The Junkie Market - What Price the High(s)?


By Jon Nadler

Jan 14 2010 9:37AM


Good Morning,

Following Wednesday’s roller-coaster price ride, gold markets remained steady-to-lower during the overnight hours in Asia. The bullion price moved in a fairly narrow range and the metal was seen finding some buyers near the lower end of the scale, around $1132, but also drawing light selling above the $1142 mark at the other end.

The market’s overnight tenor was largely dictated by the continuing tug-of-war between risk aversion and appetite for same, and the movements in the US dollar- which basically gained a small amount and hovered near 77 on the index, as the time drew nearer for an announcement on interest rates from the ECB this morning. The euro slipped against the greenback ahead of what is expected to be a case of ‘more of the same’ and ‘next question please’ from Mr. Trichet’s shop. At last check, the US dollar was ahead by 0.11 on the trade-weighted index, quoted at 76.97, while it ticked at 1.448 against the European common currency.

The ECB has already outlined the start of its exit strategy, during a similar presentation held last month, and it appears to be in sync with the Fed’s own approach of letting accommodations programmes expire on schedule and only raising rates when conditions are deemed to be sufficiently positive. The focus by both central banks is on jobs creation as part of the economic picture; a gift with which neither has yet been blessed as we roll into 2010 in earnest.

Thus, leaving interest rates on hold today appears to be the most likely course of action by the ECB. As for the euro, well, things do not appear too rosy at the moment. German Chancellor Merkel flat-out said that the common currency faces a ‘very difficult phase’ in the wake of Greek budget woes that could spill over and make for additional near-term pain for the currency.

The ECB might increase its interest rate on three-month loans in the not too distant future, but it is seen as hesitant embark on such a course at the moment, and speculation is that it will simply wait and see the what the impact of the announced phasing out of longer-term lending will be. Mr. Trichet is also likely to be interrogated by reporters on the sticky issue of possible bailouts or other forms of help for credit-rating beleaguered Greece, particularly given some pretty unequivocal recent comments on the topic of same, by Governing Council member Juergen “NO Bailouts” Stark. Greece’s announcement that it will cut over $14 billion in spending this year shows that the country is pedalling hard at fixing that which bothers rating agencies and others, but the plan failed to elicit any major praise from a worried audience, thus far.

New York spot metals dealings opened a bit on the mixed side this Thursday morning, with gold eking out a $0.40 gain and quoted at $1137.50 an ounce, while silver fell 12 cents to $18.52 at the start of the session. Platinum surged back to $1599, gaining $26 per ounce, likely due to the launch afterglow and probable actual buying by the related ETFs. Palladium also roared ahead, climbing $14 to $436 per troy ounce, a pop that is also attributable to the ETF saga. In recent weeks, the two white metals have far outstripped gold’s performance and are now drawing investment interest from totally novice buyers –which may not be the best development we could think of...

Nervousness continues in the gold (as well as some other commodity) pits, precipitated by the thwarted Sunday night/Monday rally and the posturing by China on bubble combat tactics. Interest rate talk from the Fed, the ECB, China’s central bank, and others, continues to be the topic du jour as the speculative trade is extremely apprehensive that the easy money candy might be about to run out. In the interim, every possible chart entry point is seen as fair game –provided profits are also taken higher up, just in case. For the moment, climbing above $1142 and overcoming $1150 with success are the tasks at hand for the yellow metal. That, and the hope that no other official jawbones about any kind of tightening…

Our good friend, Matthias Detremmerie, founder of, said this morning that: “In essence, price movements this week have been quite vulnerable to technical plays. The China tightening concerned a sensitive spot – whether or not monetary policy in the U.S. and Euro-zone will remain loose -, but the magnitude of the movements in gold this week have had a ‘technical’ hand in them. That said, sensitivity to rate rhetoric may continue to lead to increased volatility in the near term”.

A mixed bag of US economic news was on offer in this morning’s financial media harvest. First up, it was the jobs picture snapshot, one which showed that the average number of Americans filing first-time claims for unemployment benefits over the past four weeks dropped to the lowest level since August 2008. Continuing unemployment claims dropped by 211,000 to 4.6 million in the week that ended on Jan. 2nd. On the other hand, even the folks who were lucky enough to be given any pink slips appeared to be less inclined to place too much under their holiday trees. Sales at U.S. retailers unexpectedly fell in December following a gain the prior month, indicating that the consumer recovery remains uneven, at best.

Meanwhile, the fallout from last year’s spectacular oil bubble continues to be felt at various levels- the most visible and anticipated one being the regulatory one. Bloomberg reports that: “The Commodity Futures Trading Commission will take another step today in its efforts to rein in energy speculation, proposing hard limits on the number of futures a single investor can hold. Swaps dealers, index funds and commodity traders have been waiting for the proposal since July and August, when the commission held hearings amid concerns that speculators drove oil prices to a record high of $147.27 a barrel in 2008. “

Analysts over at London-based GFMS envision a possible $1300 gold price sometime during the course of 2010 but warn that: “While investment inflows into gold remain significant, and look likely to continue that way, the market reliance on investment is “somewhat worrying” in the longer term.

Because of the market's dependence on investment, the biggest threat to the gold price will obviously be the eventual shift to “business as usual” in the world's economies, GFMS Chairperson Phillip Klapwijk said.

“The honeymoon won't last forever. At some point the scenario does change, and then the investment case for gold becomes less appealing.” Once gold's appeal begins to dim, all it will take is a halt or a deceleration in the flow of money into gold to have a big impact on prices, Klapwijk cautioned. “The market, if you like, has become a bit like a junkie - it has become more and more dependent on bigger and bigger fixes of inflow from the investor community.”

Mr. Klapwijk also noted a 6% rise in global mine output for 2009 (to 2553 tonnes) – at a time when practically every pundit was screaming: “peak gold!” and a huge 27% rise in scrap supplies to an all-time high in 2009. Meanwhile, it was noted that fabrication demand collapsed by 23% to a 21-year low. The bright spot in this titled-fundamentals market? Why, investment demand, of course. It doubled, to 1820 tonnes. As Philip said, total reliance on investment, to absorb the overhang. Which, of course, as always, raises the question of ‘when’ – and not ‘if.’ – such a dopamine fix will run out.

Happy Trading,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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