The Fateful Imbalance

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12 مارس 2007
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Good Morning,
The US dollar resumed its climb after a couple of wobbly sessions and traders were largely sidelined as they awaited a slew of US economic data today and tomorrow. The euro’s first drop in five trading days 9now at 1.354)–once again motivated by Greek-infused apprehensions- helped the greenback rise a hefty 0.49 on the trade-weighted index, to reach 80.70 at last check. Crude oil eased just a tad, following its breathless, 2.1% sprint on Wednesday.
Fresh figures on weekly jobless claims filings, industrial production, and NAHB housing index are in the pipeline for today, and are giving players an excuse for a couple of extra coffee breaks as they wonder what the stats might show. No need to wonder about China’s economic growth, however. The country reported an 11.9% rate of growth for Q1 and gave plenty of ammo to both commodity optimists as well as to those who see the Chinese economic kettle as boiling over in a cloud of steam.
A significant outflow was recorded in silver ETFs yesterday as investors pulled profitable chips off that table and let go of more than 106 tonnes of the white metal- the biggest such outflow since January. Analysts at Barclays pointed to “silver’s fundamentals remaining weak, [and] should support from positive investment turn negative, prices are susceptible to sizeable corrections.”
A bit of a similar, profit-skimming-driven move was observed in one palladium ETF yesterday, following a spectacular, 13%+ gain in the noble metal during the course of this month alone. The Swiss-managed fund of ETF Securities lost about 3.7% of ounces being held as a result of the cashing in of chips by investors.
This morning’s New York trading session opened on the downside for the precious metals. Gold lost about $2.10 on the open, starting the day off with a quote of $1152.70 on the bid-side. Silver fell 12 cents to open at $18.30 the ounce. Platinum and palladium dropped by $13 and $6 respectively, to start at $1715.00 and $541 per ounce this morning. No change was recorded in rhodium –still quoted at $2890.00 on the bid at last check. Support for gold should emerge at near the $1145 level, whilst resistance is still manifest at the $1160+ price levels. Outside news factors will tell the story. The market’s internal fundamentals remain essentially upside-down, despite recent technical and momentum-driven jumps. To wit:
The Financial Times picked up on yesterday’s slew of GFMS-produced annual gold market statistics and found that the London-based consultancy believes that “the current price of gold is unsustainable in the long term and prices will have to fall to stimulate demand in the jewellery sector.”
This, as “demand from investors for the yellow metal soared last year, overtaking jewellery demand for the first time since 1980, GFMS said on Wednesday in its annual report on the gold market.”
Whilst GMFS sees the persistent nervousness regarding the global economic recovery as still sustaining additional investment demand in the short-term, it also believes that such strong inflows as were seen in the investment niche in 2009 are not likely to be maintained, especially as the landscape shifts towards a campaign of central bank-initiated rising interest rates as they undertake their exit strategies and put an end to the era of liquidity injections that were required to keep the global economic vessel afloat.
“It is difficult to argue that prices could be sustainable” in the long term, he said. “This is a market that has moved out of kilter with its underlying fundamentals.” argued GFMS in its report.
Global jewellery production sank 19.8% to a 21-year low last year, and GFMS opined that “prices would need to fall below $900 to revive the fortunes of the jewellery market. At $700 to $800, you’d see really good demand from places like India.”
There certainly was no shortage of bullion on the market’s supply side, with record-high prices engendering an explosion in the amounts of metal being recycled. Scrap gold flows reached a staggering 1,674 tonnes in 2009, and they were up by 27% from their 2008 levels. In fact, the flow of scrap was so large during the first quarter of 2009 that-for the first time ever- more bauble were being melted down than actually produced for sale.
More gold flowed into refiners’ furnaces around the world (many of which were being fired 24/7) than was being produced by global mines in the period. How is that for a market ‘out of kilter?’ Mine production, meanwhile, increased by 7 per cent to 2,572 tonnes, undermining the often-heard arguments of ‘peak gold’ being offered by…mining company executives (?!) at various trade shows. “Production is not falling off a cliff as some had predicted.'' Mr. Klapwijk said.
Business Week quoted GFMS’ Mr. Klapwijk as also warning that “There is an element of a bubble here and it’s not sustainable over the long run. A return to more normal type conditions in the economy isn’t going to happen in a hurry. At some point in the future there’s got to be a major drop in prices” as governments improve finances.”
It was also noted in the GFMS survey that global gold investors warmly welcomed the news last September that a faster-than-expected unwinding of the producers’ hedge books was taking place. GFMS, on the other hand, believes that last year marked the ‘last hurrah’ for de-hedging. This has been echoed by recent analyses from Societe Generale (showing only a little over 240 tonnes left on the hedge books globally), as well as others (such as Fortis Bank Nederland). Mine production cannot explain price strength in 2009 as GFMS estimate this rose notably to the second highest figure ever and that further growth is likely in 2010.
This, then, is what a fundamentally flawed gold market looks like. A market that is currently a complete junkie to speculative investment demand. How close, or how far, the situation is from the diagnosis of an ‘overdose’ remains to yet be seen. Could be two months, just as it could be two years. The point is, the spec fund gold snorting binge has not helped the market’s state of health despite the glowing headlines and mass euphoria it induced. You cannot put a spin on the market’s mainstay, structural components’ figures, try as you might. “Check that pulse” -practitioners of ancient medical techniques would advise.
Happy Trading.
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
 

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