Precious metals jostled by reported reserves

In the Lead: “Secrets Exposed. Burn After Reading.”

While there is some reasonable justification for a certain risk premium on the commodity due to resurging Iranian nuclear “issues” (the country appears to actually be working on building nukes instead of trying to produce energy), the current price of crude has some analysts wary of it. In fact, Standard Bank (SA) market watchers note that Brent crude’s RSI is “mega-overbought” and that a reversal is “imminent.” Brent crude has been “gapping” upwards and while it could reverse back towards the $112 area, a potential break of the $108 level could send it towards the $105 and then the $100 levels (the latter being within a “bear channel”).

Over in Europe, the borrowing costs for Italian debt approached the 7% mark this morning with about the same speed that Prime Minister Berlusconi’s government was coming apart at the seams. While his resignation remains a matter of speculation, the septuagenarian playboy faces the prospects of a confidence vote in parliament this week and could be handed his walking papers in a manner of speaking.

Eurozone finance ministers reached a consensus last night on augmenting the EFSF but they also kept intense levels of direct pressure on Greece and on Italy, both of which now face the prospect of a governmental changing of the guards. The common currency weakened for a third trading session this morning albeit – considering the gravity of the regional situation – it did not lose all that much ground (at $1.379).

The EU’s finance ministers indicated they will launch the beefed-up rescue ship in December but they first ordered (!) Greece to furnish written acceptance of the latest set of bailout terms and also intimated that they will seek a similar “on-paper” promise by Italy when its turn comes. This is fast turning into a game of hardball and it once again underscores the fact that things had come to a too-close-to-the-brink paradigm that had to be addressed immediately. None of the above of course has stopped Mr. Berlusconi from cheerfully denying that he might have to pack his bags and take a long Mediterranean cruise.

Meanwhile, the arguments and counter-arguments that gold is or is not in a bubble continue without pause. An interesting observation has just been made by Marketwatch contributor Shivaj Thapliyal who writes that while no one can stick their neck out and declare that the metal is indeed inside a spherical object, no one can also declare that it is not inside of one. Moreover, the five most common “hand-waving” arguments (i.e. non-numerically based ones) in favor of gold do not yield any clear, objective fair value for the yellow metal.

The by-now-nearly-shopworn arguments read as follows: “(1) it is a safe haven and we are in a period of extended financial market turmoil (2) it is a hedge against inflation and we are in period in which we will see high inflation (3) it is an under-owned asset and investors have only begun to warm up to Gold (4) the Dollar is falling and Gold is denominated mostly in Dollars (5) all fiat currencies have failed and Gold is the only alternative.”

While the author notes that none of the above is a qualitatively incorrect statement, they still do not equate to a credible means by which we can properly value the metal. Conclusions: 1) The only answer to the “bubble?” question is that there is no answer and 2) “Investment managers need to ask themselves whether they possess knowledge and understanding of an asset that can help them create wealth in a systematically repeatable way or if they are just shooting in the dark.”

Until tomorrow, keep wondering…

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

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