Elusive Eldorado


By Jon Nadler

May 1 2009 9:04AM


Good Morning,

Overnight action in the metals markets was still dominated by sellers. Gold and the rest of the complex yielded in the wake of liquidations engendered by persistent IMF gold sales talk and by rising interest among some investors in other markets. Talk of 10K Dow is not permeating the airwaves, and not just on Cramer or Kudlow.

A few too many bulls appear to be stampeding around global stock markets, but the general sentiment is that, following a 20% gain in the US market, this is no longer some head-fake move. Not much to cheer about over in Japan however. The country fell back into "D" mode once again and analysts fear a spiral of falling prices. Japan's 'lost decade' threatens to turn into the 'lost quarter-century' while the US may squeeze by with a 'quarter decade' of its own - if the green shoots turn solid by 2010. Chrylser was shifted into "P" and is now awaiting the outcome of the 'Italian Job' being promulgated by President Obama.

New York gold trading started the month of May with a $3 loss at $883 per ounce, following two consecutive months of declines. "Sell in May" could well turn out to have happened as early as March, this year. As we previously opined, the disarray in the market continues and is likely indicative of turning points coming into being.

At least for the time being, the broad range in gold remains the $850/$950 channel, but the declining pattern in place since the 18th of March still argues for a potential breach of the 200-DMA. Silver lost 15 cents to start at $12.22 per ounce. Platinum dropped $12 to open at $1091 while palladium fell $5 to $211 per ounce.

Over at NS Futures in Chicago, the current week's diagnosis reads something like this: "With global equity prices on a sharp upward run and a host of physical commodities (copper) apparently benefiting from the new found macroeconomic optimism, one might have expected gold and silver to have garnered some measure of buying interest. In fact, even suggestions that the Chinese stimulus packages were starting to spark economic activity inside China doesn't even seem to be of interest to the gold trade.

The bull camp can't even blame classic fundamental news for the anemic price activity of the last several trading sessions, as the flow of supply and demand news in gold has been minimal at best. Therefore, it would appear that investors are embracing more risk in markets that they see as undervalued and that, in turn, seems to have left gold with residual flight to quality long liquidation activity as the main feature of the trade."

The main feature of the trade as we see it at the moment is the attempt to determine how much of and when the IMF's gold will be mobilized. That the 403 tonnes intoned to plug the internal budgetary gap will be coming up for grabs, is likely not in debate. What happens to additional portions of the remaining pile, is the question du jour. Commodity Online takes a look at the hotly contested topic and finds that:

"The IMF's gold is back again in the talks of global market analysts with a senior US House of Representatives Democrat Rep Barney Frank supporting authorisation from the US Congress of planned gold sales by the International Monetary Fund (IMF).

But the Democrat put a rider to his demand saying that the IMF should keep $4 billion of the proceeds for loans to poor countries. He told new agencies that he is for gold sales only if it allows $4 billion for poor countries. The IMF plans to sell about 403 tonnes of its gold reserves to finance administrative expenses and give financial aid to poor countries. But the US Congress has to authorise the sales.

After the G-20 summit cleared the IMF plan to sell gold, poor nations are chasing the treasure now. In a world of shaky stock markets, gold has skyrocketed in value. Developing countries and anti-poverty advocates want the IMF to sell a chunk of its gold stash and share the wealth.

Even before the financial meltdown sparked economic emergencies in every corner of the globe, the IMF had embraced the idea of selling some of the gold it keeps in various depositories. Who will get to use the profit is being discussed ahead of weekend meetings of the IMF and World Bank in Washington. In recent years, business has been slow at the IMF, the world’s lender of last resort. Countries haven’t been borrowing. People were even beginning to question the IMF’s relevance.

Looking down the road, the IMF board in May cleared a broad financial overhaul plan that included selling one-eighth of its booty of gold — it has some 103.4 million ounces — to give it a new stream of operating revenue and ensure the soundness of the fund over time. When the gold sale was proposed in early 2007, the 12.97 million ounces of gold that would be sold had an estimated value of $6.6 billion. The gold’s market value now is nearly twice that amount, around $12 billion.

Anticipating that a gold sale would reap much more money than anticipated, the Group of 20 nations decided at its summit earlier this month in London that $1 billion of the money derived from the sale should be used to leverage low-interest loans to low-income countries, including those affected by the financial meltdown. African leaders and anti-poverty groups long have urged the IMF to sell gold to raise money immediately for poor countries, which are now being hard hit by falling exports and lower commodity prices."

The debate over what to do with the asset of last resort, at a time when many around the world have nothing left to resort to, will surely continue. Few will dispute that the gold was placed in the basement for a rainy day. It is now coming down in buckets in certain parts of the world.

One part of the world in which it frequently rains, is the Amazon. This is the home of an epic gold rush as well as of a growing human and environmental drama. For many, it is also The Heart of Darkness.

"You must have already heard about the new El Dorado hunt in Brazil’s Amazon forests. It was triggered by just an internet posting on gold being found in the forests.

The global recession added to the mad rush. Drawn by a Brazilian math teacher’s Web site that describes miners scooping up thousands of dollars in gold, lakhs of people have poured into the forests, cutting down huge trees, diverting streams and digging ever-deeper wildcat mines, in an area that only months ago was pristine rain forest.

Already, too many people are chasing too little gold and there isn’t enough space for all the miners at the eight main digging sites. In the 1980s, tens of thousands of miners, or garimpeiros, worked the pits, which became an economic motor of the area for a decade until most were considered depleted. Rising gold prices helped trigger a new mini-rush in 2008, when local authorities say the rudimentary mines produced 3.5 tonnes of gold.

Drugs, prostitution, malaria and undrinkable water make the place a hell on earth. Prospectors shoulder their dream alongside guns for hire and shopkeepers. Though Brazil is Latin America’s biggest economy, the global financial crisis has driven up unemployment, a scenario that doesn’t help officials already trying to halt illegal mining and logging in the impoverished Amazon.

The gold rush attracted millions of people to become artisanal miners in order to escape complete social marginalization. The rudimentary nature of artisanal mining activities often generates a legacy of extensive environmental degradation, both during operations and well after mining activities have ceased.

One of the most significant environmental impacts is derived from the use of mercury (Hg), which is illegal for use in gold amalgamation in Brazil, but continues to be the preferred method employed by artisanal gold miners. The general population is unaware of the capricious nature of mercury and artisanal mining activities.

Moreover, individuals in positions of political or economic infiuence tend to be negatively biased towards artisanal mining and government policies do not effectively address the realities of these activities. Affected communities have consequently been ignored, and mistrust towards outside parties is high. Not surprisingly, miners are suspicious of and unlikely to employ externally derived solutions to reduce mercury emissions."

Gold continues to present an obsession that is extremely difficult to explain in simple terms. As a Jungian archetype that is deeply ingrained in the human psyche, the metal will continue to be the motivator of the launch of thousands more ships designed to find it. We respectfully, but totally disagree with mining company executives - who, (curiously) while boasting about how much more gold they will soon be mining at their firms, and at what dirt-cheap prices - are emphatically predicting an inexorable dwindling global of mine supply. No chance. Not after the largest amount of exploration expenditures ever undertaken has been witnessed. Give it half a decade, at most. An additional 400-500 tonnes per annum will be the surprise to have to factor in. Along with a stupendous performance in mining company shares.

And so it goes...

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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