Scrap Hit the Fan Last Year


By Jon Nadler

Apr 7 2009 4:46PM


Good Afternoon,

Gold prices were hard at work on Tuesday, and managed to recapture about 1.25% in value, remaining however under the key $885-$895 area. Most of today's gains were the result of a combination of bargain hunters, specs buying on the heels of perceived oversold conditions, and jitters related to US earning season getting underway. The Dow was off nearly 200 points on such earnings-related nervousness.

Alcoa Inc. will lead the pack of upcoming reports, having been hit with a double-whammy of soaring energy costs earlier last year, followed by imploding demand for industrial metals in the period just prior to now. The firm's stock has wilted by about 80% during the last year. Hungarian compadre George Soros feels that the rebound in equities (best since 1933) will not have the legs required to carry it very far. Top US CEOs see further gloom ahead for the US economy. for at least the next half a year. The Fed (as we wrote on Monday) is still battling the "D" theme.

In the background, there appeared to remain few -if any- questions about GM going into bankruptcy. Soon. The Ottawa government is ramping up preparations and contingency plans for the sure-to-be-affected firms of such a move up in the Great White North. Meanwhile, leave it to GM to roll out interesting conveyances such as a two-person, two-wheel Segway at hour 11:59 in its life. For shame.

New York spot gold dealings continued on the plus side in the afternoon hours, and were last seen near 881.50 per ounce as the trade attempted to erect some more scaffolding around the metal and keep the repairs going. Silver climbed 12 cents in the afternoon, to come near $12.25, while platinum surged $22 to $1163 per ounce. Palladium gained $2 to $224 per ounce. Scotia Capital believes that the noble metals complex may be setting itself up for an unpleasant surprise, following the current period of re-stocking by industrial users. A bear-market rally, this - they say. The onus will remain on the investors henceforth. Pretty much the same picture in gold as well.

Why is that? Because the underlying market still exhibits signs that would have gold prices at substantially lower than current levels (at least 20% lower) were it not for the continuing appetite among worried investors. And, even that appetite has take a severe hit following gold's refusal to perform in the face of the 'perfect storm.' A storm which is now, largely, but a tropical depression. Okay, let's not use the word 'depression' too lightly here. Let's look at the facts, instead. One of the most telling ones, that of the number of ounces coming from scrap supplies.

London-based GFMS observes (via Mineweb) that secondary gold flows:

"Rose 27% to 1,200 tonnes in 2008 as consumers benefited from arbitrage opportunities in local versus global markets. Scrap supply surges on waning investors’ interest towards gold and other asset classes look more profitable.

The survey shows higher levels of gold recycling in 2008, largely because of profit taking and distress selling by individuals, although the retail trade and manufacturers also melted larger quantities of unsold jewellery.

The most significant increase was reported by Turkey due to a combination of soaring local prices and the economic downturn, which saw the country achieve a record level of recycling in 2008. High local prices were also a key driver in other countries, such as India, which saw its recycling rise by nearly a quarter last year."

Let's see: nearly 39 million ounces of gold made their way into furnaces last year, keeping refiners...fired up, 24/7. Investment demand -great as it was (albeit lower than in 2007, and turning to net dis-investment in Q3 2008) amounted to 16.6 million ounces in GFMS' report. Fabrication went into a black hole, and it was a global phenomenon. Of course, India contributed significantly to such a fall-off. However, the Middle East was doing its own share of the damage.

Yes, it appears gold failed its own 'stress test' recently. Probably on account of the fact that the Fed, the G-20, and the IMF passed theirs. As regards the banks, let's see the results this week. We see a mixed bag in the making. Profuse sweating, rapid heartbeats, and some clogged credit arteries will be on tap as the patients run on the treadmill. Beta-blockers are on tap and the pharmacy that the Fed and the Treasury represent for the financial sector.

For the moment, resistance in gold is seen overhead near $895 and selling into that level was recommended by trading-oriented gurus such as Dennis Gartman. We will not turn neutral on the metal until and unless it takes out such layers of resistance overhead. As for the $1100-$1200 target, well, you tell us what kind of news such a pop might require. Seems they have already been published. Might we get those numbers fulfilled? Has risk gone from the system? Are those pointless questions? The real one is - how long (if achieved) will such conditions last? It could be measured in hours. That covers the short-term buyers/sellers.

But, what of the longer-term accumulators? Well, they might wish to get used to the idea that the 400-odd tonnes that will come out of the IMF's coffers will roughly correlate to a $100 discount against where bullion prices might otherwise find themselves over the next 24 to 36 months. The folks at Goldman call this a 'limited' impact. However, when coupled with the potential for additional tonnage coming onto the market from the gold ETF (and, come it will, in a down-phase) we could make a case for an additional $100 discount against where values might otherwise be found.

Thus, the $630 to $980 range we projected in late December could turn out to be a conservative one. As such, the far-horizon holders should welcome stability and a price orbit around equilibrium levels (now near $650, formerly near $425 for three decades). Let other assets do the volatile mambo, while gold anchors a portfolio and provides enhanced returns and lowered risk. That said, do not overload on a good thing. Even if you are still convinced that this whole crisis thing is going open the gates of Hades.

Now, for some of the good news. As values stabilize, and as the crisis clouds roll away, buyers -important buyers- will once again emerge in gold. Prosperity and tradition-motivated buyers. Indian savers, Chinese yuppies, Western designers and fabricators, and other similar takers. They will once again provide a counterbalance and a structural glue that will make for a healthier market.

Over to Barclays and a bit of technical blueprint analysis. Yes, we could also quote Merv Burak or Elliott Wave - but you can find those tea leaves in the Kitco commentary section. For now, let's have a look at the head-and-shoulder pattern and examine the price dandruff fallout from same. It is, at the moment, the number one concern for gold players. All other factors are on the 'keep warm' shelf. Courtesy, Bloomberg:

"Gold may extend declines after failing to hold its break above $1,000/$1,040 an ounce, Barclays Capital said, citing trading patterns. Combined with the recently completed “head and shoulders” top, this suggests gold is likely to “head lower in range” in the near term, Jordan Kotick, New York-based global head of technical analysis at Barclays Capital, wrote in a note e-mailed today. A head and shoulders pattern is a peak, followed by a higher peak, then another peak. It forms after an uptrend and once completed, gold should move lower.

“We are disappointed by the move below $882, as this has alleviated the bullish potential we previously noted for the months ahead,” Kotick wrote. “Our preferred wave count suggests further corrective activity this quarter,” he added, referring to the Elliott Wave Theory. Gold for immediate delivery gained as much as 0.7 percent to $875.20 an ounce today, and traded at $874.70 at 9:14 a.m. in Singapore. The metal dropped to $865.49 yesterday, the lowest since Jan. 23, and 14 percent down from this year’s high of $1,006.29 on Feb. 20.

“While capped by $900, the risk is for further weakness to a swing target near $845, or even a measured move at $805,” wrote Kotick. “In the bigger picture, we are holding onto our view of a move to $1,200, though this is now likely a story for the second half of 2009.”

We will certainly contribute a second-half projection of our own, come the end of June. In the interim, let the participants duke it out and the forces at work... do their work. Do not, repeat, do not let go of the core 10% under any circumstances short of Chapter 11. As GFMS put it this morning, the game is about capital preservation, not capital gain. It's what gold has been all about, all along, but was recently (two years at least) disregarded as a result of...something else that's ages-old: temptation.

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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