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Mind the Gap, Please

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jul 17 2009 4:40PM

Good Afternoon,

Consolidation punctuated by bouts of profit-taking, followed by small-scale pre-weekend buying, followed by more light selling, was the emerging theme (if there was one) in precious metals overnight, and on Friday. Following the rise in participants unwilling to open their pocketbooks to buy more gold at levels above $940 in gold, the market saw some of its recent shine come off in a slow but steady fashion, basically since yesterday's session got underway. This morning as well as the Friday session appeared to be no different. Pre-weekend book-squaring was on tap for a good part of the day, but bullion eventually followed rising crude prices to eke out a small gain during the day - but not a long-lasting gain, as it turned out.

Time for a quick glance at the weekly gold ETF inflow/outflow data, courtesy of our busy friends over at They report that:

"Monitored investor holdings in our ten monitored gold-backed exchange-traded funds were seen dropping 16.140 tonnes (518,915 ounces) or 1.03 pct in the week from July 10th to July 17th, in-house calculations based on official data showed on Friday. Two of the ten ETF’s announced an inflow, three announced an outflow. Five of the ten ETF’s announced no change. The largest absolute movement was seen in the world’s largest gold-backed exchange traded fund, the SPDR Gold Trust, where 481,031 ounces or 14.96 tonnes (-1.35 pct) flowed out."

New York spot gold dealings opened with a $4.50 decline on Friday, as players observed a firmer US dollar on the trade-weighted index (last seen at 79.35). Safe-haven seekers appeared to emerge following a lethal hotel bombing in Jakarta, and the greenback got a bit of a boost based on that quest. Also rising on the news, was the Japanese yen. Once the price of oil started to perk up, gold buyers were not far behind in the buying crowd. Thus, bullion turned up from the mid-$930s and once again approached $940, before backing off and returning to where it was last seen this afternoon: at $936.00 per ounce, sporting a loss of $1.00 on the day.

Crude oil initially retreated by about half a dollar, trading near $61.50 per barrel following the aforementioned pickup in the US dollar's strength. Technicians indicate that black gold may test support near $58 per barrel in coming sessions. Nevertheless, the commodity gained ground following somewhat happy news from the US housing starts front. At last check, oil was up $1.50 at $63.52 per barrel. Hey, whatever makes you a buck for the day.

Another item of potential worry for the metals-bullish crowd is the yawning gap opening up in the gold/silver ratio. Opinion may be divided on the topic, but there are definitely those who do not buy into the view that 'this time it's different' and that the breach of the 72 level does not portend a weakening of the entire complex. A rising ratio has historically not benefited the niche. We do not place too much in the way of faith in ratios, to begin with (such as oil to gold, or gold to the Dow). But that, is another story. India's Economictimes reports that:

"A sharp rise in the gold-to-silver ratio shows that silver's unique investment and industrial appeal has faded. But this increase, unlike previous ones, does not portend further weakness in the precious metals complex. The closely watched ratio, calculated as the price a troy ounce of gold divided by that of silver, is used to determine how expensive silver is relative to gold. Some traders switch positions between the two metals if one is thought to be cheaper.

Silver, dubbed as the poor man's gold, has characteristics of both precious and base metals. It is widely used in the electronics industry due to its excellent electrical conductivity. In 2008, industrial application accounted for more than half of silver's total demand. Silver is generally less liquid than gold and its price tends to be more volatile. Therefore, when silver underperforms gold, analysts say metals and the broad commodities sector could follow suit to trade lower.

"Traditionally, in a bull or bear market, for the precious metals as a whole, the silver in the early stages tends to outpace gold because the market is thinner." Steel said. "So, it could presage further losses in the entire precious metals complex."  Yet, this time the rising silver-gold ratio does not indicate coming weakness in commodities because silver's industrial metal component has been crushed by a global recession, but gold's status as a monetary vehicle is largely intact.

"The widening in the gold/silver ratio is a reflection of the weaker industrial demand for silver, while at the same time gold still maintains a certain level of investment demand," said James Steel, chief commodities analyst at HSBC in New York. The gold/silver ratio rose toward 75 earlier this week, up from about 60 in early June, which also equals the historical average. It had traded as high as 80 in October last year, in tandem with what was generally seen as the climax of the global economic crisis.

