Gold weakening on continued ETF tonnage outflows

In the Lead: “Ag, Phone Home!”

If one were to remove coin fabrication demand from the total, the decline would have been on the order of 4.1%. Finally, mine output of silver climbed for the ninth straight year and reached a record 761.6 million ounces. All of this also needs to be viewed within the context of a market year that witnessed a silver price volatility of over 34% in Q1 2011, and such gyrations are set to continue this year as well. In any case the relevant question for silver is clearly not “Is there a silver shortage?” but, in the words of GFMS analysts, “Will the investment flows be sufficiently strong to absorb the surplus metal that will be on the market?”

As we have noted numerous times in recent articles here, the phenomenal margins in gold and/or silver that are available to those equipped with picks and shovels continue to boost production practically anywhere one cares to look. Like, say, Canada. There is an (excuse the pun) explosion of new mining and exploration projects in British Columbia, the NW Territory, the Yukon, and in Nunavut.

The common thread for all of this is the slogan “If you can make a buck, come on up.” The potential problems with such a boom-time are a) what happens if commodity prices drop significantly? and b) what happens after the lifespan of certain projects is up? For example, the $800 million (CAD) gold mine project in Kamloops will run “dry” of its estimated gold deposit within 23 years.

You say that gold prices will never drop again? Well, consider the analysis and projections offered by Chart Prophet Chief Investment Strategist Yoni Jacobs. Mr. Jacobs recently authored a book titled “Gold Bubble: Profiting from Gold’s Impending Collapse.” But, as ominous as the title of his publication might be, Mr. Jacobs backs his views up with not just wild guesses intended to elicit an emotional reaction.

For example, he focuses on gold’s trading volumes (such as we saw during last September’s gold price drop) and the major, extant “disconnect” between bullion and the mining shares (in fact, there is one school of thought that prices gold at under $1,200 given such share prices). He also cites the situation in areas such as shifting monetary policies among central banks, the emergent problems in the Chinese economy, and the high level of speculation present in gold in recent years.

Mr. Jacobs concludes that “based on historical trends and patterns, gold will fall below $1,000 per ounce, on its way to the $700 area.” Heresy? Perhaps. But, is anyone prepared for such a possibility? Most likely, not at all. The same could be said about those who posited the possibility of $800 gold back when gold was $250 an ounce. They were just as summarily dismissed (and, therein lies the lesson) by folks convinced of the opposite scenario.

The flow of news that moved these markets on Thursday started off with the revelation that Spain “scraped” through a pivotal bond market test with a $3.3 billion auction which, albeit deemed as “successful” saw yields on its ten-year instruments rise sharply. Just as nervousness related to Spain’s travails started to ebb, a rumor that France could be downgraded swept through the markets and rattled already jumpy investors. French government officials quickly said: “Mais Non!” to the rumor. But, is there smoke where there is no fire?

Citigroup, whose most recent research note appeared to be the catalyst for the spreading of the downgrade rumor tried to apply a bit of (presumably French) lipstick to the situation by “clarifying” that it had opined that “it is likely that Moody’s will place France’s Aaa rating on review for possible downgrade by the autumn, after close examination of the supplementary budget due to be adopted after the extraordinary session of parliament that will follow the June legislative elections.”

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