Call the AAA


By Jon Nadler

Sep 9 2009 9:14AM


Good Afternoon,

Mildly corrective action continued in the precious metals complex overnight in the Asian and European market sessions. Gold traded in a fairly narrow, $10 range extending from $992 to $1002 and saw players holding back from significant commitments, as the US dollar regained some composure on the trade-weighted index (but not for very long- it fell to 77.23 in NY this morning) and as crude oil slipped marginally lower, backing away from $71 per barrel (but not for very long- it rose 30 cents in NY to $71.30 this morning).

OPEC ministers might be reading (with interest) the news of a Brazilian oil find of up to 2 billion barrels in size, and that black gold could be starting to flow from there, as soon as 2012. The report comes one week after BP's discovery of a 3 billion barrel-sized find in the Gulf of Mexico. Peak what? The Fed's Beige Book report is due this morning, and participants are apparently holding back in some other markets as well, waiting to see if there is perhaps another play to make following the release of the findings on the US economy.

New York spot bullion trading was off to a mainly positive start in this triple-nine calendar day. Gold opened the mid-week session with a $1.90 gain, quoted at... $999.60 per ounce. Silver climbed 8 cents to start the day at $16.54 per ounce, while platinum turned $1 higher at $1285 and palladium fell $4 to $291 an ounce.

The trade remained focused on the dollar's drop to 77.18 on the index, on the euro trading at 1.452 against the greenback, on oil gaining once again, and on the upcoming Beige Book data. Pushing the metal back to Tuesday’s levels or beyond still appears to be the path of least resistance, never mind the overbought conditions, for now.

South Africa's gold output rose to 51.6 tonnes in Q2, as against a 51.4 tonne production figure in Q1. For the year-on-year period however, the country's gold output sank 9.3% - a reflection of the power supply problems experienced during most of 2008. China and the USA have overtaken the once dominant miner in rank.

China and Russia have turned the gold production spigots to 'full blast' and have recorded better than 20% gains as revealed in a recent GFMS survey. Overall gold production appears to have notched a fairly sizeable 5% or better gain thus far this year. Sad news today from China, where 13 gold miners have lost their lives in a mine fire. No matter where one mines the stuff, it is one of the world's most hazardous occupations.

Yesterday's match of the February highs was followed by all sorts of expected chiming-in from various camps. We have now been assured that we equal chance of a major 'head-fake' triple-top in the making, as well as that this is the beginning of the lunar mission for the yellow metal. In this case, that implies values far higher than the $1200 target that has been mentioned by so many, so often. For a review of all the unequivocal declarations, you may consult yesterday's "$1,000 Inkblot" commentary.

The debate continues this morning, without any let-up. The's Dan Dicker - actually a believer in the $2K gold proposition- feels that the current developing pattern smells, walks, and (most importantly) talks as a clear-cut 'head-fake' that will disappoint the trend-following small investor. Dan plans to wait this one out, and then buy at lower levels.

“Evelyne Winters at Goldessential said that daily charts were seen leaving a doji candlestick on Tuesday, which points to indecision. “For gold to really convince that an extension to the current strength is possible, the $1,010-$1,015 area is a key in the COMEX futures market. Conversely, anything below $993.20-$990 could set off a deeper correction”. She said that important support was at $985 for the December COMEX gold futures contract.

However, comparing Tuesday’s break above the $1,000 an ounce mark to historical attempts, we can see that gold carries the weight of a very high Net-Speculative Length to Open Interest ratio (COMEX gold futures), at a time when also ETF holdings are still well within sight of record highs. Historically seen, this continues to pose a heavy burden on the yellow metal’s shoulders, as any previous attempt was seen accompanied by a high (although still lower than the current) NSL to OI ratio, which in all but the latest of cases eventually led to period a correction of at least $100.”

Not so, says Nick...Bullman (we get it) a London-based fund manager whose crystal ball contains $1100 gold by the end of 2009 and $1250 gold by 2010. Nick did not share what he might do with his portfolio once gold achieves those targets. Then again, ask the average investor what they plan to do when/if gold soars to $1250 and you are likely to get a blank stare. Those who might say 'sell' usually plan to sell for...more US dollars. Question-mark, followed by several exclamation marks.

Meanwhile, investors everywhere continue to ponder the breadth and depth of the first synchronous global contraction since WWII, but they are also ramping up their state of readiness for a different trading environment as central banks are clearly getting ready to start pulling the stimulus IV needles from the recovering economic patient.

One finding that ought to have the inflation-leaning perma-bulls scratching their collective heads is the irrefutable evidence that M2 money supply has been contracting. That's right, contracting. Even in the midst of the Fed's asset shopping spree. At the worst rate in recent memory. Consumer credit imploded at five times the rate that had been expected by analysts. Wage and price pressures are pointing towards the floor for the time being.

Another item that might not sit well with those who see the imminent demise of everything American, is the fact that Moody's will not be lowering the triple-A ratings of the country, anytime soon. Or those of the UK. Or, not even those of the country most at risk of losing the coveted rating: Spain.

Finally, also going against recent 'conventional wisdom' is the opinion of a Japanese official, as relayed by Bloomberg this morning:

Eisuke Sakakibara, formerly Japan’s top foreign-exchange official, said the dollar will stay the main reserve currency after a United Nations report this week said the greenback’s role in global trade should be reduced.

“The U.S. will remain as the world leader for at least a few more decades,” Sakakibara, the Democratic Party of Japan’s top choice in 2003 to lead the Finance Ministry, said today in an event hosted by the Japan National Press Club in Tokyo. “The dollar will stay the reserve currency for the next 20 years.”

The comment by Sakakibara, known as “Mr. Yen” from his 1997-1999 tenure at the Ministry of Finance, comes after a UN report published Sept. 7 said a new currency should be created to reduce the dollar’s role and protect emerging markets from the “confidence game” of financial speculation. China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis led to the worst global recession since World War II.

Prime Minister-designate Yukio Hatoyama’s Democratic Party of Japan has no plan to diversify the country’s foreign reserves away from the dollar, party Secretary-General Katsuya Okada said on July 24. Japan, the biggest international owner of U.S. government debt after China, raised its total holdings of Treasuries by $34.6 billion to $711.8 billion in June.

Sakakibara said the DPJ hasn’t approached him to take a role in Japan’s new government. Japan should sell an extra 10 trillion yen ($108.1 billion) in government bonds to pay for economic stimulus measures, Sakakibara said. Ten-year yields, now at 1.325 percent, will stay below 2 percent even if debt sales increase, he said.

“The market has plenty room to take in that amount of bonds,” Sakakibara said. More issuance is “the only choice the government has to fund new measures and deal with falling revenues,” he said. Japan’s debt burden will probably spiral to 197 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development. The Finance Ministry in April said it will boost bond issuance by 15 percent to 130.2 trillion yen this fiscal year.

Sakakibara also said a single regional currency for Asia won’t become a reality until China deregulates its currency. “China is unlikely to remove regulations on its currency for at least 10 years,” Sakakibara said. “The common Asian currency won’t be created until that happens.” Japan should work with other Asian nations to create a single regional currency, the DPJ’s Hatoyama wrote in the New York Times last month. "

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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