Gold makes gains on EU debt and Korean jitters

Although European Union leaders made every effort to underscore their resolve to ensure the survival of the euro going forward, they came up short in tackling some of the very impact factors that are worrying investors and the markets and have brought into question the viability of the common currency. The Financial Stability Facility (Euro-TARP?) currently in place will be supplanted by a new fund, come 2013, whose outline was presented and agreed to late last week.

Peripheral bond investors took the lack of concrete measures on issues such as debt sustainability and “what-if” insolvency scenarios as a cue to demand still higher yields for holding such instruments as opposed to German ones. Debt downgrades have been the hottest European fashion to emerge as this winter knocks on the door. Ireland lost five ratings levels on Friday. Talk is that France (!) might lose one of its three “A”s and that Belgium might not be far behind in suffering a similar fate if agencies such as Moody’s or S&P continue to exhibit a souring…mood on ratings.

However, the euro gave up only modest ground this morning, trading at $1.316 against the US dollar. The latter was hovering at above 80.35 on the trade-weighted index, with little impetus to trade in a certain direction present in these pre-holiday markets. That said, fresh dollar-beneficial bids were noted as a spate of bellicose statements poured forth from North Korea in the wake of live-firing drills being carried out by its neighbor, South Korea.

The military exercises concluded without incident, but the regional tension was notable enough to unnerve global investors as the weekend concluded and the penultimate trading week of the year began. That said, N. Korea did agree to allow UN nuke inspectors to return to the country and do their job. Another case of “confuse-a-cat” (for you, Monty Python fans).

Against this background, the precious metals complex opened much firmer, despite (or, perhaps, in large part, due to) an on-going thinning of the ranks among participants. The immediate focus will be on the release of more US economic data ahead of the abbreviated late-week market sessions. Personal income and spending gauges are set to be released, as will be home sales figures.

Indications are that the Fed might yet truncate QE2 if the need to keep it in place is obviated by a demonstrably stronger American economy. That economy likely grew at a 2.8% pace in Q3 (vis a vis Q3 of 2009) – a rate that was higher than the 2.5% estimated last month. US GDP climbed 1.7% in Q2 of this year. The new set of figures is due on Wednesday, from the Commerce Department.

Gold spot prices opened $9.80 per ounce higher on Monday and were quoted at $1,385.30 as fresh fund-originated buying was noted in the wake of the aforementioned EU debt situation and Korean peninsula initiated jitters. Silver added 6 cents on the open, starting off at $29.25 the ounce. Platinum and palladium also opened higher, with the former rising $9 to the $1,706.00 level and the latter gaining $5 to reach back to the $743.00 mark.

On the ‘good news’ side of the platinum group metals’ equation (at least supply-wise) was the announcement that Platinum Group Metals will invest $100 million for the construction of what is known as the Western Bushveld Joint Venture platinum mine – a 275,000 ounce per annum source of the noble metals.

However, Japanese automaker Toyota has projected that its domestic sales might decline by more than 10% in the coming year, making for the first double-digit sales drop in more than a dozen years. This time, the fall-off in sales is not due (as it was in 1998) to a big fall in economic activity, or to the sinking of large financial institutions. Most of the contraction in sales, according to Toyota sales planners, will be due to the recent expiration of government incentives for the purchases of frugal gas-mileage vehicles.

That not-so-bright bit of automotive world news largely failed to impact the noble metals’ complex as ETFs are still lavishing plenty of attention on these metals. Not that gold has been lacking from such “attention” at all. Not even close, as a matter of fact. If you wish to get a complete expose on all matters gold and the exchange-traded vehicles that have in large part made it the best generator of bold-font headlines over the past couple of years, look no further than Cam Simpson’s in-depth article on Bloomberg this morning.

Suffice it to say that – beyond the drama and the twists and turns of how this all came to be – the data compiled by Bloomberg indicates that “gold’s rise resembles moves reached before the three big crashes of the last decade: the Nasdaq tech-stock bubble of 2000, the U.S. housing market bubble of 2005-2006, and the crude oil-price spike of 2008.” The debate on parabolas and side-effects of ETFs will surely continue as the various camps have taken up firm positions and no one is blinking.

The small investor, according to the report, is the one who will eventually blink; not only last, but the fastest (as tears could be shed). The lengthy story relays that Jeremy Siegel, a finance professor at Wharton, said “he’s skeptical about the metal over the long term, especially for retail investors. He believes they will have a harder time judging when to buy and sell.”

According to Bloomberg, Prof. Siegel’s research “shows gold has underperformed stocks, bonds, bills and even real estate over the long run. It has total real returns of just 0.6 percent per year since 1802, compared with 6.6 percent for stocks, 3.6 percent for bonds and 2.8 percent for bills. One of the only things gold has beaten is the dollar. Unlike assets such as oil or wheat that are consumed based on economic factors, gold’s true value is difficult for ordinary investors to judge. Its worth is often determined by fears of inflation or financial collapse. If you can judge how these investors will evaluate those fears, you will do well.” Keen judgment and impeccable timing. What could be simpler? Doesn’t everyone have those tools at the ready?

As well, at least one ‘gold bubble talker’ has been heard from on the topic, again. GoldAlert relays that “George Soros recently addressed the existence of a gold bubble, saying that ‘It’s all a question of where are you in that bubble…The current conditions of actual deflationary pressures and fear of inflation is pretty ideal for gold to rise.’” At a Canadian International Council meeting in Toronto, Soros went on to say that “The big negative is that too many people know this and a lot of hedge funds are very heavily exposed.” Precisely. That pesky “hedge” word keeps reappearing every time the subject is discussed.

Last week’s gold price declines – albeit not that dramatic – prompted some in the gold dealer community to ring some other bells than those heard during this particular season. The ‘alarm’ variety bell was rung by Scotia Mocatta when its on-board analyst noted on Friday afternoon that “this is the second consecutive down week off of record 1435 high. Last week’s price candle warned of a possible reversal in the metal. The lower close this week confirms an end to the bull move.

“We suggest that the market will probe lower next week to former lows 1351 and 1330.” Mocatta warned. No “dice” on that projection as of yet, but Marketwatch notes that “nervousness at the year’s end is understandable. Investors’ gains in gold are substantial. And, particularly in Europe, key gold markets will actually be closed for much of the rest of 2010 as the Christmas season takes hold.” Contrarians are stoked, expecting a golden burnish to the metal’s year-end tally. Let’s see if they, or Mocatta, are the ones proven prescient.

At the moment, the odds are stacking up for a possible trading “surprise” in 2011. Bloomberg looked into the developing standoff between uber-smug commodities’ players and certain currency investors and found…things you might wish to catch up upon, knowledge-wise. As Prof. Siegel noted above, it has (almost all) been about the US dollar when it comes to particular (or even most) commodities. And that little green piece of paper is giving certain…signals, such as the ones manifest in the correlation coefficient between the CRB and the USD index.

Until 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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