Metals report for May 28

Global markets extended Thursday’s bounce into Friday as gains in the euro provided a catalyst for risk appetite. The common currency built on yesterday’s gains and climbed above the 1.24 mark this morning, still drawing strength from China’s overt commitment to Eurozone assets as regards its reserves. The market stage in May was clearly dominated by the euro’s woes but as things stand at this juncture, the risk-reward equation for speculators shorting it versus the US dollar no longer looks enticing to technicians.

As the euro rose this morning, the U.S. dollar broke under the 86 level, crude oil climbed above $75, while US stock futures pointed towards possible gains following their second largest rise of 2010 recorded on Thursday. Nevertheless, the final May tally could end with a near 7% loss for the index, as against a probable 3% gain for gold bullion. The highly turbulent month brought with it the sharpest slump in stocks and commodities since the Lehman ‘incident’ back in 2008. It also gave us a $1250 record for gold prices.

Friday’s opening revealed a mixed bag of ups and downs as book-squaring and month-end-related positioning played out against the aforementioned rally in equities and the euro. Gold spot started the final session of the week with a $1.10 gain following in the footsteps of yesterday’s equally modest final gain. The yellow metal was quoted at $1213.10 on the bid side.

Silver fell one penny to open at $18.50 as additional gains also proved difficult to achieve. Platinum fell $7 on the open, starting the day off at $1556.00 while palladium dropped $1 to the$462 mark per troy ounce. Speaking of platinum, technical analysis indicates a possible end to the noble metal’s fall from recently recorded 21-month highs. Platinum fell 12 percent last week, in the sharpest decline since the asset liquidation mania-induced losses it suffered up to October 2008.

Indian gold purchases ticked higher overnight as local prices retreated from their all-time highs reached on Wednesday. The country’s gold trade now faces an upcoming slow period for June and July as the monsoon season’s historical patterns would indicate. For older locals, gold is essentially woven into the fabric of life. However, a new generation of Indian investors is now scrutinizing gold’s average 16% annual gains over the past decade up against the nearly identical gains (15% p.a.) shown by the Bombay Stock Exchange’s Sensex (and that, before counting dividends).

Over two decades of similar performance measurements, gold shows a 6% p.a. gain versus a steady 16% rise in the Sensex. Like we always note: buying gold for price ‘performance’ versus owning it as insurance and for gold-based peace of mind are two notably different things. All this, while fund managers such as Messrs. Einhorn and Paulson continue to blatantly talk their book full of bullion holdings and expect further robust performance from an asset that has already risen five-fold on the decade. Some beg to differ, and thus while others like it hot, they are throwing a bit of cold water on matters of far-out gold prices.

Take global market analyst group Natixis Commodity Markets, which warns that “the strong run in precious metals prices may be coming to a end much sooner than miners and investors would have hoped.” In the firm’s view, during the current year, bullion values rose almost exclusively based on the coattail effect of the European debt crisis. This, is as it ought to be. That is what gold normally should do best: provide a crisis hedge in times of…crisis.

Natixis analysts add however that gold price can only rally further from present levels depending on whether the European situation deteriorates and the contagion spreads. In that regard, Natixis opines that that further price gains will “prove difficult.”

As has been the case with most not-so-bullish projections on the gold price, Natixis then shifts its focus to the gold market’s fundamentals. These columns have consistently pointed out less-than-auspicious supply/demand figures that have been building up in the gold market. Bullion bullies would have us believe that such tonnage flows no longer matter. The fact is, they always have.

Natixis thus points a cautionary finger at slumping primary demand from jewelry fabricators, and rising supplies of scrap as well as newly mined gold. It also alludes to the fact that the world’s gold miners have almost universally de-hedged all forward gold production. This is not secret, as also revealed in the recent GFMS annual gold survey. The global hedge book (240t) has shrunk to perhaps the last year’s worth of de-hedging tonnage.

The firm does allow for the odds of additional gains in the price of gold, should sovereign debt problems aggravate. However, it basically expects that bullion prices could be in the process of topping out around present levels, and might commence a protracted slide. “Such a scenario would be hastened by a continuing improvement in the global economic outlook, in particular once it has enabled the US Federal Reserve to begin withdrawing monetary stimuli. With China’s trade position shifting into balance, its reduced accumulation of dollars may, in turn, lead to reduced demand for gold as a reserve asset.”

Now, for the numbers: While raising the annual average price it projected back in February by about $100, Natixis still offers the prospect of a possible “gold price dip below the $1 000/oz mark as early as the fourth quarter, generating an annual average for 2010 of $1 040/oz.” For silver, the firm feels that “while silver prices will benefit from a continuing recovery in industrial demand, by late 2010, average prices are expected to average $16/oz.” Finally, for the noble metals, Natixis is forecasting average prices of $485/oz. for palladium and $1,700/oz. for platinum this year.

Final item du jour: Last week’s online debate between CPM’s Jeffrey Christian and an acronym-that-shall-not-be-named-bearing club, gave rise to the usual post-game plethora of misrepresentations and false allegations leveled against CPM’s founder. Mr. Christian decided it was time to (once and for all) set the record totally straight. His parting open letter to the conspiracy club bearing the acronym-that-shall-not-be-named name is available right here on Kitco and may be found by clicking on the icon below:

Happy Trading. Happy LONG (for US readers) weekend. We will be back on Tuesday morning, with a late Monday evening-written update, as the first few days in June will be spent in the usual “home away from home” - the airline seat.

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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