Scrapped for Cash


By Jon Nadler

Aug 10 2009 4:29PM


Good Afternoon,

The US dollar rose today, as stock market declines in European as well as US equities reignited refuge-oriented demand from investors. The yen benefited from the flight to safety syndrome as well, rising for the first time in three days. The greenback climbed to 79.25 on the trade-weighted index, while black gold lost a bit of ground, declining to $70.79 per barrel. This background picture then set the stage for further losses in precious metals on this second Monday of August.

New York spot gold dealings opened with the metal only slightly lower this morning, off by $1.90 per ounce at $953.50 bid - the same figure that the London AM Fix came in at. We wrote this morning that: “following last week failure to clear the mid-970s, bullion is retracing at least part of its steps and is apparently aiming towards the $935/945 area as a first target.” Such a short-term weather forecast indeed materialized during the course of the day, and gold fell to a low of $941.60 during the session. At last check, the yellow metal was quoted at exactly $945 per ounce, sporting a loss of $10.40 (1.09%) on the day. The previously much-ballyhooed $965 area is now more than $20 higher. The gold ETF has lost some 66 tonnes since its peak balances were recorded on June 1st.

Our friends over at have dissected to COT reports up through August 4th, and have concluded that: "the renewed uptrend in gold to $950+ has seen its origin mainly in speculative long positioning and short covering, with these position indicators again entering over-extended terrain, and not boding well for a sustainable run higher. The risk for corrective dips has again increased dramatically." The team also noted that: “Gold holdings on behalf of investors in the ten (eleven) by Goldessential monitored bullion-backed exchange-traded funds were seen dropping 4.397 tonnes on Friday, August 7. The drop was the consequence of a decline of 127,588 ounces or 3.968 tonnes in the SPDR Gold Trust and a drop of 23,864 ounces or 742.27 kilos in the London-listed Gold Bullion Securities. A rise of 10,091 ounces or 313.87 kilos in the ETFS Physical Gold trust failed to offset the decline.”

Silver opened with a 9-cent loss this morning, quoted at $14.51 per ounce. Its losses intensified as the day wore on, with the latest check of the scoreboard showing a 23-cent decline at $14.37 per ounce. Meanwhile, platinum lost $20 at the start of the trading session, and was quoted at $1243 an ounce, but later made back $4 of those losses. Palladium dropped $3 to start at $271.00 in New York, and then narrowed the drop to but $1 for the day. US auto dealers report fast-depleting inventories in the wake of the CFC programme, and may need a month or two to rebuild them with the upcoming 2010 models. Volatility will continue to buffet the noble metals group, as spec funds are still seen pushing prices aggressively within the $1200 to $1300 range.

In any event, the focus was hardly on today's stock market headlines, as the Fed gets ready to meet on Tuesday and Wednesday. Players were watching for pre-Fed punditry and taking note of the upcoming sale of $75 billion worth of notes and bonds that come to market this week.That is the kind of material players are evidently awaiting in terms of its impact on the greenback. The Fed is now seen as having moved on by a couple of mileposts, and to be tackling nagging issues such as the poor health of commercial real estate and the drag it places on the US economic recovery. Meanwhile, the euro's rise against the greenback is now seen as largely over and traders see only limited upside in the common currency, as the region's economy is lagging behind that of the US in terms of recovering.

As things stand right now, the US currency may yet receive a mixed bag of Fed-related news. On the one hand, the central bank is seen playing down talk of interest rate hikes for the moment. This, despite markets that show, as well as have evidently already priced in, expectations of rates at up to 1% circa one year out. On the other hand, the Fed is also expected to let its so-called debt 'monetization' run out by the end of next month - it will likely not buy anything more in terms of longer dated bonds than the $300 billion originally allotted. Thus, the hyper-inflation alarmists can go back to snoozing as far as this topic of worry is concerned.

