a record high, said Bob Tebbutt, vice-president of corporate risk management for Peregrine Financial Group Canada Inc. Using Canadian dollars, gold traded at $1,207 an ounce yesterday.

"I guess what you have to say, is gold is finally performing as it should perform in times of uncertainty," Mr. Tebbutt said. "Finally, you are seeing a move to the upside, but it hasn't set a record in U.S.-dollar terms."

Gold traded at a record $1,014.60 (U.S.) an ounce in March, 2008. However, a look at the S&P/TSX shows the gold mining companies have recently shown some signs of fatigue. The S&P/TSX gold index jumped 4.6 per cent yesterday and it is up 18.1 per cent during the past month, but only 10 per cent so far this year. The index rose almost 1 per cent in 2008, but that performance was relatively good compared with the 35-per-cent plunge in the S&P/TSX composite index. During the past three and five years, the gold index is up 26.9 and 59.2 per cent, respectively.

"When we look at the broken correlations, we think the reversion [back to the mean] will hurt the relative performance of gold," Mr. Delisle said. "One has to wonder how much more 'market share' gold can gain if the sun ever comes up."

Call it whatever you like, but facts, figures, and history bear out some familiar patterns: make too much of one thing and conventional wisdom takes a backseat to unconventional behavior. One cannot figure out human actions and better than the potential actions of the Big Ape in the room.

With that in mind, let us welcome the breach of the $980 high we projected on 12/31/08, add to it the $100 we tacked on for good measure - in the event the sun fails to rise between now and March 31 - and await further developments. Such as the rise in volatility to beyond the 40% mark, or the open interest figures at 360,000 (while deliveries were fewer than 3000 contracts on the month) contracts.

Happy Trading.

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.