Gold brushing resistance levels on employment data

Good Morning,

Gold prices opened with a $1.10 per ounce gain this morning, supported by uncertainty over the release of the weekly initial jobless claims figures. Spot bullion was quoted at $1,230.40 on the bid-side, trading near a seven-week high despite a still-resilient US dollar (last quote: 82.28 on the index). “Growth concerns” were cited among the factors responsible for gold’s attempt at overcoming chart resistance in and around the current value zone.

The unemployment claims filings data showed a gain on the latest week, rising to the highest level in nine months. The figure stood at 500,000 – up 12,000 for the week. The US dollar lost ground in the wake of the data release, and gold edged higher, eventually to near $1235.50 the ounce.

Buried in the statistics, or at least apparently ignored by the markets, was the fact that the four-week moving average of continuing unemployment claims fell- to 4.53 million, the lowest level since late 2008. Another case of headline figures making the headlines. What else is new?

Silver prices started Thursday’s session with a gain of one dime, quoted at $18.49 basis spot bid. As leading indicator figures came out later –showing a slowing in US economic growth- the white metal narrowed its gains to but a couple of pennies on the day, by mid-morning. Given the commodity component of silver’s current price equation, that is a logical development.

Platinum initially continued somewhat higher as well, adding $4 to open at $1,533.00 the ounce, but later fell into negative territory, losing about $6 on the session. Palladium on the other hand, dropped $1 to start at $487.00 per ounce, while rhodium was at a standstill for a third morning, with a quote of $2,070.00 on the bid per troy ounce.

Interestingly, the formulae being used by the spec fund gold bulls to justify further and substantial gains in gold prices has changed diametrically, and quite suddenly, this summer. Last year’s “golden mantra” was that economic recovery was going to be very good for commodities and that it was likely to bring inflation back in a big enough way to help propel gold and everything else tangible, to new heights. The US dollar was seen as “untouchable” and fatally contaminated.

Now, the fear that the global recovery may be losing steam and that it will bring about a potential bout of deflation is what is being used as the putative catalyst for…higher bullion prices. Not everyone (see Goldman, below) agrees that such would be the case, in the event of the big “D” taking hold.

The last time that “growth concerns” were permeating the markets and shaking them to their core was during the infamous “sell everything” summer/fall of 2008 (no need to remind what happened to most asset values during that period). Such concerns may have been aggravated by today’s US figures, but they were also countervailed by the Bundesbank lifting Germany’s growth target to 3% for the current year and by an uptick in British retail sales.

Suffice it to say that –at the moment- the dollar is seen as quite “acceptable” for safe-haven purposes, but along with it, so is gold, in a classic case of strangers making (temporary) passionate bedfellows. Or, so say the funds. The economy going in either direction is now reason for bullishness. Sound suspect? Not at a time when mining company executives see nothing but blue skies above, and see no reason for hedging. Because, so say the funds. More on them, and what they wrought, now:

John Spence's Marketwatch article only serves to reinforce some current apprehensions about gold and how it is behaving. Enter the hedge fund players and observe that they have recently stripped away one of gold's long-standing attributes; that of being an effective portfolio diversifier. Add to this the potential volatility that the movement in or out of gold of such large players may bring about (sources in Switzerland warn not to be surprised by $100 down days- caused by the very same players- in coming months) and you have also just removed another one of gold's most historically reliable and desirable features: its rock-solid stability in the face of everything else behaving like a yo-yo.

The final potential risk factor for the average novice gold buyer looking at the metal as a portfolio “cure-all” may be the fact that the entree of such disloyal and highly speculative institutional players has potentially morphed gold into an asset that now moves in tandem with equities and other conventional assets. Ask yourself where gold might be today, were it a world where we did not have gold ETFs and hungry-hungry hedge funds which used to buy CDOs just a couple of years ago, now discovering a new, “golden” toy to play with...

A couple of days ago we pointed out some parts of the presently bullish chatter which used a recent Goldman opinion that gold might rise to $1,300 as the reason why gold…will rise. That is the old “because they say so” argument (never to be employed when citing bearish projections, but always reliable if you are looking at the moon as the target).

Well, in the category of “news-that-hardly-anyone-apparently-wants-to-cover-but-still-makes-you-go- ‘Hmmm’…” it turns out this morning that [the same] Goldman Sachs did indeed recently opine that we might see $1,300 gold within six months’ time. So far, so good. But:

At the same time however (at least according to ZeroHedge.com and the NY Post) the same Goldman –via its GS Asset Management arm- is advising high net-worth clients to… “dump” their gold holdings: "[We've] shifted our stance on gold after years of being long. We see gold as being vulnerable to central bank inactivity in the face of rising deflation risk." A classic case of what is good for the goose being good for…only the goose. Ever have that nagging suspicion that the rich live “differently?” Wonder no more. They may not, overall, but they sure are getting different advice from the rest of us.

It also turns out that such advice may, indeed, be the correct one for the times (not that we would ever recommend dipping under the 10% in gold allocation level in ANYone’s basket of wealth). There is, however, a very real case being made out there for general prices going in the opposite direction of that which they did in 1923, in Germany (for example):

“The risk of deflation is much more real than the risk of inflation,” said Christoph Kind, head of asset allocation at Frankfurt-Trust, which manages about $20 billion. “The move in yields is a clear reflection that we are moving toward a deflationary environment. Nobody would be buying if there was a risk of inflation picking up.”

Happy (Careful) Trading.

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

Websites: www.kitco.com and www.kitco.cn

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