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Natixis Nixes Lunar Landing

By Jon Nadler       Printer Friendly Version Bookmark and Share
Feb 23 2010 9:36AM

Good Morning,

Overnight action in gold markets was relatively subdued, with Indian buyers mainly on the sidelines and other speculators largely holding off on making significant commitments ahead of testimony by Ben Bernanke this week. The US dollar continued to rise, reaching nearly 80.75 on the trade-weighted index as risk aversion remained the predominant theme among market players. The euro remained on the defensive, slipping to 1.357 against the US currency, while crude oil gave up more than $1.25 per barrel, sliding to $79.03 at last check.

Spot gold prices were confined to the $1105-$1120 range ahead of the opening of the New York Tuesday session and it is expected that locals will also focus on the upcoming Fed chief’s input as well as Friday’s GDP figures before making larger plays. Rally attempts in gold over recent session (admirable as they may be, given the impending IMF liquidations and the hike in the discount rate) have been truncated by the rising perception that gold investment demand continues to be lackluster.

This set of conditions comes at a time when seasonal and now outside impact factors are just beginning to be felt. Mitsubishi analyst Tom Kendall opined that: “The market as a whole understands that this is the beginning of a [tightening] process that’s going to emerge and will take several years to run to its conclusion in terms of tightening monetary policy again. But the issue is timing.?

Spot metals dealing in New York opened on a mixed note this morning, with small losses in gold, which was quoted at $1112.00 per ounce – a drop of $0.60 per ounce as against a more modest gain in the US dollar (now at 80.64 on the index) and ahead of the release of US consumer sentiment data. Thus far, the yellow metal has seen support emerging near the $1100-1105 levels and players have expressed hope that such bridges of support could hold up for the time being.

Readings on German business sentiment, interpretation of UK central bank head Mervyn King comments, a sinking Case-Schiller US home price decline of 1.1% - all contributed to gains in the greenback and gold subsequently sank to $1106.90 within the first hour of trading. Call it the bitter almond whiff of deflation around the globe…

Silver fell 7 cents to $16.14 an ounce, while platinum gained $4 to $1531 and palladium remained stalled at $441 the troy ounce. No change was reported in rhodium following yesterday’s gain that brought it to the $2390 per ounce bid figure. According to Johnson Matthey and Platinum Today, “Increasing interest in diesel engines in the US could impact on the demand for platinum. According to executives from automobile components supplier Robert Bosch, US consumers are becoming much more interested in diesel-powered vehicles, which use predominantly platinum catalysts.

“In an interview with Ward's, Lars Ullrich, director of marketing diesel systems at Bosch, said diesel cars are no longer associated with a lack of speed, too much noise and an unattractive smell. Instead, consumers in the US are now focusing on the impressive fuel consumption of diesel vehicles.? Now, if they can only do something about getting diesel fuel back to where it used to be: at least one dollar per gallon under gasoline prices…Ah, but we digress…

However, digress we must, as more corroborating news about something we have repeatedly opined in these columns has now emerged –from none other than the World Gold Council. This author’s long-time friend and WGC executive, George Milling-Stanley, was recently interviewed by Bloomberg’s Millie Munshi. When asked what he thinks about the issue of the IMF gold and China, George had this to say:

“China is actually "not a realistic candidate" to buy all, or any, of the IMF's remaining 191.3 tonnes of gold which is still up for sale. We're not surprised to see that China has not" taken up any of the IMF's gold for sale and is far more likely to "buy local gold production" with which to bolster and diversify its currency reserves. China was always buying its own domestic production and it will likely to continue to do so."

Precisely, George. And, quite contrary to the wax-sealed, triple-signed guarantees you have been reading about in practically every hard money publication ever since the day after India bought its 200 tonnes of bullion from the IMF. None of this means China will not buy gold to be added to reserves (provided such an allocation does not exceed the current roughly 2% mandate, or that its reserves continue to grow, or that it does not become a highly visible buyer and damage its dollar holdings any further than they already are in the wake of last year’s dollar slide). It just means (mainly) you cannot believe everything you read.

Something else that has been thrown a bit of a bucket of ice upon, are the prognostications (that also read like carved-in-marble promises) that gold prices are headed towards the lunar surface this year, next year, and…forever. Perhaps not in a straight line, but the general direction is still beyond the 2K or 3K or 5K (dollars that is) milestones.

