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ETFs = Extra Tonnage Factor

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jan 13 2010 9:48AM

Good Morning,

Following their worst drop in three weeks on Tuesday, gold prices staged an overnight recovery as additional dollar weakness prompted some bargain hunting in the overseas markets. The yellow metal was thus far only able to retrace about a third of yesterday’s significant losses with said lukewarm buying patterns, and remains some distance from the previous $1142 resistance area it previously overcame during its late Sunday/early Monday rally. The market feels somewhat tired following yesterday’s surprise drop and could possibly take aim towards lower levels once again.

China’s raising of reserves for its banks and a couple of other dollar-supportive/ commodities-negative statements have now put a damper on what was shaping up to be quite the start in the markets for 2010.

Today’s roundup of global economic news shows that various economies are still facing significant problems of one type or another. For instance, the German economy is thought to have been flat during the last quarter of 2009, while the country’s GDP most likely shrank at a 5% annualized rate last year. This is Germany, folks, the economic engine of the EU.

Meanwhile, the economies of Portugal and Greece (according to Moody’s): “may face a “slow death? as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said. While the two countries can still avoid such a scenario, their window of opportunity? will not be open indefinitely,?

Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend? while Greece “has significantly less time.? Moody’s cut Greece’s rating to A2 from A1 on Dec. 22.? – Bloomberg. Whether or not Portugal (which has 83.8% or its reserves in gold) might reach for at least part of its asset of last resort in order to avoid said slow death, remains an open question at this time. Resorting to reserves to pay debt is not out of the realm of possibilities, as evidenced by Argentina’s (domestically controversial) plan to use $6 billion of its reserves for just such purposes.

The midweek session in New York opened with relatively mild gains in the precious metals complex, as participants tried to rethink the implications of the Chinese anti-bubble posturing and gauge the near-term direction for the all-important (to these markets) US dollar. Gold added $6.20 to start at $1134.00 per ounce following overnight lows that took it down to $1125.00, and it has thus far not made any stabs at levels higher than $1138.00 prior to COMEX opening.

A recapture of price levels above $1142 is essential for gold at this time, before any attempts towards the high $1160s or the $1174 grail can be aimed for. Silver climbed 17 cents, opening at $18.42 per ounce, while platinum showed a $7 gain to $1576.00 per ounce. The noble metal had vaulted to just above $1600 on Tuesday morning, before heavy profit-taking set in. Palladium dropped $3 to $419 per ounce. In case you’re wondering what brought the noble pair of metals to such lofty levels, wonder no more. The purchase of 80,000 and 90,000 ounces of platinum and palladium for the two respective white metal ETFs that launched in the US just last Friday, should give you a good clue as to where some help came from.

In a market such as platinum, whose 2009 surplus was estimated to be about 390,000 ounces, an 80,000 ounce ETF-led shopping expedition can make quite a difference. The entire demand for fabricated platinum bullion coins is little more than 20,000 ounces on average, annually. Combined platinum ETF holdings amounted to over half a million ounces at their April 2009 peak.

As for palladium, whose projected surplus is estimated to have been around 175,000 ounces last year, the 90,000 ounce ETF two-day scoop-up is also quite notable in proportional terms.

While automotive, jewellery, and industrial applications demand for both metals were flat-to-down last year, the advent of specialized ETFs has helped balance things out a great deal in these markets. The problem with these vehicles remains the same one we often remind readers about, when it comes to the gold-based ETF.

More specifically, that, –upon launch- and for some time thereafter, these ETF products tend enhance existing market price gains of the underlying metal by virtue of the fact that they are in accumulation mode. Subsequent to that phase, no one really knows how these funds will impact the markets, should a flat-to-downward phase in the cycle get underway. The metals ETFs remain untested in bear markets.

The relatively large amounts of ounces or tonnage purchases that helped prices move sharply higher in the ascending phase could make for an equally powerful (negative) boost factor as regards potential price declines. For example, consider the nearly 18 tonnes of bullion that gold ETFs have lost since the beginning of 2010 for various reasons, and compare that tonnage to the monthly average gold sales by central banks for the first half of 2009: about 16 tonnes per month. This is not to say that ETFs will reliably continue to bleed such balances month after month, but the point is that the amounts in question (whether being added or redeemed) make for a sizeable, and fearsome new contender on the market scene.

Watch for the $1125-$1140 range holding (or not) depending on further dollar movements. The pound gained against the greenback as interest rate hike-flavoured jawboning issued forth from the BoE via an official. An economic assessment is due later on today from the Federal Reserve which might provide some clues on the eventual direction of US interest rates. The dollar remains near 1.45 against the euro and was last seen at 76.65 on the index – a 0.39 drop that should have had gold much higher by now…

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.