Indecorous Redecorations

Good Afternoon,

New York bullion dealings opened on the downside this morning but managed to turn higher by midday and were maintaining their gains in the afternoon hours. For the week in progress, gold has shown somewhat of a disconnect with the greenback and with oil - a potential sign that safe-haven demand might be able to keep it above the $800-845 area for a while longer. Spot gold was last quoted at $859.20 per ounce, up by $6.00 as players were seen moving into the metal in anticipation of another possible run towards the recent $890 resistance area. This, despite an advance in the US dollar to 85.84 on the index, and a decline of $1.53 in crude oil, to  $42.02 per barrel. You will recall that on Tuesday, the dollar rose while gold rose as well. Prior to that, on isolated occasions in December and January, we had the same phenomenon takingplace.

These events generally correlated with bad news on the financial front, thus the strong likelihood that gold's gains on a day when the dollar was seen as being in demand for safe-haven and/or cash-hoarding purposes, was also motivated by a similar quest. We are not sure that there is a story there just yet; as we would like to see a more reliable pattern of tandem rises as well as days where oil falls and does not hold back bullion from advances it makes in parallel with the dollar. The danger remains that stock market price erosion could still engender margin call related commodity liquidations among funds.

Silver also managed to turn losses into gains later in the day, rising 10 cents to $11.40 while platinum and palladium recorded smallish gains, with the former rising $4 to $923, and the latter trading flat, at $183 per ounce. Safe to say that (in general) people tend to flock to gold in times of market and geopolitical stress. That, is as it has always been. But such quests for shelter are rather temporary in nature, as are the crises that elicit them. We also need to bear in mind that not even gold is immune from complete investment liquidation scenarios such as the massive outflows from commodities seen in the July-November period last year. This, at a time when the 'prefect storm' scenarios long-predicted in every hard-money newsletter was unfolding in front of everyone's eyes. If there was a time for gold to have achieved its oft-envisioned $2,000 price scenario, well, that was it. Since that time, gold, base metals, stocks, -practically everything has been battling the strong currents of deflation and global economic contraction.

Thus, a core insurance position the temporary value of which one does not lose sleep over is always warranted, while loading up on too much of the metal with the expectation that financial Armageddon is imminent, presents its own dangers. Ask the investor who rushed out to buy gold precisely 29 years ago, at $845 an ounce. They could sell it for very near $850 today as well. As well, they could have sold it at $1034 in March of 2008. However, they would have really needed to sell that metal for something nearer $2,200 per ounce, just to break even, when adjusted for inflation. Last we checked, we found no rule book that contains a law stating that all assets must eventually rise to, and surpass, their inflation-adjusted levels.

Accelerating and ominous global economic problems continued popping up faster overnight than a Whack-a-Mole game at the local arcade. A quick scan of business headlines reveals a sorry state of affairs, indeed. Sony will likely post a near-$3 billion loss, Nokia's profits plunged 69%, Belgium's third largest bank, KBC, was lining up for a cash injection (Dexia and Fortis having already received theirs last year), FIAT's profits fell 71%, SunTrust and Fifth Third posted quarterly losses, Hyundai' net fell 28% last quarter, US homebuilders may have started the lowest number of units in half a century last month, and United and American suffered larger losses in Q4 on falling passenger loads and soured fuel hedge positions. How's that for starters? Lost track of the commas yet? The only bright spot worth noting was Apple's selling 23 million iPods in December, exceeding analyst estimates. Apparently, the world really wants to tune out reality and plug in.

Yes, we say "for starters," because the really significant news of the day actually lurks in somewhat more macro-flavored stories from the economic front. Let's see: The euro zone's industrial orders for November fell at their highest rate on record. Ouch. Toyota became the world's largest automaker, dethroning GM, while the founder's grandson plans sweeping top management decapitations. Eeek. However, the topping on today's pyramid of bad news has to be the announcement that China's economy grew at only 6.8% last quarter - the slowest such rate in seven years. In the background, 3-month dollar Libor rates rose along with apprehensions that central banks have reached the end of the rate-cutting road, leaving them with "tasty" options such as nationalizing banks and buying toxic assets.

Then, the day went on - just another "day at the office" in this crisis -  with rising jobless claims, troubles at Microsoft, falling mortgage applications, faltering housing starts, and a Dow that once again scraped at the 8,000 level. Oh, and Mr. Thain said "adios" to his adoptive parent BofA today. This, amid staggering losses at the Merrill unit, a shareholder suit against BofA resultig from the takeover, and stories surfacing of Merril spending 1.22 million dollars to 'redecorate' Thain's office last year -just as the company was firing staf and its survival was at stake. The sacking of Rome, adapted to the 21st century.

