Metals report for May 18

A recapture of the 1.24 level by the beleaguered euro and a small decline in the U.S. dollar (to near the 86 level on the index) conspired to dampen gold demand during the overnight hours and the yellow metal fell to a one-week low near $1205 per ounce as a result. Risk appetite improved a tad and the quest for safe-havens turned somewhat muted following a bounce in European stock markets. Indian gold prices fell once again overnight as ultra-high bullion prices kept would-be buyers from doing that which their German counterparts have been doing for several days; cleaning out the local gold shop.

The growing lack of Asian gold demand is becoming a concern especially if the debt storm clouds blow away from Europe any time soon. Bloomberg reports that the recent sharp gains in bullion values are cutting into traditional demand from retail investors in Asia. This, according to David Wilson, a London-based analyst with Societe Generale SA., who said that: “The fundamental background suggests that this recent upward move cannot continue forever,” Wilson said. “Demand is crumbling in Asia in the face of gold’s relentless upward march and the volatility in the metal’s price.”

New York spot bullion values opened with further losses in all but platinum this morning. Gold was off by $15.40 at $1208.70 the ounce, and silver lost 19¢ to start near the $18.75 level. Platinum gained $6 to open at $1675 while palladium dropped $3 to the $501 mark. Rhodium showed no change at $1750.00 after a $30 decline on Monday. In ‘heard-on-the-street’ items of a curious nature: John Paulson buys 16.8 million BofA shares. What would the gold bugs say? How about: “he wants to make a buck, any which way he can?”

Gold dipped further following U.S. housing data that showed housing starts rising last month and an unexpected 0.1% drop in wholesale prices. Inflation refuses to make an appearance while the slack in the U.S. economy refuses to make a disappearing act. Crude oil rebounded strongly, adding $2.15 this morning, as risk appetite made a bit of a comeback following the resurrection of the euro from four-year lows.

Amid such existential fears about the euro, at least one nation is forging ahead with plans to adopt it as its base. Estonia will become the 17th nation to use the common currency, come January of 2011. Currency market technicians still see the euro as possibly slipping to the 1.20 mark, if it fails to make a substantial retracement, and soon.

Such woes do not however imply that we are to start singing the last rites for the “little banknote that could,” despite the apparent panic that has gripped German gold buyers over the past week. Chief Global Economist Jim O’Neill –he of Goldman Sachs- said that it is “ridiculous” to suggest that the euro area will break up within the next year (Hello, Mr. Faber?) and predicted the currency’s decline may be almost over. Whilst also allowing for a 1.20 target low in the near future, Mr. O’Neill stated that:

“The simple misconception is people trying to equate pure economic logic with social political reality,” O’Neill said in an interview from his office in London today. “The Germans and French are passionately committed to it whether the rest of us think it’s crazy or not.

Mr. O’Neill added that: “This is 60 years of history in the making, so the idea that the euro simply falls apart at first test of its credibility, I think it highly unlikely,” O’Neill said. “It might well be in 20 years time it doesn’t exist but the idea that it’s not going to exist in the next year because the market is worried about Spain and Portugal’s funding requirements is ridiculous.”

Do recall those words the next time you read the latest installment from your friendly hard-money newsletter- the same one that guaranteed you a dead-and-gone U.S. dollar by Christmas of last year. The new ‘whipping boy’ is the euro and the vendors of end-of-the-world scripts will take any condition (including a massively stronger U.S. dollar) to bolster the hyper-bullish gold price scenarios they offer.

Another bit of ‘conventional’ (for a certain niche) ‘wisdom’ was also laid to rest this week: the one about foreign interests having no interest in UD financial assets any longer. The exodus from all things American (long-term obligations, the dollar, etc.) was supposed to be in full-swing by now and the purchase of same all but invisible. Guess again, it seems.

Bloomberg found that “reverse diversification” boosted global demand for long-term U.S. financial assets to a record as the European fiscal crisis may be beginning to translate into increased demand for dollar assets. Purchases of equities, notes and bonds totaled $140.5 billion in March, more than double economists’ projections, after net buying of $47.1 billion in February, the Treasury Department said today. Treasury purchases rose by the most since June as China, the largest lender to the U.S., added to its holdings for the first time since September.” Yes, that’s the same China that “stopped buying such assets and started ‘dumping’ them” that you read about recently in some…publications.

Furthermore: 1) the rise in demand for Treasuries came even as yields rose across the yield curve in March. 2) Demand at Treasury auctions from indirect bidders rose in April. 3) Treasury holdings by China rose 2 percent in March to $895.2 billion, the biggest increase since July. 4) Japan, the second-largest holder, increased its holdings by $16.4 billion to $784.9 billion in March. Holdings in the U.K. gained $45.5 billion to $279 billion, the fifth straight monthly increase.

The Organization of Petroleum Exporting Countries (you know, the people who were supposed to adopt the gold ‘dinar’ and settle everything in anything but dollars) increased its position by $10.7 billion to $229.5 billion. What do these supposedly soured-on-the-U.S. buyers know that we do not? Nothing more special than what the U.S. market really is, and is already known by many. Namely, the deepest, most liquid one in existence, enhanced by a stable democracy infused with the rule of law. As such, the trend is set to continue.

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 senior metals analyst with Kitco Metals Inc. in Montreal.

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