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Clunker Nation

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jul 31 2009 3:31PM

Good Afternoon,

Well, we made it to this Friday, and the last day of July only to have been greeted by a plethora of economic statistics and assorted other data that ended up making for a very active trading day. First out of the gate this morning, news that stag-deflation is still gripping the Old World in a nasty way, and won't let go. Consumer prices fell by the largest amount in over a dozen years, while the number of jobless European denizens rose to a level not seen in a decade. Proof, once again, that Europe faces the same dangers as does the US for the moment, and that such dangers are not of the 'Zimbabwe-coming-soon' nature by a very long shot.

It was GDP day for the US, and pundits expected to learn of a 1.5% rate of contraction in Q2, as opposed to the 5.5% rate of shrinkage they had to digest for the previous reporting period. Learn they did; GDP was down only by 1%.  That, as against a 5.9% contraction rate in the previous two quarters. BUT- this is, STILL, the 4th quarter of CONTRACTION. A feat never yet recorded in the US economic record-books. Treasurys remained lower following the data release. New tests have been ordered, and the economy promises to come clean and deal with whatever the findings may reveal.

The corner that the US economy keeps turning (and turning) around thus far, appears more like that of a hexagonal building, at best. Periods of advances are followed by stagnation plateaus, and so on. In any event, the improvement in the rate of shrinkage can be (and will be) taken as a sign that Team Obama's plans have taken root and are starting to yield some green shoots of their own. However, it is still the 'less worser' (sic) scenario that is playing out.

The yen and the US dollar fell ahead of the release of the US data, and did so -once again- based on the formula that positive tea leaf readings in the economy must equate higher risk appetite, a lessened need for safe-haven currencies, and a nod towards speculating in the commodities' complex while the getting is still good in there.

While the results of the GDP test are far from showing an economy on steroids just yet, return-starved investors -whose sidelined mountain of cash is said to be near $9 trillion (!) appear to be inclined to use small portions of it and throw it at various markets, in the hopes that something sticks to the...wall. Thus, we had a morning high in copper prices that harks back to last October, a nickel price that shot 4.1% upward, and oil prices back to above $67 per barrel.

The dollar fell, and fell hard following the GDP data. There is no other way to put this. The US currency lost 0.96 on the index and approached 78.29, while oil took off to higher ground, climbing $1.83 to $68.77 per barrel. Risk appetite, and then some.

Gold started off the day with a $2.00 rise, quoted at $935.70 per ounce, while silver started with a gain of one dime per ounce, registering $13.57 per ounce in New York. By the afternoon hours, the gains in gold were roughly ten-fold higher- it was showing a $20.10 gain at $953.80 per ounce. Silver piled on 42 cents’ worth of gains and rose to near $13.89 per ounce.

Platinum climbed $24 to $1205.00 bid, and palladium was seen adding $5 at $262.00 per ounce. Automotive world news show that Americans are sitting on a huge pile of clunker cars. More than $1 billion worth of old guzzlers have been turned in thus far during the Obama C-4-C program, exhausting the money rather quickly. Like, in six days (!)

The entire program is now in jeopardy, after having resulted in the sale of nearly 23,000 better cars to former clunker-drivers. Just think: between new, shiny, efficient cars, a mandatory national weight-loss program, plus a recommended living will in every safe, America may yet emerge victorious out of the real estate mess it got itself into. If only all the recovery ducks were lined up and ready to take fight in sync. May we have some more, (dollars) please, Sir?

The weekly Bloomberg gold survey points to a possible further easing in gold prices, come next week.

Surveyed participants expect the metal to possibly sink towards its summertime lows - possibly touching prices in the $860s in coming sessions, before a fall rebound takes place. After today’s price action, the survey seems a bit pessimistic but recall that it is normally taken on Thursdays. Analysts at the BullionDesk opine that a deep correction could still be in gold’s cards before the leaves come off the trees.

Something that will indeed come off, is some gold from the IMF’s balances. Something else that has already apparently been coming off is gold scrap flows. Here are reports on both topics, straight from the Bloomberg terminal:

  1. “The International Monetary Fund will probably sell 200 metric tons of gold annually starting next year, “potentially weighing on prices,? Citigroup Inc. said in a report e-mailed today.

    Gold will fall to $850 an ounce in the second half of 2010, Citigroup Sydney-based analyst Alan Heap wrote in the report. The IMF board will approve a gold sale before its annual meeting in October, Reza Moghadam, director of strategy, policy and review, said on July 29. A planned sale of 13 million ounces (403 tons) was accepted by the U.S. last month.

    “We believe the sell down will likely begin in 2010 and see around 200 tons sold per year, potentially weighing on prices,? Heap wrote in the report.
    Gold for immediate delivery rose 91 cents, or 0.1 percent, to $935.32 an ounce by 1:27 p.m. in London. The price may rise to $1,000 in the first six months of 2010, according to Heap.

    The IMF owns 3,217 tons of gold, the third-largest holder of gold after the U.S. and Germany, according to data compiled by London-based research company GFMS Ltd. A sale of 200 tons would compare with 246 tons disposed last year by central banks, according to GFMS.

    European central banks have an agreement to limit their gold sales to 500 tons a year, and that arrangement expires in September. A new accord has not been announced.

    “The central bank agreement is expected to be renewed after it expires in September, although, in our view, it could now perhaps afford to be more relaxed in terms of annual limits and allocating quotas,? Barclays Capital analyst Suki Cooper wrote in a report today.?

  2. “Gold sales in the form of old jewelry and other used pieces of metal probably dropped to about 350 metric tons in the second quarter as some owners declined to sell at lower prices, GFMS Ltd. said.

    Total scrap sales fell “over 40 percent? from the first quarter as disposals in Turkey “dried up,? GFMS said today in an e-mailed statement. Bullion prices in the country declined 4 percent in the second quarter from the prior three months, said Philip Newman, an analyst at the London-based metals researcher.

    “In Turkey, they got used to the high price levels,? he said. “You would require a return to prices that we saw in the first quarter, or higher than that now, to see scrap come out again. In the U.S., scrap was not down. The recession is still there.?

    Scrap sales were a record 1,218 tons last year as the world recession spurred some owners to raise cash and others took advantage of higher prices, GFMS said in April.

    Gold for immediate delivery rose to an 11-month high of $1,006.29 an ounce in February as investors sought a haven against stock-market losses. By April 17, the price had dropped to $864.97.

Watch for a bit more book-squaring, and the final July tally. As summer doldrums go, gold did not fare badly. But summer ain't over yet even though the livin's been (relatively) 'easy.' The dollar-centric gold game continues. Bon Appetit.

Have a pleasant 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.