The price of silver had rallied to a peak of $16.22 an ounce on June 3, nearly doubled from a low of $8.42 in October. However, it has since nose-dived as economic worries prompted short-term investors to dump the metal. Silver traded at $13.30 on Thursday. The white metal is up 18 percent year-to-date, outperforming gold's 6.5 percent.

Dennis Gartman, independent investor and publisher of the Gartman Letter, said the precious metals complex could weaken if the gold/silver ratio stayed above 72.5. "Good, solid, well-founded bull markets in the metals are almost always co-extensive with a weak and falling gold/silver ratio. Instead, the ratio is rising, and so long as that is true, we can look for the metals generally to trade lower," Gartman said in a note earlier this week.

Silver, whose price action often tracks the gold market, has been driven by rising investment demand because of the popular silver-backed exchange-traded funds. For instance, the world's No. 1 iShares Silver Trust , which still holds nearly 9,000 tonnes of the metal, a record high. John Reade, head of metals strategy at UBS in London, said the recent decline in COMEX net speculative long positions has accompanied the rise in the gold/silver ratio.

"Although we believe that silver is now attractively priced compared to gold, we are looking for a further clear-out of silver longs on COMEX to provide a tactical relative value opportunity between gold and silver," Reade said in a note. HSBC's Steel warns of the pitfall of trade strategies related to the gold/silver ratio. "It's always dangerous to trade a ratio because although silver and gold are precious metals, they both have fundamentals that are unique to them, and certainly silver is much of an industrial metal," Steel said."

For the moment, the bullion crowd is fixated on the equity markets and the state of health and frequent diagnoses of same of the global green shoots. As for mid-year price projections, well the jury is in. The verdict appears positive, albeit -as usual- it is laden with caveats and hedging words. In fact, we here, see a disconnect between the projected precious metals values ( a bit generous) and the actual statements ( quite a bit more realistic) made by some of the very people who participated in the survey. Mineweb relays the consensus- such as it is-among Reuters-Thomson's recently surveyed institutional parties, and here it goes, complete with the obligatory escape clause-flavoured statements:

"A selection of analysts' views on the outlook for gold, silver, platinum and palladium prices, gathered as part of the Reuters precious metals price poll for 2009 and 2010.


                                               2009        2010

 Mean                                       937          990

 Median                                    930          975

 No. of Forecasts                      45             42


 "A spike to around the $1,000/oz level is certainly plausible in the next year, most likely associated with a period of U.S. dollar weakness. But if the gold price does cross the $1,000/oz line, we do not expect it to stay there. We expect that the gold price will be volatile over this period, as the main rationale for investor demand for gold shifts from safe haven demand to a demand based on gold as a hedge against U.S. dollar weakness and, for some investors, perceived inflation risks."


"I expect prices for both gold and silver to have another run-up at some point, as the U.S. dollar comes under further pressure, as sovereign wealth funds and China balk at huge U.S.Treasury issuance and some signs of rising inflation re-emerge -- probably towards the end of 2009." However, gold prices are expected to eventually fall back to more normal levels, once the global economic recovery takes hold and investors shift further into "more risky" assets such as equities and "emerging-market" equities."


 "Gold is basically dollar-driven, but there are expectations that all this monetary stimulus is going to spark inflation concerns, and therefore interest in gold. There is a view that if world growth is in a gradual recovery trend, that will eventually help fabrication demand."


 "The major factor for the precious metals markets will be the recovery of the global economy and inflation fears. While it should become more and more obvious in Q4 of this year that the economy has reached the bottom and is improving, inflation is not expected to re-emerge. The U.S. dollar is traditionally weak in Q4, which should help precious metals in the final quarter of this year. Fund buying might be the dominating factor for gold and silver in this period."


"Gold will be dollar-driven during the summer as the market is likely otherwise to be directionless.  If anything, prices in local terms are likely to come down. Physical demand should pick up in the fourth quarter, but this from a very low base, and dehedging is also slack. We are looking for dollar weakening and nerves over inflationary implications of quantitative easing, suggesting fresh risk hedging to lift prices in 2010."


