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Lakshmi's Goal: 20,000 Tonnes

By Jon Nadler       Printer Friendly Version
Mar 5 2009 4:21PM

Good Afternoon,

Gold turned higher, much higher, for the first time in nine sessions today. Yesterday's stock market rallies around the world gave way to furious selling on Thursday, as disappointment over China's spending programs replaced euphoria seen on Wednesday, regarding the same. Once Chinese officials clarified the substance of the economic revival effort, it became apparent that they were simply rehashing 'old news' and that no additional wads of money were being readied for launch at this time. Perhaps later in the year, if conditions warrant. Guess we should say 'when' they warrant.

Couple such a "letdown" with the emerging realization that GM might just stand for "Gone to Mortuary " and you had the makings of renewed jitters among investors. Not to mention (but mention we must) the 98-cent per share price for Citi stock. Why, you could buy 949 shares of the bank with an ounce of gold today. A year ago to the date, you could have bought 44 shares of same. Things are getting uglier by the day. Today we came into possession of a US map showing the Madoff victims' locations. We lost count of the dots. Loud voices are calling for the ouster of BofA's Ken Lewis. BofA/Merrill refuses to disclose who got bonuses just prior to the Merrill adoption by the bank. Perhaps they took a glance at the pitchforks being waved outside corporate headquarter windows. And now, we have started to notice an increase in Google mentions for GE. Nothing, but absolutely nothing is safe from the firestorm.

If it's Thursday -central bankers concluded - it must be rate-cutting day over in the Old World. Spooked by crumbling internal conditions, the BoE and the ECB took out the big scissors and they both cut rates to record lows. Only - in the case of the BoE- such a record goes back to...1694, and the cut comes with promises to buy $105 billion in assets. The ECB's cut to a record low of 1.5% has not yet been assigned the 'quantitative easing' label, but it would surely appear that the Trichet troops are slowly (too slowly for some) warming up to the idea that such a trend needs to be adopted even by the steadfast holdout that the central bank has thus far been. Submerging economies have replaced emerging economies around the European Union, and things do not look a whole lot better on the home front. Well, at least they still have some wiggle room left. The Fed no longer enjoys such luxuries.

New York spot bullion rewarded today's session participants with a $23 -plus gain, quoted at $929.50 per ounce (at last check). Investors judged the recent losses (worst in seven months) as perhaps overdone. Thus, a repair of significant proportions was undertaken today. However, many players remain very mindful of the fact that further liquidations could be in the cards. Hurdles for bullion lie ahead in the road: first on the radar is the $940/$955 area. The rising tide of scrap metal supplies is also keeping the metal some $100 under its recent price achievement.

Actually, there is a serious internecine war possibly in the making in this gold market: Investors versus grandma's bedroom drawer contents. And, no doubt, one side is sitting on most of the "ammo." Guess which one. Bears watching on a daily basis from here forward. That, and the seasonality factor in bullion. Silver added 30 cents and rose to $13.21 this afternoon, while platinum added $16 to $1062 per ounce, but palladium remained steady at $196 per ounce - losing one dollar. Rumours of GM's passing continued to rattle participants. More than anything today, the 300 point cave-in in the Dow (to near 6500) sent investors under the nearest shelter they could find. Never mind any bargains, we only have so much money left.

Markets such as these are extreme. No surprise then, that they also elicit bold pronouncements and (what some see as) extreme views. Consider the following divergent opinions on gold and the contrarian view on silver offered up by various sources, as we round up today's rich herd of headline as well as food-for-thought-worthy news. The UK's Wealth Bulletin, Bloomberg, and Investors Chronicle contributed to this amalgam:

"HSBC Private Bank has reiterated its warning that investors could be caught out by putting too much faith in gold, amid economic uncertainty. The precious metal has dropped back from recent highs of $1,000 an ounce to $910 in current trading. Fredrik Herbrand, head of global strategy at the private bank, said:

"All that glitters is not gold. While the economic environment is gold-supportive, we believe that gold prices are more based on trends than fundamentals and may not sustain such high levels in the long term."

He pointed out that recession means demand for jewellery fell by 17% quarter on quarter between the third and fourth quarters of last year. Concerns about inflation have switched to worries about deflation which tend not to help the price of gold. He added the gold price tends to be volatile. According to traders, sales of gold exchange traded funds have ebbed away and hedge funds have been forced to close long positions to meet higher equity margin calls. However, there are plenty of gold bulls out there, whose opinions balance the bears.

According to Middle East research outfit Zawya: "It is not unrealistic to predict $1,200 an ounce in the next twelve months."

Zawya agrees gold is slightly overbought at present, but says the combination of zero dollar interest rates and the expansion of US national debt is set to lead to gold's resurgence as a safe haven alternative to paper currencies. It is increasingly being hoarded in emerging markets such as Turkey, Vietnam, India and Brazil during currency weakness."

