Gold comes down, larger drop may be coming

Overnight trading in precious metals offered precious little in the way of real excitement as additional gains in the U.S. dollar (and corresponding losses in the euro) coupled with the imminent hiatus on which U.S. market participants are about to embark, kept trading ranges confined and advances on the shallow side. Gold prices appear to have reacted in a less-than-would-be-anticipated manner to the Korean peninsula instability, as well as to the Irish debt and banking situation.

Spot gold bullion opened with a small, 70-cent loss this morning and was quoted at $1,375.80 per ounce on the bid-side in New York. Dollar strength (the greenback was up 0.11 at 79.78 on the index) and scattered selling contributed to the decline. The yellow metal traded between $1,372 and $1,381 overnight. Silver prices opened with a 12-cent drop for the midweek session and were quoted at $27.39 per ounce.

The noble metals’ complex showed decent gains however. Platinum advanced $14 to start at $1,663.00 the ounce, while palladium added $4 to rise to the $690.00 per ounce level. No change was reported in rhodium, at $2,280.00 bid per troy ounce. This morning’s much-improved jobless claims data (initial filings dropped by 34,000 in the latest reporting period, and were at their lowest level since July of 2008) initially sent the dollar higher and gold lower, but those moves were fairly muted as well as trading tilted towards lethargic conditions.

Whether or not pre-holiday-weekend book-squaring, options expiries, or the thinning ranks of market participants were the factors that made for said sluggish conditions in the metals trade remains to be determined. However, there was perhaps another “to watch” item on players’ minds. A “shooting star” formation on the monthly candlestick charts tracking the CRB Index (composed of 19 raw materials, including 6% gold and 1% silver weightings) is apparently sending a red flare as to what might take place next.

United-ICAP (the leading interbank transactions broker in the world) warns that commodities may decline by as much as 17% in coming weeks, based upon the aforementioned chart formation. Recall that the CRB has risen some 14% in the September-October period, largely on pre-QE2 speculation hysteria. Now, another kind of speculation – that related to the fallout from an overt and rising effort by China to tackle its inflation problem- has already taken about 7% off of the index’s value after it reached a two-year-plus high about one week after the Fed “eased” once again with its $600 billion program.

Meanwhile, the gold market may (according to Marketwatch’s Mark Hulbert) have another important question to deal with: is it “overheated” and is it vulnerable to a “sharp” decline? Mr. Hulbert cites a major, long-standing gold bull –Richard Russell – as having come to the conclusion that “the gold picture is becoming speculative” [read: acting not on fundamentals, but on emotion, momentum, and all the other ‘wonderful’ things that may make life miserable for small, retail investors.

What metric did Mr. Russell’s resort to, to come to such a diagnosis? Why, it is the ratio of the GDXJ (junior miners) versus the GDX (seniors’ one). While that cautionary take on matters is not a call for the end of the gold bull market, it does place a few road flares on what appeared to be an open freeway up ahead.

A subsequent report showed U.S. durable goods orders taking an unexpected 3.3% “hit” in October, and, while that bit of statistical info was good enough to send the greenback towards 79.60 on the index, it did not manage to lift gold (it traded at $1,375 at last check). At times, it can be just such an environment that brings about outsized moves when certain news hits markets. As well, US data this morning showed a rise in consumer spending (for a fifth month now) in October, prompting one Wells Fargo analyst to declare that “It really looks like a recovery here.” Wonder if all of these bits might have fallen into place without QE2. Too late to speculate on that, now.

An abundance of “x-factors” remains in place as players wind down trading-effectively until Monday- at this point. The Korean stare-down contest, the Chinese resolve to slow inflation (and with it, growth), the slicing of two rating degrees from Ireland’s credit status with S&P, and the apparent disconnect in how the euro’s predicament is seen by Ms. Merkel and her own Economic Minister, are all potential triggers for a good dose of possibly-to-come market turmoil in one or another sector.

Ms. Merkel characterized the situation as “exceptionally serious” whilst Minister Bruderle opined that in his assessment, the euro is not in any danger, the “seriousness” of the situation notwithstanding. Ms. Merkel’s diagnosis struck a chord with ECB Governing Council member Ewald Nowotny, who was heard on Austrian television as saying that: "That irritates me. The euro is not in danger. Individual countries, and the banking systems of these countries, are in danger. You have to make the distinction." Yes, nuances are often important when dealing with a gathering storm that plays into hungry speculators’ hands. Talk about talking turkey. Did she? Did he?

No “nuances” were lacking in the usual “we get a life-jacket-then-we-announce-austerity-plans” sequence of communiqués coming from Ireland this morning, much in the style of what was issued by leaders in Athens, all through the summer months. The Irish government now claims that it aims to undertake a four-year plan to tighten its budget belt to the tune of $20 billion. Now that’s talking turkey. Only the rest of the country thinks its burnt offerings.

A somber tune, that one. More like a funeral march for some. Irish unions are bleating slogans of “Barbarians gathering at the gate” in the wake of what they expect will be not-so-pretty conditions in the country in coming months. The fate of the government may yet come into question over all this, as nearly 25,000 public sector jobs could come onto the chopping block, as well as 10%+ pay cuts for incoming similar employees (if any). Previews of coming Irish attractions: Portuguese public as well as private sector workers went on a “greve general” work stoppage this morning, in the largest-ever strike to let the government see and hear what they think of its austerity programs.

No such turkey-talk communications “problems” over at the Bernanke office, either. Not in terms of how things will be framed going forward, anyway, especially if Fed officials have their way. A broad revamp of the Chairman’s public communications is being considered amid recent criticism of not only policy, but the relaying thereof to the rest of the world. Whether or not such a “repackaging” of Fed communiqués is a result of recent swipes by GOP leaders and lawmakers, or the overtly confrontational and dissenting quotes that the media has been able to report coming from Mr. Bernanke’s own team, is as yet unclear.

However, do not be surprised if in fact the Fed boss will spend quite a bit more time in front of microphones next year, attempting to show a unified front to listeners, and a firm(er) conviction in his (and his team’s) chosen courses of action. Now it’s just a matter of what we will hear from Mr. Bernanke. Two Republicans (Messrs. Corker and Pence) have suggested that –for example- the Fed should focus only on prices and their stability, and not employment levels. Mr. Bernanke might have a thing or three to say about that. We’re all ears.

While wishing all of you in our American audience a HAPPY Thanksgiving we leave you to your preparations now with this little gem from Erma Bombeck:

“Thanksgiving dinners take eighteen hours to prepare. They are consumed in twelve minutes. Half-times take twelve minutes. This is not coincidence.”

Until Monday,

Jon Nadler

Senior Analyst

Kitco Metals Inc.North America

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

Blog: http://www.kitco.com/ind/index.html#nadler

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