                                2009        2010

 Mean                      13.71       14.53

 Median                   13.59       14.25

 No. of Forecasts         42            40


"As a precious metal, silver continues to attract safe haven flows as a cheap proxy for gold. However, with the exception of coin sales, we expect end uses of silver to remain weak over the forthcoming weeks and, in turn, investment demand has a larger void to fill. Given the market balance is heavily dependent upon physical exchange-traded products to soak up the excess, net redemptions would not only expand the surplus but also add downward pressure upon prices, as there is little fabrication demand elsewhere to meet any excess supply."


 "We feel silver has benefited (earlier in the year) from the general safe haven story. What we have seen in this quarter is generally that risk appetite has fallen away, so we are expecting most industrial markets to trend lower on the back of this story. Gold will be pretty well supported, but the rest of the complex will be hit. In the early part of this year people got way too optimistic about the underlying economic picture, and now there is a reassessment talking place of what's really going on."


 "As far as the outlook (for silver) is concerned, its dependence on gold is expected to continue: should gold fall afresh, buying support from the industry and private investors -- which we have observed it the recent past -- will not be able to prevent the white metal from falling further."

The focus now shifts to next week's Ben Bernanke testimony in DC, which will draw more attention from commodity market players than we have been used to, of late. Consensus indicates that listeners expect to hear at least some coverage by the Fed head on the topic of drainage. As in, liquidity drainage. Perhaps the how and when could be initially addressed at this stage. Fact is, the Fed has not injected anything into the system since, oh, about February. Fact also is that the body language which is emerging from the Obama administration, the Fed, and Treasury, (such as letting CIT succumb to its woes) is a bit mas macho than what the markets had gotten used to.

Silver started the day with a 22-cent drop, quoted at $13.07 per ounce and, it too, was showing signs of fatigue at the upper ends of its trading range. The white metal was ahead by about 6 cents at last check, quoted at $13.35 a ounce. Not much happened in platinum on the open, the noble metal opening flat at $1161 per ounce and finishing with a $10 gain at $1171, while palladium initially dropped $1 to $244 per ounce, only to finish with a $1 gain at $247 an ounce. A scarcity of automotive sector-positive news is keeping a lid on the noble metals for the moment. At the same time, the trickle of positive economic news is proving to be a positive for the metal in this niche. Such news as we did get, were primarily concerned with the sale of various automotive units to other automotive units (Porsche and Opel still looking for new parents).

Someone else is also looking for custodians at this time: some gold investors. Apparently, more than one banking-flavoured metals depository has decided that if it is going to hold gold, it will do so primarily for the "big guns" at play in the markets these days. The gold-oriented ETFs are crowding out Mr. and Mrs. Average Gold Buyer in various vaults in New York, and in Europe. Of course, there are still viable alternatives for investors (who really ought to think twice before embarking on a 'midnight gardening' project with their coins - only to find that A) the coins are gone and/or lost or B) that trying to sell them to a far-away dealer is fraught with headaches they did not factor in). Keep your stack, in your own possession, at your own (and the bullion's) peril.

For unsurpassed safety and a government guarantee on your holdings to boot, we would certainly give consideration to the Perth Mint Certificate Program. Nearly $2 billion in client holdings has not been built up Down Under because this is a less than safe vehicle. It is, in fact, as safe a metals ownership vehicle as one can ever wish for. For your current physical holdings, especially the buried ones, we would suggest contacting Brinks Inc. and ViaMat International - both of which have very long-standing experience in the business, and are quite likely to be able to offer the storage space, and international location(s) you might desire. 

Most of all, you will gain untold increments of liquidity for your vital stash. Any reputable dealer, located anywhere, will be glad to make you a very competitive (market usually by phone), on a holding that is "loco" Brinks or ViaMat Int'l. This, because most reputable dealers already maintain storage accounts with such depositories, and a fast transfer can take place - no shipping/no waiting. Hey, it's your gold (and it's your money, too.). Just a thought. 

More than anything, these are specialized firms - their primary business is to safely hold valuables on behalf of others. Of course, safety comes with a monthly price tag. But, it is a price well-worth paying when it comes to what is supposed to be your asset of last resort. The backyard has never been the answer. Neither has the local bank's safe deposit box. But not for the reasons conventionally feared (i.e. 'confiscation'). In any case, Mineweb alerts that:

"In a note entitled No more space for Gold Bars, Swiss news website 20 Minuten Online reports that Swiss banks are running out of secure storage space for gold bullion held by investors and institutions.  Fears of hyperinflation, the economic downturn and the success of gold index funds (ETFs), which are supported by physical gold, has led to a run on precious metals investment - and in gold in particular, and in the necessary secure storage space in which to hold it..

