Gold investment demand dwindling

Good Morning,

Overnight trading saw gold confined to a roughly seven dollar price range as very little in the way of external news filtered into the market to give players motivation for more active participation. The US dollar remained steady near 82 on the trade-weighted index while the euro touched the $1.30 level and held slightly above it into the early part of the morning. Some analysts remain skeptical of the common currency’s current strength and envision it giving some of it up later in the year as debt worries return.

The European bank stress story that occupied most of last week’s headlines has now largely been shelved and has been replaced by the stories anticipating the US GDP figures set to arrive on Friday. Yesterday’s better-than-expected US new home sales data amounted to a small but visible sigh of relief among those who make their plays based on risk appetite signals versus the opposite sentiment.

A couple of external macro news headlines of note were on offer this morning: China slows and India hikes. The PBOC announced this morning that it sees a slowdown in the country’s formerly ‘too-fast growth’ and that Q2 GDP has already come down to the 10.3% level as against that which had been recorded in the first trimester: an 11.9% rate of expansion.

The PBOC sees no ‘double-dip’ threat in the country. India, on the other hand, seeing the threat of a double…digit inflation rate (over 10% now) raised key lending and borrowing rate by a quarter point –the fourth such ratcheting up of rates in 2010. ‘Cause, that, folks, is what central banks do when prices rise (okay, when people in the street protest price rises that take too much of a toll).

The overriding picture emerging in the gold market is one that points toward ebbing investment demand following the stabilization of the situation in Europe and the apparent refusal of central bankers to let the global economy careen out of control in either extreme direction that typical gold buyers normally expect; hyperinflation or deep depression.

If you need further proof that the euro-centric-begets-must-have-more-gold crisis mentality is abating, look no further than Reuters –which reported this very morning that: “Gold priced in euros and sterling slipped to multi-month lows on Tuesday as growing confidence in the outlook for the financial markets dented buying of the metal as a haven from risk.”

On the other hand, physical buyers (read: India) have finally had something to smile about following bullion’s dip to under the $1190s over recent sessions. Indication is that they might actually break into full grins if perhaps they are presented with prices nearer to the mid-1100s anytime soon. Today’s first-hour dip to under $1175.00 per ounce might just usher in those better conditions for buyers of that ilk.

As such, the unmistakable exit by gold fund holders and by gold speculators in the futures markets from just a portion of the massive positions that had been built up in anticipation of such unpleasant outcomes has now placed gold on course for its first monthly drop since March and has already seen it touch an eight-week low recently. The current technical picture in gold presents some…challenges as well, as you can see from this video clip seen on Marketwatch. And that’s the take offered by a long-term bull, mind you.

Underscoring the retreat in interest for gold as a safe-haven and/or hedging tool for the above dire scenarios, the gold-oriented ETFs-led by the SPDR Gold Trust lost balances in July. The largest such fund is now on track to lose about 20 tonnes in July (it is now down to about 1301 tonnes as of the last tally); a month that did not witness the death of the euro, the regional economy, and/or of its banking sector, despite forecasts and assurances to the contrary from many quarters.

This decline in assets under management (read: ounces) would be second to January’s loss of about 22.5 tonnes and such redemptions have made for a tally which shows that the current month has only added 6.8 tonnes to holdings as against the 148 tonnes that were piled up during the June euro-centric crisis. Of course, when compared to the more than 450 tonnes that were seen flowing into the gold-based funds in Q1 of 2009, the difference in the underlying sense of urgency to hold the metal is quite remarkable.

Last week, Standard and Poors raised its gold price assumptions for the current year, while leaving forward projections unchanged. S&P raised its forecast from $900 per ounce to $1,100 ounce for the rest of 2010, and from $800 to $900 for 2011. Gold prices envisioned for 2012, 2013, as well as the longer term are unchanged according to S&P, respectively, at $700, $650 and $600 per ounce. Clearly, this is a case of many a missing zeros, in some people’s opinion –be they fund managers, or mining firm CEOs. They would tender that S&P is only to be believed when it talks about downgrading the credit ratings of entire countries, not the future price of gold.

Today’s New York session opened with evaporating gains in gold. The yellow metal had treaded water just above $1185 near the start of the day but was actually down to $1181.90 at last check; just ten minutes into the trading day. The other metals in the complex were either unchanged (silver at $18.18 and rhodium at $2250.00) or moving higher (platinum up $10 to $1556.00 and palladium ahead by $5 to $475.00) in a virtual replay of yesterday’s de-coupled action in the sector.

What’s this? Gold de-coupling from its siblings and cousins? Gold down/ dollar down? Why, it must be the planetary alignment to which we alluded to in yesterday’s post. Apparently not even a small portion of Hell broke loose on Monday, after all. But, there is always hope for today or tomorrow…

Speaking of hope, there is apparently a good deal of it to be found when it comes to dissecting the fundamental picture in platinum. Mineweb’s Geoff Candy did just such a close-quarters table-top examination of the noble metal and came away with some interesting conclusions. Conclusions bolstered by authoritative insights from a source that ought to really know its stuff when it comes to the metal: Johnson Matthey.

Nutshell “take-aways” from the JM analysis: a) the platinum market could be bottoming out. b) supply/demand fundamentals would argue in favour of (at least) maintenance of current price levels and/or perhaps a higher price zone later in the year and into the next one. c) modest growth is seen in South African platinum output. d) Chinese jewellery demand (the largest) has fallen off this year. e) the market needs a renaissance to take place in the demand sector for diesel engine catalyst applications but JM feels it could be coming. f) the ETF that is; a sector that presents a bit of a mystery going forward, following a period of robust accumulation earlier in the year.

Matthey’s GM of Research, Peter Duncan, says it better than we can when it comes to platinum and the world of ETFs, and it goes as follows:

"So far we've seen significant growth in ETF investment this year, after the launch of the US-based ETF fund. How much of that of course is pent up demand and how much reflects what demand will do going forward is a little bit more difficult to say. Certainly the demand - the rate of growth in cumulative holdings has fallen, but there's no real evidence here that people haven't taken any profit and in fact the cumulative demand in ETFs has just grown irrespective of what price has done - so we saw no or very little exiting of positions when the price dropped recently and the curve has continued to go smoothly upwards. ETF investment - difficult to say what's going to happen long term but so far, it's looking fairly sticky, as we say - it's looking to hold onto the platinum that it's bought."

Just one of the reasons we remain ebullient about rhodium’s own future prospects; a metal for which there is no substitute when it comes to catalyst applications, and a metal in which the ETFs are not present. But you can be. Learn all about it here.

Happy Trading.

Jon Nadler is a 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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