“The government has created a massive increase in the monetary base, and it means we are entering a massive inflation cycle,? Michael Pento, chief economist at Delta Global Advisors, said in a telephone interview from Holmdel, New Jersey. “Inflation will be intractable. All of these commodities will start to act as an alternative to currency and start to pick up. Gold should be the primary investment, and energy and base metals should be secondary.?

"Gold may jump as much as 54 percent to between $1,250 and $1,400 an ounce by late 2009 or early 2010," Pento said. "Copper will surge 77 percent to $3 a pound," he said.

"The bulls are in the silver shop, with headlines shouting about silver's widest discount to gold for 13 years - quoting the ratio between dollar prices per ounce for the 'poor man's gold' and the genuine article as 72, compared with an average of 58 over the past two years. The theory is that simple mean reversion could spell some 'catch-up' for silver versus gold. But we doubt it. So far this year, silver has risen 18 per cent compared with a 5 per cent rise for gold. And there are plenty of cheerleaders. CNBC pundit Jim Cramer has said: "Silver has more room for growth than gold. There's a lot of steam left in the precious metals market, so that scenario shouldn't change anytime soon."

Shouldn't it? In the past 13 years, the discount was at its widest, with a gold-silver ratio of 85, last November. Since then, silver has gained 38 per cent compared with 16 per cent for gold, so a good portion of any mean-reversion has already taken place. Furthermore, the 20-year, rather than two-year, average gold-silver ratio is actually 68. But the real reason to be wary of silver is that, as Mr Cramer understands it, it will only gain anything in absolute terms if the whole precious metals complex, led by gold, continues to do so. And that's far from a foregone conclusion. Another average derived from the gold price which has proven predictive power, now suggests gold's surge could be running out of legs.

In January 2006, the ratio between the sterling-quoted gold price and the FTSE All-Share index was historically low, with an ounce of gold then buying just 11 per cent of the index compared with an average of 16 per cent since 1985. By January this year, gold had gained 54 per cent and the All-Share shed 29 per cent. So an ounce of the yellow metal now buys 36 per cent of the All-share. Based on past trends, that suggests a fall of 20 per cent for gold and a rise of 50 per cent for the All-share over the next three years. See Groundhog gold for more."

Perhaps the most neglected gold story of the day (perhaps of the year, thus far) comes from, courtesy of India's Commodity Online. Do not - under any circumstances - underestimate the potential implications of the news item. First, the content:

"India is all set to go for a gold hunt now. Concerned over its increased dependence on bullion imports, government of India has asked Geological Survey of India (GSI) to tap the countries potential to dig out gold and diamond reserves spread over several states. India is estimated to have 20,000 tonnes of gold and diamond reserves spread over several states. The Indian government has asked GSI to explore additional reserves of gold and diamonds in Andhra Pradesh, Karnataka, Madhya Pradesh, West Bengal, Rajasthan, Bihar and Chhattisgarh.

India has been the top importer of gold for several years and the Indian government is concerned over its over-dependence on imports for its bullion needs. The concern increased during the recession time when prices of gold shot up beyond $1,000 per ounce in the international markets. Moreover, gold has become the safest haven available for investors at present. The government has given GSI three years to explore the possibilities to tap the gold reserves. Now, India is estimated to have 14,000 tonnes of gold and diamond reserves which should be accelerated by 20,000 tonnes in next three years.

The government has also accorded the public sector company Hindustan Copper Ltd to diversify into gold and diamond mining in collaboration with leading foreign companies through setting up of joint ventures. The overseas firms that are in talks with the government for gold and mining exploration include Indogold, Anglo-American Gold Mining, Monarach Gold Mining, De Beers India Ltd, ACC Rio Tinto Exploration Ltd and BHP Minerals. The Indian government is taking all initiatives to channelise efforts in unearthing high value minerals like gold and diamonds. India imports Rs 65000 crore worth gold per annum as against Rs 75000 crore of diamond imports. India currently produces hardly 0.4% of its gold consumption despite having 9% of global gold reserves under the country's land mass.

Foreign companies rarely come to India because they cannot sell the data they map and can only utilise the information if they venture into mining themselves. Under the existing rules if any entrepreneur invests money and finds gold, then he must apply again for mining. However, the new mining policy is expected to open up the mining sector for foreign investment. Under the new rules, approvals for most minerals must be made in about a year or be automatically referred to a tribunal. International gold mining companies are looking for tying up with gold exploration firms in India to form joint venture and launch new exploration projects. Southern India's Deccan region has been surveyed as having one of the richest deposits of the yellow metal."

Witness the legacy of high gold prices. The world's largest gold consumer set to tap into its own source of the metal. It's only a blast away. Thirty-plus years' worth of 'average' Indian demand about to be tapped into. Suddenly, S.Africa, US, China, Canada, Australia -and others will need to court the remaining would-be gold buyers around the globe with some very sweet music. The sitar and the tabla could be sounding a very domestic tune in the near future. It may not unfold along as simplistic a scenario as this, but ignore the development only at great risk.


Until Friday,

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.