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Baubles Sell, Bubbles Swell

By Jon Nadler       Printer Friendly Version Bookmark and Share
May 27 2010 9:15AM

Good Morning,

As has frequently been the case of late, reports that surface one day regarding what China might or might not do about it vast forex reserves, were dismissed the following day by…China itself. In this case, Wednesday’s headline “China Reviews Eurozone Bond Holdings? (posted by the Financial Times, no less) turned into “China Stands Pat on Reserves Policy? (thank you, Reuters). Perhaps someday, someone will figure out how book-talk becomes news. Until then we have speculators who enjoy an occasional ‘manufactured’ set of temporary conditions which play straight into their hands.

The euro turned higher, as did European equities, as did Dow futures, following the logical denial coming from China. The country obviously has no intention of self-inflicting collateral damage on an about one-third portion of its huge $2.4 trillion of reserves. Kind of like the late 2009 fall Internet-fueled urban myth about China dumping its dollar holding to buy…euros and gold (or so the story went, at the time). Nothing of the sort happened, but did it ever make for good forum-based chatter…

As the euro moved off its recent lows, the greenback turned lower this morning. A lot lower, actually. At last check the US currency was off by 0.73 to the 86.63 level on the trade-weighted index. The Nikkei Index managed a 117-point climb overnight. Talking about jittery markets would be to list a string of understatements and euphemisms. All of these markets are standing/sitting on a bunch of dimes, ready to turn with the next news item (if only the item were verified and real).

Meanwhile, Korean tensions remained visible on the world scene –albeit at a somewhat more muted level- as S. Korea prepared to take matters to the UN Security Council, but Russia and China adopted a ‘wait-and-see’ attitude vis-à-vis N. Korea. The former wants ‘100% proof’ that N.Korea sank its neighbour’s warship, while the latter said it was not ‘assigning blame’ in the naval incident that has sparked the current spat between the two countries. The turmoil on the Korean Peninsula is, in part, responsible for the three day-old bounce in precious metals.

Speaking of said bounce, it appeared to be extending into a fourth day this morning, save for gold, that is. Gold opened under the $1210 level but gains were still noted in the white and noble metals sectors. The latter are of course coming back from a savage thumping they received last week. Spot gold started at $1208.20 (after having once again attempted to overcome the $1220 level overnight) showing a $2.40 per ounce loss. Silver rose 20 cents to open at $18.25 the ounce. Platinum added $21 to rise to the $1540 mark while palladium climbed $13 to touch the $450 level per ounce. No change reported in rhodium at $2630.00 bid per troy ounce.

Overnight Indian demand was once again subdued, as fresh record prices (at 18,810 rupees per ten grams) kept buyers at bay. While the World Gold Council noted a sharp rebound in Indian gold demand during Q1 of this year, it also conceded that festival-related demand ahead of mid-May’s Akshaya Trityia was possibly much lower than expected, as price-sensitive Indians passed on loading up on record or near-record-priced trinkets.

Mineweb’s Lawrence Williams describes conditions in the Indian market here this morning and agrees that more anecdotal evidence will be necessary from the region in order to arrive at a complete and fair tally for Q1 and Q2. Until then, Mr. Williams notes that “overall gold's fundamentals have been thrown into disarray by global investment demand.? You’ve read as much, in these very columns. It does not go unnoticed. Thus, India will continue to be a case of price-driven (buying) ebb and price-driven (scrap) flow, no matter how certain press releases read on a given day.

Finally, some good news to report on the jewellery sales front. Luxury-goods purveyor Tiffany & Co. reported more than a doubling in its first quarter earnings compared to 2009. Strong sales (up 26%) at its flagship Fifth Avenue store as well as at those in its Asian stores (up 50%) showed that there are signs of life in the luxury-spending niche as the global recovery –fragile though it may be- takes hold. Now, if the global economy just does not fall into the dreaded double-dip…

We will not pass judgment on exactly what kind of signs the appearance of a three-part series on gold in the Wall Street Journal (!) or the launch of gold-spewing ATM machines at swanky hotels in the Emirates might represent. A poll of NYC cab drivers has already been taken by this writer and it tells one story. To be conveyed at a later date. Nonetheless, gold is good headline material. The WSJ’s Brett Arends says he made instant friends as well as instant enemies (welcome to the club, Brett) by writing parts I and II of his expose on bullion.

In part I of the series, Mr. Arends opines that the current gold chart looks much like the NASDAQ’s did in the 1990’s (in so many words, a bubble now, or a bubble in the making). He cites Harvard’s Niall Ferguson (a debt alarm-ringer like few others) as saying that “the time to buy gold was in 1999 not in 2010.? while at the same time allowing for the possibility that gold might just be preparing for the long-awaited lunar landing.

“There is, of course, no guarantee gold will turn into another mania. But the fact that we now seem to live in Bubblonia—the land of perpetual bubbles—would suggest there is a current opening for the role. And in many ways, gold may be well cast. It has a "This time is different" story line: The world's central banks are flooding the market with liquidity. That should inevitably devalue the currencies. Gold is the only "currency" they can't just print.

It has an army of true believers behind it, ready to claim each rise as a "victory" and to mock skeptics with the words "They just don't get it."And it's easy to untether from reality. You can't value gold by traditional financial measures, as it generates no cash flow. So there's plenty of potential to value it by other means. Eyeballs, anyone??

In part II, Mr. Arends frets about the uber-popularity of gold (see ATMs that spew ingots) and the fact that some folks are betting everything on gold even as it reaches the mid $1200s. Then, Mr. Arends takes a look at the market’s fundamentals. It always comes down to the fundamentals. It has to. Despite transitory events that make the whole thing appear as a one-way street. What does Mr. Arends find?

“If the price rises you'd think there must be a shortage. But data provided by the World Gold Council, an industry body, tell a remarkable story. Over that period the world has produced—or, more accurately, recovered—far more gold than anyone actually wanted to use. Since 2002, for example, total demand for gold from goldsmiths and jewelers, and dentists, and general industry, has come to about 22,500 tonnes. But during the same period, more than 29,000 tonnes has come on to the market. The surplus alone is enough to produce about 220 million one-ounce gold American Buffalo coins. That's in eight years.

Most of the new supply has come from mine production. Some, though a dwindling amount, has come from central banks. And a growing amount has come from recycling—old jewelry and the like being melted down for scrap. (This is a perennial issue with gold. I never understand why the fans think gold's incredible durability—it doesn't waste or corrode—is bullish for the market. It's bearish.) So if supply has consistently exceeded user demand, how come the price of gold has still been rising? In a word, hoarding. Gold investors, or hoarders, have made up all the difference. They are the only reason total "demand" has exceeded supply.

Lots of people have been buying gold in the hope it would rise. But the only way it can rise is if still more people buy it, hoping it will rise still further. And so on. What do we call an investment scheme where current members' returns depend entirely on new money brought in by new members??

Cannot wait for part III? Thought so.

In the interim, let’s just leave defining gold to the words of none other than James Turk, who has repeatedly warned that ‘gold is not an ‘investment.’ In fact it is a lousy ‘investment’ but a wonderful savings device –says Mr. Turk in his presentations.

Could not agree more. Got your 10%? Good. Then stop obsessing about the price, already.

Happy Trading. Or as RBC’s Olivia Burwood-Taylor brilliantly advises: “Live Long and Break Even?


Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
US & Canada Toll Free: 1 (877) 839-8036
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