The Road to Eldorado


By Jon Nadler

Sep 3 2009 3:08PM


Good Afternoon,

Follow-through buying in the precious and not-so-precious metals continued overnight, as well as during the Thursday session, as yesterday's breach of technical resistance levels emboldened additional latecomer spec funds to the party. Early action this morning and during the day had gold continuing towards a test of values up -at, and above- $990.00 and shooting for the four-digit mark. Silver, in turn, tried the same type of move – and with success - towards the $16.10 level. Open interest in gold now stands at 410,000 contracts, up by some 24,000 in the Dec. contract.

Rewind to Feb. 20, 2009. Gold achieves $1007.20 an ounce. Silver rises 45 cents to $14.45 an ounce. Oil is trading at $39.28 per barrel. The Dow plunges under the pivotal 7500 level. TEOTWAWKI headlines in abundance, everywhere. How is that for a stage being set for more of the same? Well, you know what ensued.

The US dollar was initially seen 0.27 lower on the index, quoted at 78.11 after having lost some ground against the euro earlier. ECB rate decision time came and went with a big yawn, but no one expected a change in posture anyway. Officials from Mr. Geither to Mr. Trichet appear fairly firm in their 'steady-as-she-goes' stance. Read: things are looking up, but not quite enough to start taking the baby bottle away from the neonate (recovery) just yet. Read: low interest rate environment to continue into 2010.

New York spot metals dealings opened with a $6.80 gain in gold, which was quoted at $985.40 per ounce. Silver added 36 cents to start the session at $15.74 per ounce. Recent holdouts, platinum and palladium joined the party and rose $10.00 and 5.00 respectively. The former was seen at $1240.00 an ounce, while the latter opened at $290 per troy ounce this morning.

The afternoon portion of today’s session had gold within a stone’s throw of the $1K mark (up $13.80 at $992.40 per ounce), silver sporting a 72-cent gain at $16.10 and the noble metals following suit. Platinum added $16 to $1246 while palladium gained $6 to reach $291 an ounce. Eldorado was once again visible.

The daily missive from RBC Capital sums up today’s action as follows:

  • “Gold outperformed all asset classes for a second day as the momentum led rally from yesterday spilled over to global markets that covered spot bullion, US futures and etf trades alike. Currently trading spot at $990.  Gold based equities are also on a tear as portfolio managers look to add value on the move.  Technical breakout charts were flying over the email wires and Bloomberg "grab screens" today with targets listed up towards $1100. All kinds of reasoning will be given to this move which runs from "dollar aversion" to China's physical demand and falling back on that "old chestnut" - speculative influence.  Reasons therefore will be allocated after the fact but in reality a technical breakout on a market that had worked a triangle of consolidation over a long period of time will always find friends and momentum.”  

Players will now be watching for signs of emergent profit-taking following the breathless two-day rally being observed since yesterday. More definition could be provided to the trading scene by the release of US labour statistics, due tomorrow. E-mails from the souks in the Middle East are asking us “When will this overdue correction come? We are nearly at a halt in sales in the Gulf” To which, we must say, we do not know ‘when’ only ‘that’ it will.

The biggest rally in Chinese stocks in half a year (the SC Index gained 4.8%) helped metals and financials issues gain in value overnight, and it also boosted crude oil prices by more than $1.25 in early Thursday trade. The advance in oil dissipated as the day wore on however, and we had black gold last quoted at $68.38 per barrel. The Chinese market roller-coaster appears to have no intentions of being shut down just to prevent whiplash among its many riders, domestically or overseas.

After rallying 103 percent since last November, the Shanghai index lost 22 percent last month. Now, we get 5 percent comebacks in a single day. Wheee! Almost all of the grossly uneven sine wave that the Shanghai index has traced over the course of the near-term has been determined by official posturing as regards the availability of credit and/or possible support for the markets. The latest twist involves a positive reading of the tea leaves by investors, as China's national day approaches on Oct. 1st.

Back to a quick overview of the metals markets’ fundamentals and related analysts’ observations. Yes, even in the midst of this long-touted upward pop in prices, there are cautionary signs aplenty for latecomers and other uni-dimensional speculators to heed.

