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Jon Nadler

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Dubai, Mumbai Cry: Oversupply!

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jun 3 2009 3:42PM

Good Afternoon,

The first real day of corrections in the hitherto apparently unstoppable gold price took a toll on values today, and the action was once again precipitated by background countermoves in the US dollar and in crude oil. The greenback regained a full point on the index, rising to 79.53, while black gold caved under massive selling pressure and lost $3 for the day, sinking to $65.55 per barrel.

Commodities, as a group, headed for their largest decline in six weeks today, as various news bits undermined the wild abandon with which spec funds had thrown money at the niche since the beginning of May. One could say that a dose of reality set in today, and that it was clearly overdue. And, yes, we were proven wrong in guessing on Bloomberg Radio early Monday that 1K was but a matter of hours away. Even if we opined that subsequent sustainability was the key issue, and not the achievement per se.

Mind you, gold should have continued the party which appeared all set to catapult it back to the 1K level and perhaps a tad beyond. This, on account of Bernanke-originated comments about deficits and the US, alone. You do not often get a more goldbug-friendly set of warning words than those issued by Mr. B today. And yet,...the markets (and not just the gold one) stalled.

The Fed Chairman commented on how the large U.S. budget deficits threaten financial stability and warned that the government can’t continue indefinitely to borrow at the current rate to finance the shortfall. In so many words: “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,? Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.?

To be fair, Mr. Bernanke also said: “I am comfortable with the policy actions that the Federal Reserve has taken. We are comfortable that we can exit from those policies at the appropriate time without inflationary consequences.?

But, markets worried about immediate conditions today. Friday's jobs numbers, today's ISM service sector numbers, and overbought conditions in recovery-anticipating commodities all conspired to take some of the rich froth off of these areas. The Dow lost 133 points, and was certainly not left out of the selling party that took place on Wednesday.

The latest market observations showed gold losing $18 (1.83%) on the day, and quoted at $963.10 basis spot. Silver, the ever out-performer in the event of significant moves, fell 71 cents and behaved like the industrial commodity it really is at the end of the day. The surprise for the day - all things considered - was that platinum lost only $3 and palladium dropped $6 on the day. Last quotes indicated $1236 and $241 respectively.

While we did yet not get any Congress-issued decisions on what to do about IMF gold sales, there could be one other bit of fundamental news that could have had profitable longs go running to cash some gold chips in today. The news concerns the same conditions of market disarray in the area of fundamentals, that we have been alluding to, since quite a few months now.

Two Commodity Online stories hit the wires yesterday, and they both present a significant amount of concern as we move forward. Ignore them if you will, deride this writer for pointing them out, if you will. The facts remain as plain as daylight, and they matter very much, indeed. Even if the two news items are paying attention to the strong investment demand outside of these key areas. This, is what you should know.

There is no fuzzy math to be done here, we must have solid proof that investment demand will remain extremely robust, and that it can mitigate (and then some) the rising tide (and pile) of gold coming from the M.E. and India. In other words, that all, or more than what is piling up, can and will be melted into bars and coins, for which there will remain eager buyers locally as well as worldwide, at current high prices, or higher. We simply do not know who can promise you such an equation, for how long, and under what specific circumstances. We do know that some people want you to ignore this reality and focus on the only gold price driver that they believe matters. We happen to believe in more than price drivers around here. Like market dynamics and the ebb and flow of the metal itself out there.

Item 1.

"DUBAI: High gold prices coupled with economic miseries brought about by the global financial crisis are forcing people to sell their old gold. 2009 is the year of scrap gold and look at the Middle East bullion market if you need any proof.

Even as gold prices continue to march ahead to a record $1000 per ounce, scrap gold and jewellery items are flooding the bullion market across the Gulf nations. Gold refiners in Dubai and other cities in the Middle East are these days buying/importing big quantities of scrap from foreign destinations such as gold consuming countries like China and India.

“It is boom time for old gold. Tonnes of scrap gold are arriving in several Middle East cities including the gold hub of Dubai. Gold refiners and jewellers are depending on scrap gold sold by cash-strapped consumers from countries like India and China,? Dubai-based bullion analyst Mark Robinson told Commodity Online.

He said at a time when gold prices are ruling around $1000 per ounce, old gold has become the most sought after commodity in the bullion market now. Recently, global bullion consultancy GFMS said that around 500 tonnes of scrap gold was sold in the Middle East markets in the first quarter of 2009.

