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Kitcommentary from Kitco Metals Inc. - "Got Jobs?"

Category: Investment, Gold, Mining

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November 2, 2012 ( Mining stocks newswire) The US dollar broke substantially above the pivotal 80.00 mark on the trade-weighted index this morning, prompting fairly sizeable selling in the precious metals' complex. Spot gold fell to an overnight low of $1,705 while spot silver showed bids near $31.80 per ounce. There is not much new to report on the physical side of the gold market in terms of the level of Indian demand as we approach Dhanteras and Diwali – the offtake remains tepid.

On the other hand, there is a new development in India that does warrant some attention. Continuing its overt efforts to curb gold appetite (make that: gold fever) among Indians, the Reserve Bank of India this week banned the country's banks from making loans for the purchase of gold by jewelers, or for the purchase of gold ornaments and coins. The RBI has set up a working committee that needs to come up with various ways of dealing with hitherto (up to last year anyway) burgeoning gold imports.

The gold business in Saudi Arabia, on the other hand, has gone from bad to worse with the closure of the 500th outlet in that country this year. Whereas the Kingdom once had over 4,000 gold shops, more than 1,500 of them have opted to leave the business owing to the elevated international price of the yellow metal and to the waning demand for it by local consumers. The just-concluded Hajj season did not translate into improved demand for gold and it saw the closure of some 30 gold-selling shops in the holy city of Makkah. Overall gold sales in Saudi Arabia have collapsed by 40 to 50 percent according to recent tallies.

Within the context of the above pieces of industry news (the jewellery one, that is) it is not difficult to see why the analysts at Standard Bank (SA) write that: "An important reason for the weakness (relative to last year) in gold physical demand, from especially Asia, is due to jewellery demand. While seasonality should support gold jewellery demand in Q4, it is clear that jewellery demand is unlikely to support the gold price as it did in previous years. Investment demand will have to pick up the slack and, while we believe that it is possible, one would have to be more patient before rallies become sustainable. The faster the gold price rises relative to income growth, the more negative the impact will be on jewellery demand — this should provide a drag on the gold price.

Turning to the USA, the Treasury Department's US Mint reported gold and silver bullion sales which are anything but post-card material to write home about when seen in the context of previous demand levels. The first ten months of 2012 saw sales of 54,500 gold coins –a drop of about 40% from last year's similar period. Silver Eagle sales for the January-October period were down by 21% to 28.9 million units from last year's 36.4 million.

The greenback's 0.55% advance to fresh seven-week highs on the aforementioned index was largely attributed to the string of positive US economic data that flowed into the markets all week long and then it received a 'nitro' boost after the US jobs numbers (more on that later). Background markets had oil slipping 70 cents per barrel, the euro breaking to under $1.29, copper falling 1.1%, and platinum and palladium down $9 and $4 respectively. Rhodium bucked the trend with a gain of $25 to $1,175 per ounce on the bid-side. The Dow advanced a hardly-noticeable 6.5 points in early trading.

We are referring here to items such as: the highest level of consumer confidence in over four years, a further improvement in the ISM manufacturing index, a decline of 9.000 initial weekly jobless claims filings, and an ADP private payrolls survey that showed 158.000 jobs having been added in the US in October, beating economists' forecasts. We could add a few other metrics to that list, such as the best level of home builder sentiment since mid-2006, generally quite upbeat October retail sales (up to the unfortunate arrival of Hurricane Sandy anyway), etc. In other words, not exactly the 'unraveling' of America taking place right here, right now, as some market observers would have you believe.

This morning's US labor market report- the last one before President Obama and GOP candidate Romney face the verdict of voters next Tuesday-was also heavily discussed prior to its release. Economists had projected that 125.000 new jobs may have been created in America but that the overall unemployment level may have risen by 0.10% to 7.9% from the lowest level that was witnessed during Mr. Obama's White House tenure. As it turns out, US employers added 171.000 new jobs last month, easily beating economists' estimates, albeit the general unemployment did tick higher by the exact tenth of a percent that had been predicted. On a related note, Canada's employers jobs last month.

Gold prices immediately fell to just under $1,695 per ounce (a loss of more than $20 an ounce) in the wake of the BLS figures, once again raising questions about just how strong the support for the metal might turn out to be at or near the pivot figure of $1,700 per ounce. We should know by the end of today's session and as we head into next week.

TD Securities analysts had warned earlier in the week that "should a negative catalyst present itself, gold still risks a substantial downside move given the still lofty speculative long positioning (in Commodity Futures Trading Commission data). A price drop to near $1,660-50 per ounce could certainly happen, which is consistent with the 100-200 day moving average." Whether or not the payrolls figure turns out to be that 'catalyst' remains to be seen, at this juncture.

On the other hand, the better-than-anticipated jobs numbers will also generate a lot of talk about the kind of support they might generate for President Obama as he seeks re-election. Clearly, the opposition will still characterize the figure as being part of a feeble recovery –one that is weak enough to warrant a change in White House management. American voters –those who can get to the polls- will decide on that job appointment in just a few days.

Certain pundits have already decided that it will matter not who occupies the Oval Office come January of next year, but that what matters more is whether or not the US will have gone over the brink of the so-called Fiscal Cliff and taken the plunge into a direction unknown. Much of what happens to the value of the US dollar in coming months will also depend on that epic event materializing of not –improving economic conditions notwithstanding. Then again, when it comes to the by now supposedly deceased US currency, well, consider the alternatives. You could opt for a non-convertible yuan, a beleaguered-by-the-hobbled-economy yen, or go for the euro –if you dare.

The Telegraph's Jeremy Warner had this to say about the common currency just this week: "...though the single currency may have been saved from imminent death on the operating table, it seems now to be heading for a scarcely more appetising alternative – a condition of chronic, long-term illness where still very tight monetary conditions in many parts of the eurozone in combination with lockstep austerity threaten to induce a virtually permanent state of depression. Even Germany shows every sign of slipping back into economic contraction." Against such 'competition' the buck is starting to look like an obvious choice, sharp cliffs and monstrous deficits notwithstanding.

We close today with a couple of news items that should bring a smile to some faces. First, Con Ed said that all power should be back on in Manhattan by the time its stressed-out inhabitants wake up tomorrow morning. Second, it has been reported this week that failed cruise-ship lounge singer Silvio Berlusconi will now get a chance to entertain his burly cell-mates in an Italian prison –that's where he is supposed to be headed for a four-year "engagement" in the wake of his tax evasion stint. Mamma Mia!

Last but not least, here is something we do not often have to do, but will do, since we are always keen on bringing you the facts, the whole facts, nothing but the facts, and the exact facts, at that. Here is an erratum that was contained in our last article on the subject of alchemy and turning water into (a little) gold: In Tuesday's commentary it was implied that a French company had developed technology to extract one microgram per liter of gold from seawater, but in fact, the company is using its special plastic resin on undisclosed sources of industrial waste water to extract between 5 and 10 milligrams of gold and platinum group precious metals per liter leaving behind only one microgram per liter. We apologize for the mistake and thank the astute reader, Mr. Naylor, an Undergraduate Physics student at the University of Washington in Seattle, for bringing it to our attention.

Until next time,

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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