Gold opens higher on “overcooked enthusiasm”

In the Lead: “Manufactured Gains”

Several “best January starts since…” sentences were the material of financial headlines overnight. Tempting investors into the markets were sexy stories such as “Stocks Headed for Best January Since 1997” and “Stocks Best Start Since 1994 Better Than Commodities” right alongside other titles such as “Gold in Best Start to Year Since 1983.” How can anyone resist and not follow the ‘big guns’ into the money-making pits when more than $3 trillion was being added to stock values (last month)?

How can anyone not get drunk on…orange juice after it spiked 24 (twenty-four!) percent in January? And, how can small retail investors ignore the lure of the GLD – currently being recommended for purchase by twice (!) as many money advisors as even the most popular gold mining share? Well, read on.

If things were even close to being “normal” by historical standards in the investment universe, at least one of those two headlines ought to read “Worst Start Since XXXX” in order to be appropriate. As analysts at Standard Bank (SA) pointed out this morning, January’s performance – at least in the commodities’ space – was largely not underpinned by real demand and was based mainly on overcooked enthusiasm connected to expectations of growing liquidity around the world. The phenomenon continued this morning. At the opening bell the Dow was up 0.80% while gold was posting a 0.60% gain of its own. Go figure.

Spot metals dealings opened higher across the board on Wednesday as the specs extended that which they successfully carried out in January for yet another session’s worth. Gold opened near $1,745 with a roughly $7 gain per ounce while silver hovered near $33.80 posting a 60-cent advance. If and when a close were to occur in gold above the $1,803 mark a push towards a new high could unfold, according to EW analysis issued late on Monday.

Absent that development, the odds of a decline toward lower levels remain unchanged. In silver the closing level beneath which lower prices can be expected is $31.50 while the upside target of the countertrend push remains $35.70 – the high from late October. As was the case on Tuesday, the early gains largely evaporated as the trading session wore on and profit-takers moved in to harvest their daily chips. On the physical side of things, it is worth noting that India (after it has already hiked its tariffs on gold and silver imports by a hefty margin) has just raised the base import prices of gold and silver by 5.7% and 2% respectively. The base import price is the minimum level at which imports are taxed regardless of purchase prices (in order to avert under-invoicing).

Platinum and palladium reversed course this morning and pushed significantly higher. The former gained $28 to touch $1,606 per ounce while the latter moved $9 higher to reach $698 on the offered side of spot quotes. US car sales have been surging and could be nearing the annualized sales level of 13.5 million units if analysts’ calculations prove to be correct. There is notable pent-up demand for autos among US consumers whose ageing car fleet presents a real need for replacement. Formerly bankrupt Chrysler (now owned largely by Fiat) has sold 44% more cars last month and has returned to profitability.

Stung by the staggering losses they incurred in the debacle of 2008 speculative funds were hard at work last month, throwing money at everything on the investment wall and trying to see what sticks. Pretty much everything did stick, especially after the Fed gave indications that cash equates trash as far as savers are concerned for perhaps a couple more years. Additional fuel for the “buy everything!” syndrome being exhibited by the specs out there came in the form of this week’s flavor of the “solution” to the Greek debt problem and from an unexpected bump in Chinese manufacturing activities.

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