Gold fighting to hold onto record price

Good Morning,

Gold prices continued to hover near all-time record levels following the spectacular push by speculative funds on Tuesday. The $10 overshoot of the previous $1,265 pinnacle naturally brought with it a rising and louder chorus of chants calling for more of the same.

Even as the latest GMFS opinion that gold might visit the $1,300 level before 2010 draws to a close was tendered, kernels of caution were embedded within the same. Kitco News’ reporter Debbie Carlson summed up and quoted the level-headed talk by the British statistics and consultancy house as follows:

“Despite what GFMS calls “bullish talk of buoyant investment demand,” the consultancy said total investment buying was much lower than the first half of 2009 when the financial markets were still dealing with the collapse of Lehman Brothers.

“It’s hard to see how price gains can be truly sustainable when major fabricators like India and Turkey are net exporters of bullion, the position we were in early last year.

Scrap supplies could increase and jewelry demand could fall if gold prices were to rally ‘substantially.’ Small increases in electronics demand were able to counteract the absence of great producer de-hedging, the slight rise in mine production and small net selling by the official sector.”

In a nutshell, the very same not-so-bullish impact factors we cautioned about in the Kitco eConference presentation on gold’s fundamentals. Not to mention the nature of said “buoyant” investment demand - a demand that bears the unmistakable fingerprints of the same entities that made for $147.00 oil two years ago. Echoing the GFMS take on market-driving factors, Commerzbank analyst Eugen Weinberg noted that he: “Wouldn't be surprised if gold goes to $1,300 but it will not be done on any fundamental demand, but more on technicals.”

Thus it is with some hilarity that one must note the latest urban myths being floated out there: namely, that the puppeteers of gold now, suddenly want it to go higher. Of course, if by such marionette-handlers we mean opportunistic spec funds who went long, and headlong, into gold (as opposed to certain JPM Imperial Storm Troopers acting at the behest of Dick Cheney from a dark cave), then we can agree.

Meanwhile, over in India, gold demand dried up as per reports from the Economic Times and our ground-based sources. Record prices equaled “absolutely nil demand, with people not even making inquires.” This is the period during which festival-engendered demand is supposed to make gold fly off the shelves of retailers in India’s bazaars.

Whether or not the country’s overall gold demand manages to match last year’s 480 tonnes (a 12-year low) remains an open question at this point. A future gold price-dependent question, more precisely. For now, 19,257 rupees/10 gr. gold price tags are eliciting a “No, Thanks!” from would-be bauble shoppers.

The two-year anniversary of the collapse of Lehman Bros. brought back vivid memories of the nearly total falling of the skies. It was an event that changed the course of economies and altered the psyche of investors and whose reverberations are still being felt today. One seasoned New York bullion trader opined last night that part of what unfolded yesterday (aside from the obvious and aggressive spec fund plays) was a frisson of post-traumatic fear that traces its origins to that momentous happening in 2008.

One of the outcomes of that financial mushroom cloud became manifest this morning; the EU proposed curbs on “Wild West” trading. Monitoring of (and eventual enforcement) the OTC derivatives markets, and of naked short-selling could be in the cards as early as 2012 – only four years after the events that shook the markets and the global economy. In market-regulatory geologic time, but a fraction of a nano-second.

It did not take long for the Lehman-flavored malaise to take a back seat to more…urgent preoccupations among traders; especially currency traders during the overnight hours. The newly (re)installed Kan leadership in Japan finally came through with that which had been threatened for several weeks now; intervention into the currency market. For the first time in six years, official yen selling took place in an effort to aid growth.

An undisclosed (but apparently sufficient) amount of yen was sold in order to bring the US dollar back to above the 85 level. In a matter of just minutes, more than two yen’s worth of value was erased by the action, leaving no room for speculation that intervention had taken place. Analysts at Morgan Stanley opined that Japan acted alone (not even a phone call to Washington?) and they estimated the size of the intervention scalpel at about $3 billion. Others tendered estimates of from $2 to $17 billion. In other words: only Tokyo knows for sure.

The greenback continued to extricate itself from the funk it fell into on Tuesday and was last seen rising by 0.47 (to 81.68 on the index) or by about half of yesterday’s losses, while the Nikkei Average notched a 217+ point gain during the overnight hours.

Thus we come to the opening of the New York metals spot markets this morning. An opening that saw gold trying to remain near, or at, the $1,270 level but had the rest of the complex struggling to maintain and/or augment Tuesday’s hefty gains. Spot gold dropped a dime at the start of the session, and was quoted at $1,268.60 per ounce on the bid side.

Silver fell six cents to open at $20.42 the ounce, while platinum and palladium each gave back one dollar in value. The former started at $1,588.00 while the latter opened at precisely the mid-point between $500 and $600 per troy ounce. Obviously, questions surrounding profit-taking, the direction of the US dollar after the yen event and crude oil’s $1.55 drop came into active focus this morning.

So did, however, the effects of the release of US industrial production figures for August as well as the numbers related to the Empire State’s current manufacturing prowess. Or, lack thereof, should we say; it fell to 4.1 this month from the 7.1 reading recorded in August. Dow futures, oil, and gold fell in the wake of the numbers. Expansion, yes, but at a slower pace.

Numbers, numbers. As reported yesterday, Messrs. Buffett and Ballmer are actively betting on the US not falling into first the double-dip, and then the Japanese lost decade paradigm at this point. They were joined today by PIMCO’s Bill Gross who put $8.1 billion worth of his firm’s money where his mouth is; in the camp that argues no dice when it comes to deflation taking hold in the USA.

At the heart of the matter is the fact that – in the view of at least some respected economists – the US has a much different currency policy than Japan did for the lost decade (or two). Meanwhile, over in Europe, inflation levels fell to 1.6% last month - still below ECB targets - driven down primarily by energy and clothing price declines. Closing (but significant) quote of the day: Treasury Secretary. Geithner said that it would be “irresponsible” for the US to borrow another $700 billion from our children in order to sustain “those Bush tax cuts that only go to the wealthiest 2% of Americans.”

One analyst estimated the give-up by individuals fortunate enough to belong to that elite bracket as the equivalent of a…BMW (make that an extra BMW?) not gracing someone’s circular McMansion driveway. Anyone have a Kleenex handy?

Until [sob] tomorrow,

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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