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There's Gold in Them Thar' Dumps

By Jon Nadler       Printer Friendly Version Bookmark and Share
Sep 15 2009 9:08AM

Good Day,

Sideways price action defined much of the overnight period in the precious metals markets, although the bias was towards slightly lower values. Gold retreated to the low $990s once again but traded in a narrow, barely six-dollar range, as the dollar added a few more points on the trade-weighted index during the Asian and European sessions.

China did open its enquiry into the chicken and car parts imports from the US but called for talks at the WTO with its adversary in this dispute. As we said yesterday, it appears to be in its best interest not to ratchet the tensions to a level that could then boil over into a full-fledged protectionist wave.

The British pound wasn't as lucky as the dollar this morning, it was seen falling to a three-month low following signals from BoE Governor King that his institution is considering cutting deposit rates on excess reserves held by banks in a move designed to encourage them to convert such funds into other assets (read: lend more, or else).

Crude oil made small gains in early going, rising to $69.19 per barrel but the going is starting to show signs of real fatigue as global inventories are still at historical highs and as demand appears to be as sluggish as the level of ebullience is regarding the recovery is currently.

Over in Germany, the ZEW tracked the highest level of consumer confidence in three years on the heels of the country's sudden exit from the nastiest recessions since WWII during the second quarter. Still, the Bundesbank expects German unemployment to rise to 10.5% next year, as compared to the 8.3% current level. Ever the philosopher, French President Sarkozy spoke at the Sorbonne yesterday and proposed a 'revolution' in the way economic growth ought to be measured. Forget GDP. Enter DHP. Domestic Happiness Product.

Naturellement, his own country, known for its leisurely meals, long vacations and labor protections, could outshine more profit-focused economies if nations act on new recommendations in a report headed by two Nobel economists commissioned 18 months ago. The man has a point. A very good point. Education, health care, domestic wealth and responsible consumption. Now there are some valuable index components. We say: "Oui."

Gold dealings opened with a $1.70 gain/loss in New York this morning, and were quoted at $997.90 per ounce against the US dollar's 76.85 trade index-based level. The greenback was quoted at precisely 1.46 against the euro as the market session got underway. Silver fell 4 cents at the open, starting the day out at $16.50 an ounce. Platinum lost $10 out of the gate today, quoted at $1305 per ounce. Palladium dropped $1 to open at $291 an ounce.

The debate on gold's price prospects remains alive and well among both fundamentals-followers and technicians poring over charts. Our own Merv Burak opines that charts indicate that if the $1050 level is not attained during the current 'break-out' and/or a double or triple top is confirmed under that same level, then gold could signal a reversal such as the ones that occur on average about every six years in this market.

If-on the other hand- a successful breach to levels above $1050 is achieved, say the same charts, then the path could be cleared for anything between $1075 and $1575 an ounce. One slight catch: for a confirmation of the double/triple top to take place, bullion would have to fall back t last fall's roughly $680 area.

On the fundamentals' side, conditions remain basically poor. Mine production jumped 7% in the first half of 2009, scrap flows surged to a full year's level during Q1 (albeit they are expected to slow during the current half), and global fabrication has swooned and remains out cold. The potential bright spots might come from any prospective official sector purchases (although one still needs to factor in the coming IMF and ECB sales in the year ahead), and from broad-based individual investor demand in the event of 'factor X' type of geopolitical or macro-economic bad news. As things stand right now, one of the putative mirrors of such demand-the gold ETF-is in hibernation mode, and it has been there since peaking in June.

One item that has had the gold bulls jumping for joy was the Barrick announcement last week. Most perma-bulls interpreted the firm's abandoning hedging as a new paradigm - one guaranteed to propel gold to lunar orbit. We say, not so fast. As previously mentioned, the trend is not your friend in this case. Barrick may not turn out to be a trend-setter in this case. But, then again, we brought you such signals from BNP Paribas VM Fortis and GFMS analyses, months ago...Marketwatch's Laura Mandaro fills us in on the controversial details.

"Gold producers abandoned more of their hedges in the first half of this year as they tried to position their businesses to take advantage of rising bullion prices, a new report said Monday. But because they had taken off so many of these contracts in past years, the pace of what's known as de-hedging slowed, providing less of a support to prices.

"Net de-hedging slumped in the first half," said London-based metals consultancy GFMS Ltd. in a statement. That was largely due to the "limited scale of the outstanding producer hedge book, due to previous years' heavy de-hedging." Gold producers reduced their hedge books by a net 31 metric tons in the first six months of year, largely due to a decision by South African gold miner AngloGold Ashanti Ltd.  to trim its hedges by 25 metric tons, said GFMS in the report prepared for release at this week's Denver Gold Forum. In contrast, gold producers last year reduced their gold hedges by nearly 360 metric tons.

