Gold “costly” on rising long positions

Good Morning,

Precious metals trading opened on a mixed note this morning, with minor advances noted in the noble metals complex, while gold and silver retreated slightly. Amid a rather slow start in the flow of financial news and with little or no major economic data due today, market participants continued to focus on the after-effects of last week’s global developments.

Mergers and acquisitions activity supported stock index futures (think Potash looking for new suitors after rebuffing BHP Billiton) this morning. Meanwhile, over in the currency markets the euro retreated closer to $1.27 as news that the eurozone recovery stalled somewhat in July as well as this month.

Black gold rose from the lowest levels it traded at in more than six weeks but indications are that it could continue to slide in coming days if the US economic recovery shows further signs of faltering. Stockpiles of certain petroleum products are at their highest level in two decades. In the interim, only a third of polled investors by MoneyShow.com believe that the label of “bull” applies to them when it comes to stocks. That’s a far more dismal reading than was recorded prior to the market’s bottoming, in February of 2009.

Spot gold dealings started with a half-dollar per ounce loss, with the yellow metal quoted at $1,227.50 as against a small drop in the US dollar on the trade-weighted index (to 82.95 at last check). Bullion maintained the $1,225-$1,230 range following Friday’s $4+ drop in spot values but weekend demand in India was rather anemic according to local sources. Festival-related demand might offer some support to gold in the coming week but continuing high prices are making life difficult (to say the least) for local stockists who are trying to entice would-be buyers to take the plunge.

Silver prices fell a nickel at the start of Monday’s trading session. The bid-side quote on the white metal was indicated at $17.97 the ounce, as uncertainties over the tenor of the economic recovery came with similar apprehensions about industrial demand for the metal. Platinum added $1 to open at $1509.00 while palladium gained $4 to start at $478.00 the troy ounce. No change thus far in rhodium, with a quote this morning at $2,070.00 per ounce.

Gold shows signs of having become rather “costly” compared to its “noble” cousins (the PGM group of metals), reports Reuters this morning. A quick snapshot of spot values indicates that the gold/platinum and gold/silver ratios have risen to their highest levels since the end of May. Nevertheless, CFTC data reveals that speculative net long positions (hello, hedge funds!) have risen for a fourth week in the period ending on the 17th of the month. How sustainable is this?

"The current rally in gold could well be unsustainable, with the bubble set to burst at the first sign of weakness," opined analysts at UK-based FXCM Holdings- a major foreign exchange brokerage. Why the skittishness? Stop us if you’ve heard this one before:

"With real supply and demand conditions for gold pressuring prices lower, continued interest in investing in the metal is the only way for prices to continue to advance – but the truth is that the rally has become self-fulfilling with its appeal to investors dependent almost entirely upon its continued gains."

Others, such as S&P, Barings Holdings, LGT, Union Investment and Legal & General have also grown less bullish on the yellow metal in recent months. For example, Andrew Cole, manager at the Barings Multi-Asset fund, says that he has invested in gold since 2007, but also says the reasons for its appreciation have changed.

“More recently the rise in gold has been spurred by increasing nervousness about the willingness of central banks in the West to maintain the purchasing power of their currencies. Our purchases of gold in 2007 were driven by the desire to find a genuine risk-diversifier, but more recently it has not fulfilled that objective. Its performance has been [positively] correlated with that of other risk assets and this has prompted us to reduce exposure.”

Meanwhile, Legal & General analysts have said that: “gold’s [recent] appreciation has been supported by an environment of low interest rates and ample liquidity and if these factors faded and demand subsided, weakness could follow.”

Such “free lunches” as those still being offered by virtually zero interest rates have been fanning various asset bubbles [see above] and have prompted the IMF’s former chief economist –Mr. Raghuram Rajan- to warn that the pressures soon to be felt by central banks to reverse the expansionary monetary policies with which they had hoped to rekindle growth are “inadequately” appreciated by carry-traders. Politely said.

Mr. Rajan is not alone in ringing the asset bubble bell. We heard about the same scenario (and continue to hear the same) from Dr. Nouriel Roubini and from the Fed’s own Mr. Hoenig. The gentlemen now also have company in William White, former head of the monetary and economic department of the BIS.

Mr. White’s advice? Following the conclusion of the European debt situation (translation: any minute now) the Fed should raise benchmark rates by 2 (that’s two) percentage points and draw away from negative real interest rates. Messrs. Rajan and White will be heard from this very week, over at the Fed’s annual Jackson Hole Wyoming Jamboree.

One of the questions still on the table (in Wyoming, as well as at other Fed get-togethers) remains the one about US housing. Seven out of the past eight recessions were housing recovery-driven. This time around, it may be the same housing front that possibly morphs the recovery into a fresh recessionary dip.

Moody’s, for one, believes that US housing prices have another 20% to go (on the downside) over the next couple of years. The sooner the Fed acknowledges that there is in fact very little that it can do to stem such a process as is taking place in the housing market, the better-equipped it will be to deal with the other critical issue also on the front burner; job creation.

And, yes, housing will ultimately come back from the dead as well. However, the one change that everyone might have to learn to live with, going forward, is the one that points to the fact that home ownership might never again equate a nest-egg of wealth earmarked for the “golden years.” The mantra that “housing is special,” so oft-recited by realtors during the past 50 years, has now most likely become not only an agenda-driven slogan, but probably a big fat lie as well. One will be lucky if housing values will keep the pace up with inflation. And, for the moment, we are facing anything but that nuisance.

Happy (cautious) 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 senior metals analyst with Kitco Metals Inc. in Montreal.

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