But first, the usual reminder we give at such a juncture. Save the “I told you so” e-mails. Simply refer to the July 1st commentary and re-read the passage regarding where we saw gold and other metals prices going for the second half of this year. There will be no spectacular surprises or wild revelations. 730-1030 plus and/or minus $100 –if certain trends materialized- was the gold price projection. Now then,

We will not mince words when asserting that the current move in gold is taking place amid some of the poorest market fundamentals in recent memory. It would not be equitable to brush such factors aside, as they have proven –time and again- that they very much matter to the final price equation (even if not in the near-term). Thus, we will abstain from applying the label of ‘mother of all moves’ to this fund-driven price push as well.

To wit: Scrap flows in Q1 amounted to 500 tonnes (as much as the market normally takes in during a full year). ETF balances have not grown since peaking in early June. Less than 2 tonnes were added in Wednesday’s move. Mine supply has risen- as GFMS has recently pointed out-, due primarily to flows from China and Russia. India will undergo a 66% slump in imports in 2009.

The world's largest gold consumer appears set to only bring in about 250 tonnes of the shiny stuff this year. The usual suspect is first cited: too high a price in the eyes of local would-be buyers. To that, we can add poor rupee values, and bad weather -as in not enough rain to allow for bountiful crops. - This, according to Mining

Also as far as the golden side of matters is concerned, Fitch Ratings sees that the precious metal that will still remain confined within a certain range, current developments notwithstanding:

"The price of gold is not expected to move too much in the short term, at least until the next real shift in global markets, Fitch Ratings said on Wednesday. In a report on the outlook for the yellow metal, Fitch analysts predict that, while the gold price remains near historic highs, as a result of investors seeking safety from more volatile assets, prices will likely remain "range-bound" in the short term.

The precious metal has largely hovered around the $920/oz to $965/oz range over the last three months, although it was a bit stronger on Wednesday afternoon, at $977/oz, buoyed by weaker equity markets and economic concerns. Of course, waves of loss of confidence in the economy or weakening of the dollar will continue to send investors scuttling back to the safety of gold, which seemed to be the case on Wednesday.

“But we don't expect it to move around much from where it's currently been trading, until 'the next new thing' happens,” Fitch Ratings director Monica Bonar said in an interview from New York. “And that could be until markets recover enough that people really start saying: 'Why have I got stuck in gold bars when I can capture upside in the debt market, or the equity market, or the housing market?'.”

While gold exchange-traded funds saw record inflows during the first quarter of the year, activity has since slowed, with the funds themselves reporting flat and even sometimes slightly lower gold holdings. “It does looks like investors are already nipping at other asset classes,” Bonar commented. And if the inflation expectations that have helped underpin investment demand for gold wane in the short term, this would also back the case for a 'pause' in overall demand.

In the longer term, Fitch views investment demand as robust and expects that it should support relatively high prices over an extended period, “first supported by a flight to quality, then as a currency hedge and finally, when the cycle turns, as a store of wealth in the emerging markets”, according to the report published on Wednesday.

As can be expected in a high-price environment, jewellery and industrial gold demand remain subdued, and are expected to stay that way through the down cycle. On the supply side, the stronger gold prices seen this year have resulted in high levels of scrap coming onto the market, particularly in the first quarter.

Most of the 'distressed' selling of gold in so-called Western markets (Europe and North America) has likely peaked by now, while consumers in Asian, the Middle East and Latin America, or emerging markets, will probably remain price sensitive - selling scrap when prices appear high in local currency and buying jewelry, coins or bars when prices are below expectations, Bonar said.

From a supply point of view, central bank gold sales are not expected to play any role at all. “So, it’s really a question of, will the people with money in gold leave it there, on the western side, or, on the eastern side, will there be more people selling at high prices? ” she commented.

Another aspect to consider is that any improvements in global economies and financial markets would likely be accompanied by strong growth in emerging economies. This means that the potential decline in investment demand, as less risk-averse investors move their money into other asset classes, would probably be partly offset by higher physical demand from emerging market consumers, who are in a better position to accumulate gold.

