Metals update for June 10

Good Morning,

Calmer conditions returned to the markets overnight as several factors conspired to divert investors from the panicky behavior they exhibited earlier in the week. The euro strengthened a tad, rising above the 1.20 mark once again, the US dollar declined a little, the Nikkei index eked out a 103 point gain, and thus profit-takers regained the upper hand in bullion markets as Thursday’s action got underway overseas.

Risk appetite appeared to turn healthier in most markets, but in the case of gold that meant a decline in purchasing appetite, and the realization that scrap flows are eclipsing physical offtake once again just as the ‘summer doldrums’ are upon us.

Several statements from Chinese officials also appeared to put a damper on some of the speculation that was manifest in the markets earlier. The head of China’s national pension fund said that the euro will in fact manage to survive the current debt crisis. Then, the State Administration of Foreign Exchange (SAFE) said in Beijing- once and for all clearing up the “mystery” of why China has not jumped on the IMF’s gold (or any other massive amounts of gold for that matter) –that the gold market is too small, illiquid, and volatile (their words) to be “suitable for asset allocation.”

By which, we construe, to be unsuitable for allocation percentages of a significant order of magnitude higher than the 2% or so percent with which the world’s third largest economy’s managers feel comfortable at this time.

Also from China, several statements on the bubble being possibly created in gold markets is by hot-to-trot speculative money that has leaked into it from real estate gamblers. The China People’s Daily reported that “Mr. Cheng Zhang, deputy general manager of China National Gold Group Marketing Company, told reporters that May has historically been a low season for gold sales, but sales conditions in May this year are better than that of previous years. Inflation expectations and a cool property market have made gold the focal point of investment.

Mr. Zhou Dewen, head of Wenzhou SME Development Association, said that Wenzhou businesspeople have been discussing withdrawing capital from the property market in recent months. Because gold is easier to transfer into money, it has become a tool for businesspeople to pursue capital appreciation in a short period of time.”

After noting the changing trend in the flow of money, the gentlemen cautioned that “the current domestic gold price would not have been so high without international speculation. As China has become the world's second largest gold-consumption market, international speculators are turning their eyes to the Chinese market.

China should be cautious of international speculators who deliberately drive up the price before tempting investors to enter the market. "I suggest that investors should not particulate too much in gold speculation," Mr. Zhu said. "The current gold buy-back channels in China are not smooth, so gold speculators will be exposed to high risks."

The final item on our Chinese-sourced news roundup this morning comes from out good friend, Mr. Zhang Bingnan, who is the Vice President of the China Gold Association. Mr. Zhang said (and this does not come as too much of a surprise) that China is expected to have higher gold output this year, even more than the record of 313.9 tons it produced in 2009.

Separately, JP Morgan upped its price targets for several mining firms (the names are some of the largest and are known to gold followers, so we will not mention them), recommended gold to any investor whose allocation pie does not contain the yellow metal, and also raised its long-term price forecast for gold to $950 per ounce. Not a misprint, not missing a zero.

Morgan analysts see only a 25% chance of $1500 gold in the cards. Echoing this writer’s advice tendered during the Cambridge Show debate last Sunday, the JPM analysts said that: “It's difficult to buy gold after its strength and close to record highs. However, we feel it's more difficult not to have a gold position in these highly uncertain times. Even at these levels we'd encourage investors who haven't yet entered the gold sector to open a starter position." Which is all fine –so long as one bears in mind the 75% probability of gold not going to $1,500.00 per ounce. As we said, buying gold for price performance is to bark…you know the rest…

Spot metals dealings opened with mixed results once again, as profit-takers in one niche were offset by profit-seekers in others. Gold started on the back foot this morning, opening with a $6.20 per ounce loss and quoted at $1226.90 bid after having touched an overnight low of just under the $1220 mark. Indian gold buying was once again in mothballs overnight, as locals awaited prices to be backing away from this week’s peak over time.

EW analysis confirms an on-going (but worrisome) disconnect between gold and silver, as well as other assets. Despite allowing for a speculative-fueled run to $1346- if conditions converge in an ideal manner- the Prechterian angle still tilts towards characterizing recent chart traces as a top. Support at just under $1200 is critical to maintain. Overhead resistance is manifest from $1230 to $1240 and on up to the just-above-$1250 level that gold touched earlier in the week.

Silver dropped 6 cents to open at $18.04 per ounce. On the other hand, platinum added $7 and palladium gained $4 to rise to $1533.00 and $451 respectively. Rhodium was unchanged at $2430.00 after having dipped again on Wednesday. Oil prices gained 66 cents to rise to $75.04 per barrel while copper added less than a tenth of a percent this morning. Chinese imports for May-at 397,000 tons- came in under forecasted levels.

US weekly jobless claim numbers were on tap this morning, and the results show a small dip in the filings. The 3,000 fewer applications for benefits brought the weekly tally down to 456,000 but the figure was still higher than that which economists had expected. Perhaps the broader picture is more revealing: the continuing claims numbers fell to 4.46 million – the lowest such level since December of 2008. The (jobs) trend is your friend, Mr. Bernanke. On the other hand, your colleague, Mr. Trichet has quite a job on his hands…

The ECB (and the BoE) left good enough alone and did not tinker with interest rates this morning. Noting a projected 0.7% growth rate for 2010 followed by a projected ‘growth’ rate of 0.2% next year, the ECB could point to only one ‘bright’ spot in its announcement this morning; that the inflation rate is ‘firmly anchored.’ Translation: we are staring at disinflation, or worse.

We on the other hand, will be staring at price monitors and news flows for the rest of the day, as we head towards pre-weekend book-squaring.

Happy Trading.

Jon Nadler is a Senior Analyst at Kitco Metals Inc, North America.

About the Author
Jon Nadler

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

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