Metals report for April 19

Sunday evening’s reopening gold price tickers initially headed lower as Asian trading got underway. Evidently, left-over sell orders and some fresh bailing out instructions were the first tickets found on trading desks at the start of the new week overseas. At the same time, the U.S. dollar got quite close to the 81 mark on the index, and its continuing strong bid contributed to fresh declines in other metals as well; silver fell to $17.62, platinum to $1687, and palladium to $528 (losing $15) –all within the first 10 minutes of action.

By the morning, gold had already hit a two-week low just above the $1120 level, breaching the 1130 support (and previous break-out point) as the US dollar surged to 81.25 on the index on the perception that commodities as an asset class will take a notable hit in demand by virtue of the advent of regulation that is likely to follow the Goldman debacle. More market-related ‘sci-fi’ was on offer during the hours preceding the opening of market in New York.

Everything from ‘back up the truck’ sloganeering, to scary stories about a shortage of gold in the wake of volcanic ash-engendered flight disruptions, to colorful tales of how putative gold cartels ‘whacked’ gold prices in order to prevent the masses from carrying out their nascent revolution, was encountered on the “Internets” this morning. One such nonsensical urban myth prompted a veteran name in this industry, Stewart Murray (now the CEO of the LBMA), to remind folks that -for the moment –flight restrictions notwithstanding-there is “a lot of gold in London and a very active lending market, thus if anyone needed to borrow gold because a shipment was delayed, I can’t imagine there would be a problem.”

New York spot bullion dealings opened in the red for the yellow and white metals this morning, albeit other colorful commodities (orange copper and black gold) were not immune from the mini-exodus from the complex that was born on Friday. With the dollar still higher, the euro at 1.344 and a near 200-point drop in the Nikkei average overnight, players appear to be tilting towards risk aversion once again – just one week after they exhibited a healthy dose of quite the opposite.

Spot gold bullion opened with a $7.10 loss, quoted at $1129.70 per ounce while spot silver started the session with a 13¢ drop at $17.57 and it was on course for a full one-dollar loss during the course of a week. Support in gold will hopefully become manifest around $1117.00 but the risk of a sub-$1100 dip has once again risen substantially following the “Goldman Commodity Slide.” For the moment, however, repairs could be the order of the day and some rebound can logically be expected, even if $1140 has now turned into overhead resistance.

Platinum fell $12 on the open and was quoted at $1677.00 the ounce, while palladium slid $7 to the $521.00 level. The noble metals posted 3 and 5% declines since their most recent peaks as of this morning’s tally. Rhodium dropped $20 to the $2910.00 bid level. Crude oil traded more than $2 lower this morning, near the $81 per barrel level.

Friday’s 2%+ gold meltdown was the worst in over two months’ time, and thus the quarterbacking related to the event was at a fever-pitch all over the Internet, all weekend long (no surprise there). No need to rehash the news at this point, but, we will, anyway. In a nutshell: Goldman Sachs being charged by the SEC with fraud over mortgage products (CDOs). The headline sparked massive asset sales across the board on Friday (including gold, which many would have counted upon to…rise).

There is a notion that hedge fund Paulson & Co. is being implicated in, and possibly tied to, said fraud, albeit no charges have been filed against it or its principal. How such straightforward news morphed into theories of an ‘orchestrated’ hit on gold (at a time when oil, silver, sugar, stocks, copper, and a plethora of other assets also fell out of bed) is beyond the limits of reasonable comprehension. But, hey, that’s forum and newsletter territory for you. Read at the peril of your own sanity (and money).

The speculative side of the Goldman-Paulson story would read something like this, on the other hand: “Paulson & Co. recently launched a hedge fund to capitalize on what it saw as a possible longer-term move to come in the gold market. If Paulson is implicated in the SEC’s charges, then Friday’s specs were simply betting that there might also be an exodus from his funds.”

That could mean that Paulson will have to sell some assets (such as GLD) just to deal with redemptions and client losses. The gold-based hedge fund Paulson launched at the start of 2010 has a three-year lockup feature, which means investors won't be able to withdraw their money for that set period. However, other Paulson hedge funds also hold gold and gold-related positions.

The bottom line, at least according to one market observer, Michael Pento, the chief economist at Delta Global Advisors (who, BTW, correctly predicted the 2008 price collapse in raw materials) is that “this [filing of charges] is not good for commodities, [as] it could [turnout to] be the case that traders stop making trades with Goldman. Paulson has been a big bettor on gold. If this fetters the ability of the fund to keep adding positions, or forces them to do some asset sales, it's going to be bad." As of Feb. 28, Goldman Sachs was the largest commodity brokerage according to CFTC data. The investment bank's shares tumbled as much as 16% on Friday.

Well, if the public reading of the market’s (fundamentals-flavored) not-so-positive tea leaves by statistical guru GMFS was greeted with nary a yawn in the bullion bully circles on Wednesday, Friday’s unexpected ‘incoming’ from left-field left no doubt that many a position recently added to the 720 tonne-plus speculative paper pile in gold was less than a confident one, and came into the market on momentum alone (a stack which even a child in possession of a huge supply sturdy-looking Lego blocks would ultimately not dare undertake as a project for a Dubai-style skyscraper). But, try they did, and eventually will again, once the SEC Goldman-oriented hoopla dies down a bit.

More hoopla and incredulous jeering is likely to be generated among certain radical extremist gold bug clubs by the words spoken last Thursday by Dallas Federal Reserve Bank President Richard Fisher. Said Mr. Fisher, according to a briefing by Reuters: "We have politely made clear in all our speeches ... that we will not monetize the deficits."

So, the Fed made it clear that it will not monetize federal budget deficits by printing money. So, the Fed signaled that it is finished with the job of providing liquidity to markets during the financial crisis. So, the Fed is mulling how best to withdraw said excess liquidity from the system. So, Fed officials say they now regret its decision to purchase $300 billion in longer-term Treasury securities during the crisis. Why? Because it suggested to observers that the Fed was prepared to fund the U.S. fiscal shortfall. That little act was sufficient to bring about a credibility ‘problem’ and has the inflationist camps dismissing Mr. Fisher’s recent statement as ‘empty rhetoric’ and ‘pabulum for the market.’ We say, wait about 12 months.

We might not have to wait twelve months to see some action on the Chinese real estate front. You know, the overheated, piranha-frenzy-like housing bubble that the Chinese government is fretting about. Well, before the weekend rolled around, China’s central bank pledged to immediately implement new lending rules to cool real-estate speculation and one of its policy advisers said the market is having its “last madness.”

Jon Nadler Senior Analyst, Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

Blog: http://www.kitco.com/ind/index.html#nadler

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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