Gold prices possibly beginning to stabilize

Good Morning,

The final week of September started off on a relatively firm footing for gold and silver, and with only minor losses in noble metals. A bit of stabilization in the US dollar –albeit still at levels near the 79.25 mark on the trade-weighted index-made progress in gold to levels much beyond the round figure a tad difficult for the moment. No matter, bullish posturing appears to be gaining fresh converts each day.

Yet another mining firm exec threw his uber-bullish prediction (to above $1,500) into a ring that now sports a plethora of taurean-horn-adorned hats thrown in by…(surprise!) gold producers. As well, weekend price conditions in gold gave rise to another, equally obvious headline: “Increase in gold prices affects jewelry consumption negatively.”

Spot bullion trading opened with a $2.40 gain in gold on Monday. The bid-side quote for the yellow metals showed a $1,299.40 indication. Participants are gearing up for at least three pivotal numbers slated to be on offer this week: US consumer confidence (tomorrow), jobless claims, and GDP (Thursday). Then, on Friday, the markets will digest US consumer and construction spending, ISM data and automotive sales figures. Plenty there to choose from, and enough categories to eventually show gains as well as declines. In other words, more uncertainty exists about the immediate direction of the world’s largest economy.

Silver showed a 12-cent gain on the open, trading at $21.58 per ounce. Meanwhile, platinum fell $3 to start at $1,636.00 the ounce, and palladium rose $2 to $559.00 initially. No change reported in rhodium values, last quoted at $2,240.00 per troy ounce. Carmaker Ford envisions whittling down its nameplates and models on offer further, as the industry concentrates on what sells best and it continues to discard ‘has-beens’ (like the iconic-of-the-pre-crisis-euphoria-era Hummer; a ‘vehicle’ that had no reason to pound pavements aside from certain male inadequacy issues…).

Kitco News’ Allen Sykora consulted one major institutional market player and offers the following take on gold’s near-term conditions: Commerzbank offers some caution now that gold touched $1,300 an ounce Friday. “While gold is likely to make more attempts at overcoming this mark on a lasting basis, the air appears to get thinner at this level. In our view, gold’s latest price rally was more down to dollar weakness than gold strength, so the rally has a shaky footing. This is also reflected in outflows from the SPDR Gold Trust.” SPDR holdings declined on Friday by 0.9 metric ton according to its website. “Further profit-taking is possible at any time.”

As for where the future projections currently stand regarding gold, the two numbers wearing the latest ‘made-on’ date allude to either $1,315 by end-2010 (as offered in a Bloomberg market analysts’ survey) and/or $1,406 in one year (the apparent consensus of an LBMA conference participants’ poll). In other words, polled participants offered a potential range of from 1 to 8 percent in additional gains for 3 to 12 months out in gold, from current levels.

That is, if investment demand remains at its present pitch (a rather large unknown, that one). In any event, the overriding theme apparently emerging from the Berlin gathering is one that has gold acting in a stable manner over the coming year, after a decade’s worth of gains. No price estimates of corrective event results were offered by either survey. The current investment environment – according to bond giant PIMCO – offers a situation where even investors with well-diversified portfolios and appropriate risk-management techniques can expect greater volatility, with returns shrinking to between 3 percent and 5 percent in the current economic cycle compared with 6 percent to 8 percent historically.

The gold market’s overdependence on investment demand is a feature we have long warned about in these posts. Whether the ebbing of such inflows comes next week, next month or next year is really not the issue; it is the fact that it will invariably arrive; as it always has. When interviewed at the LBMA Gold Conference in Berlin over the weekend, one direct participant in this market opined “that investment [as a demand category] has fueled much of the gold rally to above $1,300 an ounce and reliance on one element for so much of the increase could have some risks.”

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