High levels of scrap sales are particularly being reported in the Middle East where such sales have risen 140 per cent in the past six months. In normal circumstances, 500 tonnes is the annual sales figure for gold scrap. In fact, for the first time in the past three decades, the amount of scrap sold has exceeded the amount of new gold bought.

However, demand for gold jewellery has ebbed across the world. The World Gold Council recently announced the demand for gold as an investment product has surged the highest in the Middle East triggering sales of scrap gold. According to market reports, demand for gold as investments has risen more than 140 per cent in the first four months of 2009 in the region.

GFMS said gold prices will average at $908.41 an ounce this year, up 4.8 per cent from 2008. Prices may cross the $1,000/oz mark this year with $1,100 an ounce a real possibility. Evaluating markets in long term, a weaker US dollar and a potential build in inflation are likely to cause investors to increase their exposure to gold, ushering a rally into oil prices.

Official sale of gold will remain weak in 2009 as CBGA (Central Bank Gold Agreement) sales will remain below quota, GFMS said. Robison said that nearly 500 tonnes of scrap gold have entered the Middle East market in the first quarter compared with around 300 tonnes for whole of last year. He said refiners make anything from scrap gold and jewellery items including melting them into gold bars and coins.

Item 2.

MUMBAI: As global gold prices continue to remain on record highs, the Indian bullion market is caught in falling jewellery sales and plunging imports of the yellow metal. But scrap gold sales in India are picking up thanks to high prices.

Gold imports by India, one of the largest consumers and importers of the yellow metal in the world, for the first five months of 2009 remain around 47 tonnes, far below the imports of the yellow metal that the country used to have in past years. In 2008, India's gold imports had stood at around 400 tonnes.

According to figures from the Bombay Bullion Association, gold imports in India have been dropping thanks to high prices of the yellow metal. Global economic meltdown, uncertainty in stocks and commodities markets and volatility in gold prices have had a major impact on India’s gold imports in 2009. In January, gold import by India was a paltry 1.8 tons against 18 tons in January 2008. In February and March, gold imports by India fell to zero levels, the worst in the last one decade.

In April, gold imports picked up momentum, largely thanks to the ongoing marriage season and gold buying religious festivals like Akshaya Tritiya. In April, India’s gold import was around 30 tonnes. In May, gold imports fell to around 15 tonnes.

Suresh Hundia, president of the Bombay Bullion Association says gold imports are falling as prices have gone up this month. "If gold prices go any higher, imports will stop and scrap selling will start,? he said. Last month, a bullion research report from Commodity Online had said that India will have the lowest gold import in 2009 in the last eight years.

?We expect gold imports by India to be sluggish in 2009. There will not be much momentum in gold sales and imports in the country thanks to the high gold prices, volatility in markets and global economic conditions,? says Nitin Khanna, bullion research head at Commodity Online.

Khanna has predicted that gold imports by India could stand around 200 tons this year if this trend continues. He said gold imports and sales will gain in the months of August, September and November thanks to festivals like Diwali and Onam. “However, current bullion trade scenario suggests that countries like China will import more gold than India,? he said.  Following are the Commodity Online research findings on India gold imports:

**In the last eight years from 2000, gold imports by India every year have been between 400-800 tons. In 2008, India’s gold imports dipped by 45 per cent to touch 450 tons. **India managed to import only around 32 tons of gold during January, February, March and April, 2009. **Buying of gold jewellery has fallen sharply in the last four months leading to a slump in the yellow metal’s imports.

**Bombay Bullion Association assessment says gold sales and demand have dropped to negligible levels because of high prices and gold and jewellery sector is reeling under a crisis because of high prices and retrenchments across sectors. **Current gold prices in India are hovering around Rs 14,000 for10 grams. Bullion traders expect gold prices could zoom to Rs 15,000 per 10 grams in the coming months, leading to a dip in gold imports.

**Fall in gold demand has been thanks to high prices of the yellow metal. Gold prices have moved up as investors found heaven in the yellow metal on fear of deflation. But even though investment in gold looks attractive, many investors have been struggling for survival after they lost money in commodities and equity markets.

**Gold prices could zoom to higher levels because of the dollar-euro movements on weak economic fundamentals. **One major reason why gold imports by India are plunging is because Indian banks have a lot of carryover gold stocks from last year resulting in lower imports."

And so it goes.

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.