The precious metal traded as low as $250/oz in early 2001, but was catapulted to an all-time peak of $1 030,80/oz in March last year, as investors sought safe haven from riskier assets. The gold price ventured back into four-digit territory again in February this year, before declining again."

Furthermore, we also have uncertainties present about price prospects in platinum-group sector. This, after the US auto-scrapping scheme has come to a halt, and is now being followed by the cessation of a similar programme in Germany.

Analysts at Mineweb believe that scrap supplies of the noble metals are inevitably going to rise -and rise significantly- after so many 'clunkers' have been flattened and their entrails recycled. Between them, the US and Germany have thus far taken in nearly 3 million older cars - however, many of those were indeed fitted with pgm-based catalysts. The firm does expect a better recovery in palladium prices in 2010.

Meanwhile, a Reuters today report envisions a platinum market that is about to tilt into surplus mode, should current trends remain in place:

“A persistent lack of demand for auto-catalyst material platinum could push the market into surplus this year even with the prospect of supply disruption in strike-hit South Africa, the main global producer.

Prices of platinum have barely budged despite news of strikes at two Impala Platinum mines, the dismissal of almost 4 000 striking contract workers at Aquarius Platinum and Anglo Platinum staff rejecting a wage offer. Analysts say rising stocks of the metal and weak car production are likely to keep prices in check unless industrial action proves persistent.

"Demand is still very poor, and above-ground stocks of the metal keep rising," said Tom Kendall, a strategist at Mitsubishi Corporation. "Net flows of platinum into Zurich - total imports minus total exports - from January to July this year amounted to almost 765 000 ounces," he said.

"That's even with strong Chinese demand."

The platinum market was in a deficit of 375 000 ounces last year, metals consultancy Johnson Matthey said in its Platinum 2009 report. But sharply lower demand from car makers is likely to have caused platinum stockpiles to rise this year, analysts say. With demand from car makers making up about half of global platinum consumption last year, the sector is a vital one for the metal.

The favourable price of platinum sponge - primarily used by industrial buyers, whereas investors and jewellers usually buy platinum ingot - suggests industrial demand is still weak. "There is... enough physical material around," said Wolfgang Wrzesniok-Rossbach, the head of sales at Heraeus. "There is no kind of rush to buy the material."

Prices have been supported by resurgent jewellery demand this year, especially from China, but this is unlikely to entirely offset falling demand from the automotive sector. The car industry suffered heavily from the economic downturn last year; however, it received some support this year from "cash for clunkers" car scrappage schemes.

"Car demand this year is unusually high, given the state of the economy," said Commerzbank analyst Eugen Weinberg. "But it will be interesting to see whether it will continue." (The platinum market) "will be in surplus for 2009, but the scrappage schemes will reduce it massively," he said. "It will... (not) be as high as we expected at the beginning of the year." Given this backdrop, supply cuts could have more of an impact on the market than has yet been seen.”


On a final note, we welcome the advent of accessible gold and silver investment vehicles in China, and we too, do see a bright future for that market. The efforts of the World Gold Council in the country, coupled with the willingness of local officials to encourage metals business are to be applauded. We do note however, that China will not become a simple replay of India. China might overtake India in some aspects, but it will not behave similarly. It never has. China will not become a buy, buy, buy, and then hold and buy some more equation.

We anticipate that given the Chinese mind set, the gold and silver trading activity will turn into just that: trading. Buying, followed by selling, followed by more…of the same. Thus, those who are banking on the billion-plus Chinese potential buyers to remake the gold market in some radical way defined by incessant buying, better also prepare themselves for the waves of speculative, profit-taking selling that the Chinese will very much prove to be capable of, on occasion.

A very good proposition for trading-oriented firms with a foothold in the country. Keyword: trading. Defined as: buying or selling of securities or commodities. And, if you wish to see a preview of what that coming attraction might look like, just glance at the Shanghai Composite Index and/or the local real estate markets of recent years.

Have a nice evening.

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.