One Swiss bank, earlier this year, reported that it was having to relocate some of its stored silver bullion to another site to make room for gold.  The Zurich Kantonal bank put this down to the success of its gold ETF.The website reports another Swiss investment banker despairing "We have the need to store more gold for our clients but are finding it difficult to find secure storage facilities".  Gold storage makes high demands on security which is what is making the gold holding task more difficult.  Few banks will divulge exactly where their gold is stored for security reasons.

Another banker reported that his bank still had space but that it is beginning to run out. Some of the problems are being handled by improving the storage systems in existing space.  As one banker commented "A 12.5 kilo gold bar only occupies about the same amount of space as a tetrapak of milk".

Finally today, more of the same, on the Chinese anti-dollar jawboning campaign. That is, that it has been full of poppycock. Marketwatch offers this "reality vs. posturing" story for your edification (and that of your friendly hard-money newsletter writer, for sure). By-the-way, hard-money mythology has us believe that China holds two trillion dollars in reserves. Learn the correct number, below:

"U.S. capital-flow data on China's Treasury holdings show Beijing is still buying American, even as the two nations' dueling rhetoric over currency policy continued Friday. "We simply want to see China's currency to float freely," U.S. Commerce Secretary Gary Locke reportedly said at an event in Shanghai hosted by the American Chamber of Commerce. For its part, China, as the largest holder of dollar-denominated reserves, has repeatedly taken aim at the U.S. dollar and voiced concerns this year over the world economy's reliance on the greenback as a reserve currency.

In March, People's Bank of China Gov. Zhou Xiaochuan proposed the creation a new international reserve currency in an essay published on the central bank's Web site, a call repeated several times since. But the U.S. Treasury's international capital flow (TIC) report for May released Thursday showed China has not been backing up its expressed concerns with action.

"Despite media efforts to portray China's U.S. Treasury portfolio holdings as a looming crisis, the data does not bear this out," said Win Thin, currency strategist at Brown Brothers Harriman. "Bottom line: The big global reserve managers are not dumping U.S. dollar assets."

In May, China's net holdings of U.S. Treasury securities rose $38 billion, and the total rise in China's holdings across all U.S. securities in May was $36 billion -- the highest monthly increase since October 2008, Thin said. All told, China's total U.S. dollar holdings have increased $229 billion since June 2008 to $1.43 trillion, he said, citing the TIC data. China's U.S. Treasury holdings have increased by $266.5 billion since then.

Locke's comments Friday had no currency market impact, as China tightly controls the yuan's trading range. Since it ended its currency's peg to the U.S. dollar in July 2005, China has permitted the yuan to trade in a narrow band -- now 0.5% -- on either side of its official parity rate, which it sets daily. For years, China has shrugged off similar calls from U.S. and European officials to allow the yuan to appreciate, as its relative weakness to other currencies gives Chinese exports a competitive edge in overseas markets.

The yuan gained about 6% against the dollar in the first half of 2008, before China abruptly halted the appreciation as the global credit crisis deepened and investors around the world sought the safety of U.S. assets, supporting the dollar. Economists estimate around 65% of China's official holdings are in U.S. dollar assets, so the greenback's recent depreciation in line with investors' improving risk appetite has boosted the value of China's foreign-exchange reserves.

Already the largest in the world, Chinese foreign-exchange reserves swelled to $2.13 trillion at the end of June, as a record $178 billion were added to the reserves during the April to June period, the People's Bank of China said Wednesday. Reserves ballooned at a record pace, even as the nation's exports remained under pressure during the period because of weak global demand. "We understand China's currency policy is aimed toward an eventual balance between inflows and outflows. But for now, inflows are dominant," said Patrick Bennett, strategist at Société Générale in Hong Kong."

Well, that's all we have room for right now.  It was, otherwise, a rather slow news day. You know this is the case, when, one of the topics under intense scrutiny by financial media readers is whether Maria Bartiromo or Erin Burnett will be crowned with the "Money Honey" title by CNBC. Yawn. We say: "Where is Sue Herera?" The 'original' Money Honey. Go back to LA, circa the 80's and channel 22 - You will know what we mean.

Happy Weekend. 

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.