In early February, a Citigroup research study projected a return towards the $900s (annual average price) in roughly two years’ time and towards a long-term $700 per ounce, beyond that. The projections were met with laughter (to be very polite) in many a chat room and newsletter. Now we get word from UK-based Natixis Commodities Markets and it happens to correlate to the Citi findings (as well as previous ones from TD Bank, Saxo, Nomura, and others).

While the London-based company does not envision any major collapse in gold or silver prices, the opinion it offers us as to the price prospects for 2010 and 2011 in gold is certainly not as “positive? (to again use a very mild term) as some (or most) of the recent predictions we have all seen in the global financial media about the future prices of the precious metal. Says the Natixis analysis:

“An average gold price of around $950/oz or even lower is likely this year if the global economic recovery gains pace, supporting conventional asset values and undermining assets like gold, which is seen as a store of value.  Although there remains huge uncertainty concerning the economic and financial markets, we feel the balance of probabilities favours an eventual resolution of economic imbalances, such that investor interest in gold and silver will gradually begin to unwind."

"We could also see the economic recovery gather pace and solidity, underpinning conventional asset values but undermining those store-of-value assets with low yields," it says. Such a retreat could also prove self-fulfilling, with bouts of long liquidation further undermining remaining investor positioning. In such an event, an average gold price for this year of below $1,000 would become likely, and it could end up close to $950 or even lower.

With investment continuing to unwind in 2011, we would anticipate further price weakness, with an average below $900 probable. With the ‘blip’ of IMF sales out the way, jewellery continuing to recover, and fresh producer hedging being thin on the ground, the [gold] price retreat should not be spectacular and so this average could end up in the mid-$800s, although a slight retreat yet further cannot be discounted.?  

The core rationale of the Natixis projections is –unsurprisingly- found in the fundamentals of this market. This is also something we have also repeatedly cautioned about and attempted to put into perspective– most recently, last week, when the WGC demand statistics for Q4 and 2009 as a whole were released. On that rather “sticky? subject matter Natixis said:

"The other key reason for expecting a marked price descent is unhelpful fundamentals. The fundamentals for the gold market are not likely to support the price this year, with mine production forecast to grow, while the market will need to “digest? the International Monetary Fund's sale of its remaining 191 tonnes.  Indeed, overall net official sector sales could prove much higher than many expect if the large scale purchases hoped for by some fail to materialize.?

On the demand side, the market will need to adjust to significantly lower levels of producer de-hedging, as the global outstanding hedge book has been significantly reduced. "As for demand," it adds, "one big negative the market will have to contend with is the slump in producer de-hedging as a result of the now much reduced outstanding hedge book.  “We do not as yet expect a swing to substantial strategic hedging, but that potential should always be borne in mind.?  

As always, there are some bright spots in every report. The Natixis projections include encouraging news for you if you are a jeweler (perhaps not so much if you are a scrap refiner) and are still wondering how you will make a go of it this year, or next:

“Jewellery production should rise as global economic growth returns and the price falls. However, it might be rash to expect much active price support from this sector; we only expect buying to be strong on price dips, thus making the retreat in the price smoother than might otherwise have been the case. The volume of secondary recycled scrap gold likely to hit the market, however, might not overwhelm, if prices were to begin to fall."  

Moving on to the other precious (and some base) metals that matter, Natixis is equally cautious, but it seems to offer fairly optimistic outlooks for the noble metals complex.

“Natixis has forecast an average silver price of $15/oz this year, followed by $13.30/oz in 2011. Given silver's poor underlying fundamentals, we are cautious about the prospects, forecasting an average price in 2010 of $15 per oz followed by $13.30 per oz in 2011.?

Platinum is seen at an average of $1,550/oz this year, while palladium is forecast at $362.50/oz.
Natixis said it expects prices for industrial metals to firm this year, boosted by increased demand especially from China, India and other Asian economies. "Although consumption of platinum group metals should grow in 2010, offsetting part of this positive impact is our expectation of a gold price correction this year.

“While platinum and palladium prices will continue to receive marginal support from the impact of supply concerns on investor sentiment, we believe that further gains from current levels will be limited. The company has forecast average prices in 2010 of $2,370/t for aluminium, $7,885/t for copper, 2,565/t for lead, $19,340/t for nickel, $17,500/t for tin and $2,800/t for zinc.?

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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