Last week's CBG Agreement is still generating a good stir in the proverbial pot of gold. While the usual suspects- the perma-bulls- are reading nothing but blessings into the self-imposed 400 tonne sales limit by central banks, others see some different risks in the decrease in liquidations. Philip Klapwijk, the Chairman of GMFS, said on Friday that "the omission in the latest version of the CBGA of references to gold leasing and the use of gold futures and options also "opens up some interesting possibilities. There is a reasonably convincing case for central banks with large gold holdings which under certain circumstances they might be prepared to sell to try and generate some sort of income on those holdings through the use of derivative instruments. This has opened up the possibility for European central banks to start using these derivative instruments."

At the end of the day, the idea (as well as the practice) of using one's gold reserves to raise cash -either by direct sales, or by employing derivative tools- is nothing new. Whether or not one approves (philosophically) of central banks being in the business of 'making money' is another issue altogether. And, make no mistake, we did write last week, that the agreement certainly removes some element of risk and uncertainty from the gold equation, and probably offers a firmer foundation for the metal at the lower end of the price scale- wherever that may lie (from $650 on up).

However, the fact also remains that parts of the official sector have been doing this (using derivatives against gold holdings as a revenue-generator) and will continue to do the same, whenever their pocketbooks appear to be slimming down a bit more than intended. We see central banks as part of the fabric of this market -neither friend nor foe - just an integral cogwheel. Like, say scrap sales.

Speaking of which, GFMS (as well as us) have often felt that the fundamental elements of old scrap and jewellery fabrication can (and do) get unfairly ignored by certain market pundits, for whom the gold price is solely a function of what is happening in the investment arena. Fat chance. Mineweb fills in the details and we conclude that scrap deserves a whole lot more respect than it gets. Perhaps the very name might need a revamp:

"The London-based metals consultancy believe this was amply demonstrated in the ?rst quarter of this year when ‘western' investment soared to over 700 tonnes, or more than four times volumes of the same period a year earlier, yet the price failed to breach the $1,000 mark, let alone  establish fresh record highs.  The reason for this ‘under-performance' GFMS believe is what happened in the physical market, with jewellery fabrication slumping and scrap soaring.  This generated the unprecedented situation of major fabricating countries such as India, Turkey and Italy exporting surplus bullion onto the world market.

Provisional ?gures from GFMS for the second quarter show a very different situation for scrap, with this having fallen by over 40% from ?rst quarter levels to around 350 tonnes.  This might surprise some given that the dollar gold price was slightly higher in the second quarter than in the ?rst and the consultancy points out that average prices in local currencies did not behave that differently. 

One reason for the retreat was said to be a large slice of near market supplies having already emerged.  Tied in was the role of expectations - GFMS noted that many consumers in India believed the price had reached its peak in the ?rst quarter and rushed to sell even though the second quarter rupee price actually rose in comparison to the ?rst.  Another important player was Turkey. Philip Newman, research director with responsibility for that market, commented, "We started seeing an out?ow of material during the fourth quarter as prices began climbing.  This then soared in the ?rst quarter but in the past couple of months it's dried up".

Detail on these ?rst half statistics and estimates for the second half will be published in GFMS' Gold Survey 2009 - Update 1, to be released on 14th September but Philip Klapwijk, chairman, noted now, "we could see a bit of a lull over the rest of the summer, but that still leaves us with plenty of potential for a fresh surge in scrap should the gold price start to get exciting again.  And so it's difficult to see how another record year for scrap can be avoided - but quite whether it reaches levels big enough to derail any price rally is a hard one to call". Klapwijk also added, "there are some interesting features to scrap looking further ahead - what role does the growing pool of product have?  Will the shift from plain to gemset materially dent volumes?  And what about scrap from non-jewellery sources?"

At this time, the continued focus on India, scrap supplies, and central banks is well-advised. Reports that the below average monsoon season could trim as much as a full percent from the country's 2009 growth rate. How the situation will play out when the festival season rolls around later this year, remains uncertain. High gold prices -should they persist- could create a double-sided problem. Scrap sales coming into the market at a time when seasonal demand might possibly be impacted by a monsoon-related drought of disposable cash might indeed leave the onus in this market squarely on the (apparently) tired shoulders of investment demand.

And now, a small visual footnote from last week’s travels:

A member (who would only identify himself as “Croc”) of the Down Under Chapter of Gold Always Triumphs in Australia attempting to convince the writer that gold is still being manipulated.

Happy Monday.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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