A (Re)balancing Act


By Jon Nadler

Jan 4 2011 12:04PM


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Gold prices fell well under the $1,400.00 mark relatively early on Tuesday, losing the most value in nearly two months’ time, as market participants returning to their trading posts in larger numbers decided that profit-taking was in order, in light of the emergent global recovery (and a few other trends as well).

Such a development does not just imply a lack of crisis conditions, against which a gold safe-haven allocation may make less sense than, say, the period of from 2007 through mid-2010; it may also mean that bullion will have to show its “mettle” against a host of other, competing assets, seen as ripe for better performance. As you recall, the hunt for yields made for some strange investment bedfellows in 2010. But, times, they’re possibly a ‘changin’…

If, in fact, last year’s gold offtake by the ETF sector (as well as the lower physical coin sales by the US and Austrian mints mentioned in yesterday’s commentary) is any indication, well, there may be a trend change underway in this market. While headlines make hay of 2009’s acquisition of some 303 tonnes of the yellow metal by exchange-traded vehicles, the reality is that such offtake was less than half of what that same sector absorbed (629 tonnes) in 2009, during “full-on” crisis conditions.

“A gain is a gain,” some will claim, pointing to the record tonnage at which such holdings finished the past year at. Yes, but equally notable is the diminished size of the demanded tonnage in question, and the underlying potential trend-change. Less than half. Not a misprint, that. Measured in another way, the annualized pace of gold hoarding by ETFs showed a 52.2% gain in 2009, but only a 16.4% rate of growth in 2010. In other words, that was less than one-third the rate of growth of the previous year. This, at a time when stories of ‘record’ gold investment demand were seen saturating every single hard-money (and many a mainstream) financial publication.

The most recent cover of a very well-known financial advice magazine features a “2011 guide to investments,” including the (by now obligatory) headline: “Gold Gone Wild.” ‘Nuff said (other than to mention that the gold ETF stats have been brought to you courtesy of over in Belgium).

So, what can explain the halving of gold tonnage going into such instruments, as well as the decline in take-home coin products by the ‘man in the street?’ More than likely, the fact that, indeed, the sky managed not to fall (as it actually did in 2008) and that the recovery track is seen as lessening (note that no one said: “eliminating”) the need for as much of a gold allocation as previously. Less likely, it could be that the appetite for safe-haven smoke and fire detectors in one’s portfolio has been sated.

Asset rebalancing among commodity indexes may have played a part in today’s price turmoil in various markets as such vehicles normally fine-tune their allocation weightings during the first half of January. Estimates offered by Reuters indicate that index fund rebalancing activities might result in losses of as much as $3.8 billion from the commodity markets. Expectations are that such outflows might not have a material impact on (some commodity) prices, however. In the case of precious metals, at least on this day, the effect (if it is in fact related to the above) has been rather dramatic.

More such rebalancing will take place in the period that extends out one week from this coming Friday. RBC Wealth Management analysts opined that “index re balancing in the beginning of the New Year could cause some money to leave gold due to its high price now leaving portfolios over-weighted without re balancing.” This type of “development” is something we alluded to in the closing articles of 2010. Many a fund (and individual investor) whose original 5-10 percent gold allocation was deemed “appropriate” now finds itself/himself with gold weightings of from 10 to 20 percent (or more) in the wake of the Gartman-labeled “bottom-left/ top right” diagonal on the gold price chart (not to mention the “straight-up” line since late 2010).

At any rate, gold opened with an $11.90 per ounce loss on Tuesday, quoted at $1,402.70 in the wake of predominant physical selling by spec funds and a still-resilient US dollar (it rose 0.15 to 79.32 on the index). The precious metal soon slumped by more than $32.00 per ounce, to reach lows near $1,380.00 following more such selling.

Meanwhile, the ‘clock’ on gold’s predicted/expected/demanded/wagered $1,650.00 per ounce price target achievement by the second week of January has but 120 hours left to tick before it runs out and possibly comes up $300 short of same. Yogi Berra’s advice on predictions remains most valuable (except, for the table below, in which future projections turned out nearly spot-on). Courtesy, LBMA:

An equally swift, near 2.75% loss was seen in ‘poor man’s gold’ this morning, as the white metal sank by some 85 cents to break under the $30 level on similar fund selling and possible rebalancing. A surge in US factory orders (up 0.7% in November) contributed to steadiness in base metals, while also sapping some of the energy away from the precious metals’ complex.

Platinum and palladium also fell victim to the aforementioned liquidation and lost an equal, $24 per ounce amount, in hectic morning trading. The former fell to $1,742.00 per ounce, while the latter dipped to $767.00 the troy ounce. Rhodium remained steady at $2,380.00 per ounce, as of the last indication from New York. GM reported December sales as up by 7.5% (in fact, sales of the firm’s four core nameplates rose by 15.5% last month) and the 2010 overall sales tally as being up 21%.

The precious metals were not alone in shedding value on this first ‘real’ full day (in terms of participation) of trading for 2011. Crude oil dropped 2.46%, losing $2.25 to reach the $89.30 per-barrel mark, as traders awaited Fed minutes to be released, the reports on US weekly inventories, and while copper also declined (but much less). Among base metals, the picture was actually not all that negative, as viewed through the “prism” of rising US factory orders.

Look for more of the same: churning, rebalancing, fine-tuning and the battle of profit-takers versus bargain hunters in coming hours. However, do not lose sight of the Thursday/Friday jobs data festival. It is as pivotal as ever, possibly more so.

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Metals Inc.North America


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.