Todya, India's Commodity Online reported a shift in the patterns of gold offtake as having taken place last year. While we view this displacement of the pecking order as temporary, it is still a noteworthy development:

"India has been until now, the undisputed single-largest Gold bullion consumer, with its own final demand outweighing the next largest market – China by almost 57 percent. But it seems now, that the Chinese Gold buyers have caught up during 2008. World Gold Council’s latest data says Chinese demand is surging rapidly (up by 15 percent year-on-year) while Indian demand fell as Indian Gold sales collapsed by about 65 percent in the first six months of 2008.

Finally, China has overtaken India in Gold sales as India’s Gold demand has been consistently dropping for the last few months. China has for all these years remained one step behind India, trying hard but unable to match India’s voracious appetite for the yellow metal. It looks like finally the Tortoise, at its own pace has overtaken the hare. India has for so long been the undisputed single-largest consumer of Gold bullion, with its final demand outweighing the next largest market- China by almost 57 percent.

High prices have been the culprit this year as Gold imports in India for 2008 dipped by almost 47 percent to 402 tonnes. The December 2008 Gold imports at 3 tonnes versus 16 tonnes in December 2007. Despite December being the marriage season, it is not the ideal and as auspicious as is the month of April and May. Buying remained dull and prices remained high on global cues.

How are the Indian ETF’s doing?

Although redemption has been marginal, India’s Gold collection under Exchange traded funds edged lower and this has not really helped the funds. The Exchange traded fund lost about 4.3 percent on the month to 5.3 tonnes in December. The Gold Benchmark Exchange Traded Scheme (GBES.NS) on National Stock Exchange closed at Rs 1,316.89 per gram, down 7.6 percent from its all-time high of Rs 1,425 per gram struck in mid October. Though Gold collections under the ETF’s are growing year on year, they remain negligible when compared to India’s imports of around 700 tonnes annually.

Although prices in December have been range bound between Rs 12,500 to Rs 13,500 per 10 grams and not very erratic, they have been very fluctuating. A rally has hence been absent for long as prices climb and are soon pulled down by lackluster demand. December began with high prices as the wedding season was in process and Gold is an integral part of an Indian wedding. But neither the auspicious days nor the recent shuddering Bombay blasts could catalyse a rally in Gold prices. We have been talking about the absence of a Gold rally since November and are still waiting to see one.

First week of December saw Gold prices surge ahead of the Federal Reserve’s Interest rate meeting. A rate cut would indeed support the euro and in turn push up Gold prices. Investors remained bullish even in India but buyers remained conspicuously absent. Traders and retailers alike strongly felt that Gold prices are too high for the Indian consumer, extremely price sensitive that he is.

One puzzling fact is that despite the continual string of bad news and with the world economies worsening by the day, Gold has not reacted and rallied. Price volatility has been at its lowest in December and prices have moved almost sideways. Indian buying has been insignificant and Gold imports for this month have fallen drastically as mentioned earlier by a staggering 47 percent. The continuous depreciation of the rupee has not helped either, making imports more expensive and the need for capital more vital.

The only relief over the long run is the second important phase of wedding season in the Hindu calendar arriving in a few months. Let’s hope Gold sales pick and India’s traditional behavioral buying patterns restore the dampened imports."

The current leadership position may yet reverse if China's growth remains on the slowing tack we are witnessing in the making. Also, should gold prices ease to well under $800 per ounce, India might regain some of its lost appetite for the yellow metal. In either case, those who plan to participate in a gamble on gold this year, better pay attention to these two countries and their buying (or lack thereof) patterns. That, and de facto Treasury Secretary Geithner's statment that: " A strong dollar is in America’s national interest,” he said. “Maintaining confidence in the long-term strength of the United States economy and the stability of the U.S. financial system is good for America as well as our trading and investing partners.” Take that to mean shaking a big stick in the direction of China (which Mr. G has all but described as 'manipulating' the yuan, or take it as a sign that the Obama team might just do more than simply pay lip service to restoring America's prestige, economy, and the faith of others in its currency. Yes, they can. Let's see if they will. Some take the very appointment of the man as a sign that corruption rules. Wonder how clean the tax returns of the individuals doing the complaining are...

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal

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