Truth in Numbers


By Jon Nadler

Feb 17 2010 8:51AM


Good Morning,

Gold continued to orbit near the $1120 level during overnight trading overseas, as the US dollar regained a bit (0.21 on the index) composure following yesterday’s slide that brought it near the 79.60 zone rather swiftly. An overnight/early morning high of $1128.00 basis spot offer was recorded in the yellow metal as one sizeable wave of buying rolled through the market around the 8 o’clock hour. Bullion prices last traded at near that number during an early February rally. Physical demand was slack in overnight dealings, as locals in India were seen holding off for sub-$1100 bargains once again.

The steadiness in gold reflected the combination of US dollar consolidation patterns and the intense investor focus on the euro. Although no concrete problem-solving announcements made their way into the financial press over the past couple of days, there are some rising perceptions that the common currency had been oversold (literally). At last check, the euro was trading at 1.372 against the greenback. Risk appetite was also manifest in crude oil values, which were last seen at just above the $77.50 level following yesterday’s rally.

New York spot dealings for the midweek session opened on the plus side for the precious metals complex. Gold added $2.60 to open at $1120.40 per ounce, and silver rose 7 cents to the $16.18 level. Platinum gained $2 to start at $1540 while palladium climbed $6 to reach $437 per ounce. Rhodium showed no change at the $2350 per ounce figure.

The immediate-term technical picture, as brought to us by our friends at Gold shows that a successful demolition of the $1126.40 level would brighten the skies and potentially open the possibility of a reach for the $1144 or perhaps the January 11 rally high of $1166.80 an ounce. Players will be gearing up for key US inflation data due over the next couple of days as well as keeping an eye on any statements coming from Europe on the issues that continue to unnerve many.

Market focus for the moment will remain on the dollar/euro pair to be sure, however, today’s release of the last Fed meeting minutes could also offer and opportunity for some trades, based on how market pundits view the contents of said meeting, and what they might reveal about the state of mind of the US central bank at this time. There certainly is no perfect harmony within the Fed.

Kansas City Fed President Thomas Hoenig brought such realities to the forefront just yesterday, when he bluntly asserted that: "In time, significant and permanent fiscal reforms must occur in the United States, and I much prefer this be done well before anyone feels an irresistible impulse to knock on this central bank's door." Mr. Hoenig was referring to what he sees as necessary adjustments that the US government should undertake in both its spending and taxation programs.

“Hoenig grabbed attention late last month when he was the lone dissenter from the latest statement about the economy from the Federal Reserve. He called on the Fed to scrap its language to keep rates low for an extended period. But he didn't demand an immediate rate hike to end the central bank's zero interest rate policy. It was the first dissent in a year.” – observed Marketwatch’s Robert Schroeder in yesterday’s article.

This writer remains of the opinion that, not only are higher interest rates coming to the US in the not too distant future, but that higher taxes will become part of the picture as well. US President Obama has proposed certain freezes and some cuts and is studying ways by which to further slash the more than $1.5 trillion deficit that some computations point towards in the current fiscal year.

Well, today’s focus section is on the release of the Q4 and full-year gold demand trends publication as offered by the World Gold Council. There certainly is an ample supply of both encouraging as well as some disquieting facts and figures in the 25-page booklet.

At the very least, the numbers will offer no wiggle room for market pundits who would like to try to shade the big picture in order to sell more newsletters (among other things). Without further ado, let us delve into the WGC’s findings as regards the last trimester of 2009, and the last calendar year as a whole:

Item: The volume of total identifiable gold demand during 2009 was down 11% on 2008 levels at 3,385.8 tonnes .Tonnage demand in Q4 was down 24% versus Q4 2008. To state that the fall-off in off-take was related to the record high prices that gold witnessed during the calendar year, is to state the obvious. None of this means that publications which boldly declare that gold demand is at some kind of stratospheric –no, make that outer space- demand level, have stopped churning out their propaganda, or even temper it a slight bit.
Item: Identifiable investment in 2009 was up 7% relative to 2008, the only sector on the demand side to record positive growth. Recall the recent Citigroup research analysis (among other similar findings from GFMS, VM Fortis, TD Bank, Nomura, etc.) which pointed out just how dangerously dependent the gold market became on investment demand during last year. And when we say ‘investment demand’ we mean the western variety almost exclusively. Aside from China, non-western investment demand was dormant.

Item: Industrial, dental, and jewellery demand recorded declines of 16% and 20% respectively. China (as was the case with investment) was the only major jewellery market to post an annual growth in tonnage. Invariably, this raises questions as to what happens if China slows down, or if Chinese spending contracts in the wake of curtailed lending and/or possible bursts in certain sectors that have been identified as bubbles (manifest, or in the making).

Item: Bar hoarding, which largely covers the non-western markets, experienced a significant decline in both annual terms and in Q4 relative to Q4 2008. At 169.9 tonnes, bar hoarding was less than half of 2008 levels (recorded at 392.2 tonnes).

Item: What the WGC calls “net retail investment” was down 22% in 2009 versus 2008 levels, and it amounted to 676.2 tonnes. Total identifiable investment in gold in Q4 (at 219.5 tonnes) was down 50% on against Q4 of 2008. This, at a time when gold reached a pinnacle of $1225 per ounce and you were told that gold shops offered empty display cases? Sure, if you were living in the USA where the net retail inflow increased by 104% from 19.0 tonnes in Q3 to 37.3 tonnes in Q4.

Or, perhaps, you were in Europe, where investment flows also enjoyed a solid gain from 49.7 to 56.9 tonnes, with Germany, Switzerland and the other European countries all contributing (except France, which turned into a net seller in H2 of 2009). Note that, in the meantime - and at the same time – Chinese and Indonesian investment experienced tonnage declines from the previous quarter.

Who recalls reading about the ‘insatiable’ gold investment demand of 2009? You do. If only the writers of such large font headlines had cared to specify the fact that it was in the form of futures and options contracts, and other paper plays. The 2009 cake however was taken by India (another incessantly mentioned country in certain publications) –as its net annual investment demand was down 136.8 tonnes. Selling into price strength? What a concept. Buying into rising prices because Glenn Beck is scaring the daylights out of you? What another concept…

Item: Gold supply in 2009 was up 11% against the levels seen in 2008, with the single biggest contributor being scrap flows, but with mine production also making a sizeable positive contribution. Mine production was up 6% on the year, to 2,554 tonnes. Again, none of this hard numbers-based reality has stopped the flow of so-called market analyses and sensationalistic-oriented newsletters from flat-out hypnotizing their readers into buying the ‘peak gold’ argument that eventually took on all of the trappings of the previous year’s ‘peak oil’ noise. The above-mentioned market fundamentals are not what a gold bull market is defined by.

Tomorrow we will focus on the two (and pretty much only) bright spots in the WGC’s report: central banks and ETFs. There is plenty of’ red meat’ and diverging views to bite into on those two fronts, as well.

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.