Gold nears record high before profit taking

Good Morning,

The successful bond auction conducted by Portugal this morning helped engender a mild (but transitory) gain in risk appetite, which was reflected in a small decline in the US dollar and a firming in US equity futures. Gold prices however bucked the emergent trend and continued to approach the $1,265.00 June high as uniformly exuberant hedge fund managers and market timers were betting on nothing but clear skies in the bullion weather forecast.

Today’s forecast: clear skies with temperatures at or above 1,264.00 degrees. High humidity will linger, brought on by the sweaty palms of shorts. Strong, hot, rhetorical winds from the direction of the PR machines at hedge funds, bullion websites and hard-money newsletter editorial desks.

Yesterday’s contrarian snapshot by MarketWatch’s Mark Hulbert found that the rhetoric of bullish sentiment (at 52.1%) surpassed levels seen over the past three years and was expected to only rise, following the close at a new high in the active December futures contract on Tuesday. Last week, Mr. Hulbert alluded to such a “slope of hope” when defining gold’s climb; a process that would be more sustainable (historically speaking) if it were being carried out on another surface: a wall of worry.

Worry did morph into alarm over in Japan this morning. Local officials once again raised rhetorical “what if?” questions and pointed to the fresh, 15-year high recorded by the yen against the US dollar as the potential catalyst for unpleasant outcomes in the nation’s economy and made references to various fiscal measures, but did not manage to make the difference that outright currency market intervention would.

Rhetoric that shows similar signs of failing was heard in China as well, where government attempts to deflate the hugely dangerous property bubble with anything shot of a sharp policy pin is being disregarded by greedy speculators. To wit, despite what was the intention of Beijing officials, housing deals in Shanghai for example, rose last month. Like, by 149% from last year’s levels (read: lotsa money thrown at buildings). “Curb your enthusiasm,” says the government. “Curb this! “say the profiteers.

New York spot metals dealings opened with solid gains for the midweek session this morning. Gold showed a $5.20 per ounce advance, quoted at $1,260.40 on the bid side as against a small slippage in the greenback on the index (at 82.77). The effects or the dollar’s decline made for a $2 gain in values, whereas physical buying added a similar-sized premium to prices, resulting in the $5 net rise.

Tracking reports from China indicate that local gold production took a (rather unusual) step backwards in July, with a 2.6% fall in output from the record 31.897 tonnes the country dug up in June. The annualized tally for the first seven months of 2010 shows Chinese gold output way ahead of 2009 with a larger than 10% gain at 190.298 metric tonnes. Silver outpaced the yellow metal by a factor of more than three – in percentage terms – rising 34 cents and advancing to one full dime above the $20.00 mark per ounce.

Six dollars were added to values in both platinum and palladium this morning. On-going labour difficulties in South Africa continued to support values, albeit there has been no discernable impact on overall supplies. The National Union of Mineworkers turned up its militant rhetoric a notch further, and gave hints that its strike over at producer Northam could go on for several months or, at least for so long as the firm does not meet its wage demands. The firm is reportedly losing about 1,000 ounces of platinum output per day as a result of the strike.

ETFs in the noble metals continue to receive attention (read: lotsa money) from spec funds apparently gunning for $1,600 (make that, $1,601 according to yesterday’s prediction by one firm) for the former, and/or $600 for the latter. This morning’s tally showed platinum at $1,559.00 and palladium at $524.00 with little in the way of signs for market fatigue apparent.

Today’s market focus will orbit around the release and digestion of the Fed’s Beige Book; however, 2 p.m. is still a long ways down the road for these markets. There is still a $21 billion ten-year note auction and its results for players to factor in, as well as how the Dow will behave on the day.

This, following the 200+ point slippage in the Nikkei average overnight and the subsequent improvement in European markets after the Portuguese bond auction and better demand for similar instruments offered by Poland. In early dealings, Dow futures were indicative of a possible gain on the day as debt concerns dissipated a tad.

Gold spot values fell back to unchanged (near $1,255.00) and then into negative territory, following a probing maneuver to touch $1,264.10 on the offer side by the aforementioned speculative fund faction. Profit-taking became manifest at the near-record figure, though it was milder than certain dish soaps.

Meanwhile, Down Under, it appears that despite the fireworks of the recent elections (an event largely precipitated by the very core issue at hand), the proposed “Henry Tax” will likely go ahead. Oz Treasurer Wayne Swan revived the recent tax-oriented rhetoric saying this morning that the tax on mining co. profits is critical in order to fund spending on infrastructure and pension plans (read: lotsa money needed, lotsa money available from certain well-to-do-these-days firms).

The Labour Party drew one step closer to a potential victory yesterday and the tax talk is gaining traction yet again. Mining firms staged heavy opposition (read: lotsa money) to avert such a toll on revenues. To be continued. Surely.

Back on the ranch, the Central Bank of Canada raised its key interest rate this morning, even while the rhetoric coming from Ottawa underscored expectations of a more gradual (read: less robust than anticipated) recovery in the nation’s economy. The Loonie took flight on the news, and the US dollar fell to C$1.044 against it at last check. Gradual, or not, the rate rhetoric spells: e-x-i-t. This, while market players assure us of anything but (read: lotsa money to be made that way).

Until tomorrow,

Jon Nader 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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