In just the fourth quarter, they narrowed their hedge book by 48 metric tons. De-hedging -- unwinding contracts that agree to sell gold at a point in the future -- is considered a support for prices, because it reduces the supply of gold created by these forward contracts. That support is faltering: Producers have fewer hedges to take off because they've removed so many of these contracts in the past. The relatively low volume of abandoned hedges "reflects the much-reduced scope for de-hedging to continue to be a strong market component in the near term," said GFMS executive chairman Philip Klapwijk in a statement.

The net reduction in global gold hedges in the first half of this year brought the amount of gold that miners have sold in forward contracts, or the total global hedge book, to 360 metric tons. While hedges protect miners if the price of gold falls, they amount to money left on the table if prices rise. Gold miners and analysts say the perception of lost opportunities has pressured the share prices of miners that hedge their production, encouraging those companies to reduce hedge books.

Last week, Canada's Barrick Gold Corp.said it planned to eliminate all of its fixed-price gold contracts in the next year, and a portion of its floating, spot-price gold contracts. The Toronto gold miner said the change will allow it to gain "full leverage" to the gold price on all future production, reflecting "an increasingly positive outlook on the gold price." "The gold hedge book has been a particular concern among our shareholders," said the company in a statement.

Moves by Barrick and others to close out their forward-sales contracts bolsters gold prices, and may even have helped lift bullion to more than $1,000 last week, said Banc of America Securities-Merrill Lynch analysts in a report released Monday. But they noted the de-hedging trend is likely to provide waning support to gold prices. "With Barrick's announced de-hedging the global hedge book has now been mostly eliminated," said analysts led by Michael Widmer.

That trend suggests the positive impact on gold prices from de-hedging will become "increasingly less pronounced in the medium term." AngloGold Ashanti remains the only major gold producer that still has scope to reduce its hedge positions, they said. On a small scale, some gold miners are still adding hedges. Australian gold producer Catalpa Resources and North American producer Apollo Gold Corp.  added new hedges, totaling 20 metric tons, in the first quarter, said GFMS. "

There is a smoking pipe on the table, awaiting the perma-bulls for whom every single headline amounts to the lighting of the proverbial fuse.

Speaking of supply and demand, here is a tremendously interesting read from The Times. A vast, untapped reservoir of gold. Suprised? Look no further than your Blackberry or iPod.

"Japan's enormous high-tech rubbish dumps have become a natural resource for precious metals including gold, silver and indium. Japan's high-tech rubbish dumps - the vast “urban mines? of landfill outside every big city - have grown so huge that the country now ranks among the biggest natural resource nations in the world.

Tens of millions of defunct mobile phones, discarded televisions, PCs and MP3 players conceal a “virtual lode? of hundreds of tonnes of precious metals. An even greater seam may be lurking forgotten - but not yet discarded - in Japan's attics and garages.

According to new calculations by the National Institute for Materials Science (NIMS) in Tsukuba, Japan has unwittingly accumulated three times as much gold, silver and indium than the entire world uses or buys in a year. In the case of platinum, Japan's urban mines may contain six times annual global consumption.

The institute's leading urban mine expert said that if these electronics-rich treasure troves were properly tapped, supposedly resource-poor Japan would suddenly join the likes of Australia, Canada and Brazil in the top five producers of some elements.

The mines have been accumulated because of the extraordinarily high speed at which Japanese consumers replace gadgets. Of these, the 20million mobile phones replaced by the Japanese each year are especially attractive “ores? for urban miners. Only 13 per cent, about 550 tonnes a year, are recycled, with the remainder thrown away or stored in drawers and cupboards. The circuit boards of each phone contain a smorgasboard of precious metals: in minute quantities there are silver, lead, zinc, copper, tin, gold, palladium and titanium.

Although other developed countries - particularly the United States and Britain - are thought to have very substantial untapped urban mines of their own, Japan leads the world as an assessor of what its dumps and attics contain in the way of metal resources. Koumei Harada, the director of the institute's strategic use of elements division, has pioneered the calculation of Japan's potential urban mine resources.

By comparing the quantities of metals imported over the past 60 years with what has left Japan inside its electronics, cars and other exported goods, Professor Harada arrived at basic reserves. From this were subtracted theoretical quantities of metal that remain in use.

According to the professor, decades at the forefront of the global consumer electronics industry had left Japan with a tantalising legacy: it has invisibly accumulated stocks of some metals to rival proven worldwide reserves in the ground, but it knows where only about half of it is. Worse, that half is difficult to process.

Now the Ministry of Economy, Trade and Industry is pushing for nationwide collections of old electronics from homes and for ideas about how best to excavate the landfill. Companies such as Asahi Pretec already run urban mines at various plants in Japan. One of its plants retrieved about 15 tonnes of gold last year from a variety of industrial waste.

Professor Harada is part of a team working on establishing “artificial ore? factories at Japan's waste dumps and landfill sites. By his estimates, a tonne of ore from a real goldmine might produce only five grams of actual gold, while a tonne of artificial ore made from reduced mobile phones would yield about 150 grams."

Coming soon to an exchange near you: The Urban Miner's Index.

Note: We will not publish a closing update due to travel schedules. We will see you on Bloomberg Radio live, tomorrow at he 8 o'clock hour. 

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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