Metals report for May 10

We closed last week’s columns with a post titled “There’s Got To Be A Morning After.” It turns out that this morning could turn out to be just such a post ‘the-sky-was-about-to-fall-but-did-not’ morning as regards the debt situation over in Europe. While the outcome of what took place over the weekend is far from being certain to any reliable degree, it does reveal one inescapable reality- one that doomsayers ought to note of with care. That is, that when it comes to concerted efforts –be they as late as they have been in this case- by central banks and other officials, they do make a difference.

When it comes to falling skies, it seems that the safer bet to make (after of course first profiting from swelling fear) is that they won’t. Almost three years after we were (and still are) assured of such dire outcomes, they have not materialized despite several major opportunities to do so. It sells newsletters, nonetheless. Thus, the opposites of our Friday title can be counted upon to continue to make an appearance.

Global markets were greeted with a substantially different picture than the one they closed based upon at the end of last week. News of the massive and aggressive containment package that EU put into motion over the weekend blew a large portion of the dark clouds of anxiety hanging over investors’ head away and quickly rebalanced many a price equation this morning.

A quick scan of this morning’s price tickers showed that crude oil gained $2.56, the US dollar fell 1.03 in the index, the euro popped up to 1.30 and gold prices handed back a good chunk of the fear premium that took them well above $1200 as last week drew to a close. Spot gold started off with a $12.60 per ounce loss at $1195.40 after having touched overnight lows near $1183.00 the ounce.

As mentioned, the yellow metal slipped in concert with the US dollar as profit-takers and the lifting of a portion of the fear premium impacted it. We expect choppy conditions to remain the order of the day as opposing forces continue to duke it out in this market. As the euro slipped back towards 1.29 and the greenback’s losses shrank somewhat, gold stabilized near the $1200 mark awaiting further cues.

The trading range remains within the broader $1175-$1225 channel and attempts to get back above the round figure at $1200 will continue. Much depends on investors’ perception of what levels are sustainable at this juncture, and the longer-range effects of the European package. The sense of urgency to reach for the old high (or higher) is for the time being, on hiatus.

No such problems for the white metals however, on this Monday morning. Stimulated by the reappearance of risk appetite, silver and the noble metals made progress to the upside as markets opened for trading. Silver gained 9 cents to start at $18.49 per ounce. Platinum climbed a robust $37 at the open, trading at $1697.00 the ounce.

Palladium surged $18 to reach $529.00 per ounce. Rhodium was flat at $2780.00 on the bid side this morning. The US stock market greeted the news from Europe with a 153-point opening gain (following earlier Dow futures that were indicating a massive 300-400 point rise on the open as being in the works) that quickly turned into a 335-point ‘applause’ of the package by investors.

Meanwhile, following last week’s call for $800 gold by Barclays, another firm has joined the ranks of those calling for an eventual adjustment in the value of the yellow metal. This time, that similar kind of prognosis comes from investment bank Société Générale which is projecting gold prices to turn down and trade below $800 by the end of this year.

Recall that the Barclays projection allowed for a return to that number by perhaps as late as the end of 2011 or the beginning of 2012. SocGen bases its outlook on a stall in investment demand for the yellow metal. Its analysts opine that such reduction in demand by spec funds and other investors is not likely to be offset by an equivalent recovery in jewelry fabrication demand. The fact that gold prices fell quite substantially on faltering investment demand during the Dec-Jan period, and once again in March, was cited by SocGen as a potential harbinger of more of the same, later in 2010.

Clearly, spec fund activity continues to dominate gold’s price patterns for the moment, and is overshadowing otherwise feeble market fundamentals. This could continue for so long as the fear premium is maintained by turbulent external conditions. SocGen analysts note however, that investment activity is clearly not the only price driver in the gold market, even if it is currently the bullish influence (perhaps in addition to the fact that central banks have not come to market with much-if any-gold at all since the year started).

Absorption of 198 tons into the gold-oriented funds in the first three weeks of February was accompanied a gold price increase of $80 per ounce. In the two subsequent trading weeks that gain was wiped out, highlighting the importance of sustained investment offtake as a key catalyst for gold prices to remain high given the other not-to-be-taken-lightly components of the market (mine supply, [especially] scrap supply, and primary fabrication demand).

Jon Nadler

Senior Analyst, Kitco Metals Inc.North America

www.kitco.com and www.kitco.cn

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

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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