Gold lower on scrap numbers

Good Morning,

Gold prices fell back towards the psychologically important $1200 mark as the new trading week got underway, with little in the way of bullish news coming the way of precious metals buyers. Although the euro weakened a tad and dropped under the 1.26 level against the US dollar, the strength exhibited by the latter undermined the progress to the upside that gold attempted to undertake last Friday.

Moreover, the continued unwinding of speculative long positions geared to benefit from a possible mushroom cloud in the European debt crisis appeared to be the true and prime catalysts behind the yellow metal’s decline overnight and this morning. In effect, the speculative gold position book is back to the status quo it was seen in, prior to the aggravation of the sovereign debt problem whose fuse was ignited by headlines out of Greece.

Such headlines are currently almost absent from the news radar and therefore the appetite for risk has buoyed other assets rather than gold. In fact, the news that commodities investors are currently focusing on is of the type that reveals that Greece has implemented pension reform and that European banks stress tests are yielding comforting results. Not to mention the news that China’s copper imports fell for a third straight month in June, a story that engendered a 1.1% drop in copper this morning.

According to CFTC data, the number of bets on higher gold prices fell by the most since April. April of 2009, that is. Spec longs still outnumbered shorts by 209,042 contracts on the Comex as of last Tuesday. Net-longs however shrank by more than 41,000 contracts, or some 15 percent, from a week earlier. In the words of one Seoul-based analyst/trader: “As concerns about the economic recovery ease, investors are losing their appetite for gold, though any sharp decline in prices is unlikely.” The SPDR Gold Trust’s balances lost a modest 1.52 metric tons last Friday, bringing its total July outflows to nearly six tonnes.

Spot gold dealings opened under renewed selling pressure on Monday, with the yellow metal losing $9.00 per ounce to the $1202.40 level. Hope that Indian physical buyers might emerge and support the metal at under the $1200 value zone is still present, although (or perhaps because) local gold futures may extend their declines into a fourth week. Something that is not declining in India is the heavy selling of gold scrap. Old jewellery is being sold at a furious pace, as global gold price remain still quite elevated. Reports that jewellery shops have been witnessing a 10% surge in scrap sales while new baubles languish on the shelves are common these days.

In part, the sellbacks are attributable to seasonal patterns where farmers liquidate old gold to raise the cash needed for seeds and fertilizer during monsoon. Still, the World Gold Council estimates that last year-seasonality or not- Indian scrap gold sales may have totaled over 200 tonnes – a record. A record engendered by another record; that in gold prices. When one considers that total Indian demand was just above 400 tonnes last year, the scrap sales figure starts taking on significant…weight.

For others, such signs are…signs of the times. Or, signs of a fifth wave of a major bull market peak. Broad public awareness of stratospheric prices may indicate that the next leg in values is not more of the same but rather something quite the opposite. So opines ActiveTradingPartners’ David Banister in a missive over the weekend. At any rate, for the moment, gold remains confined within the broader $1180-$1230 price band, albeit the bias to the downside continues to prevail in the wake of aforementioned news and trading pattern developments. Silver fell 19 cents on the open and was quoted at $17.96 the ounce.

Platinum prices lost $10.00 when they opened this morning and were trading at $1520.00 per ounce. Meanwhile, palladium dropped $3 to start at $454.00 the ounce. Rhodium was up a modest $10 to the $2410.00 level. The noble metals continue to be hooked on news from the automotive sector and from the periodic ETF balance tallies. Early in 2010 the ETF accumulation factor took over these markets’ daily price action almost completely.

On the car sales front, there is certainly something to write home about: namely, that Chinese sales gained more than 30% year-on-year for the first six months of 2010. Auto production surged more than 44% in the country and the government extended its incentive program for replacing smog-belching old vehicles with new ones through year’s-end.

Indian car production and sales figures were also quite encouraging. Carmaker Tata sold 63% more autos last month but Maruti Suzuki, Mahindra and Hyundai also tallied solid sales numbers. India and China (and to a large extent also Russia and Brazil) are in the driver’s seat of global auto sales at the moment as North America, and especially Europe, work their way out of automotive sales recessions.

Happy Trading.

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

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