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Kitcommentary from Kitco Metals Inc. - "An Early Vote To Sell"

Category: Investment, Gold, Mining

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November 6, 2012 (Investorideas.com Mining stocks newswire) Metals markets opened marginally higher on this US Election Day as the US dollar traded virtually flat and as crude oil advanced by about thirty cents per barrel. Speculative participants appeared to be willing to take only small bites at the market as uncertainty over the Presidential election and a good number of bears still prowling on the scene kept risk appetite at minimum levels. Spot gold gained $4.90 to open at a dime shy of $1,690 per ounce while silver rose eleven cents to start the session at $31.30 the ounce. Platinum bucked the trend with a $5 per ounce loss at $1,536 and palladium climbed only $1 to $611 the ounce. No change was reported in rhodium at the bid level of $1,175 per ounce.

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Last Friday's near-$40 plunge (it was the largest one since June) in gold prices resulted in a dramatic reassessment of the bullishness that had pervaded the speculative crowd's mindset since before the advent of the Fed's QE3 program. Thus instead of being able to talk about new highs above $1,800 and/or $1,900 by now, the analytical crews at various financial publications have had to report lows in gold which have all but broken important 100 and/or 200-day moving averages near $1,670 per ounce.

If we need to mention silver in this story (okay, we will), we can only note that the white metal (basis the December contract price) shed 4.1% in last Friday's debacle. Silver = Gold on Steroids (in either direction) we have noted here previously. Bullion Vault's economist Ben Traynor noted that "The[$40 down] move takes us back to where we were just after [Fed Chairman] Ben Bernanke's Jackson Hole speech at the end of August, and offers further confirmation that September's QE3 buzz has now well and truly worn off."

Veteran gold market analyst Ned Schmidt was a tad more...blunt with his take on Friday's events and where they might now lead. He wrote that "Until this [Friday] morning the [gold] market was assuming that the Federal Reserve would keep making QE-3 bigger and bigger. That belief was supporting gold, even though it had already rolled over. Note our past comments on how the mini parabolic had already been broken. We have noted several times that the failure of this pattern is always associated with pain. Friday was that pain."

Mr. Schmidt then went on to assert that "As is evident to today, Gold seems to have no bottom. This reaction is not going to be reversed in a matter of days. Gold is going to be very vulnerable to selling, and buyers will be few. Remember, we are not talking about cash buyers driving the gold market on Friday, or recent weeks. Immature children are trading futures, and they act like lemmings. Gold has broken down in the charts this morning, and that is not going to change any time soon. As a discontinuity, we can almost throw out the chart before Friday. And contrary to suggestions of amateurs, chart damage did occur. A complete rebuilding of the chart is necessary, quite possibly from lower levels."

For the time being however, late Monday night EW analysis indicates that we might witness a partial retracement of this latest large decline (from $1,800 to $1,671) owing to the fact that the Daily Sentiment Index at only the 9% level shows very few bulls left 'roaming' the market prairie. As a point of reference, back in May, when gold touched its 2012 lows at $1,527 the DSI showed a reading of only 5% bulls. The small traders' commitment levels, albeit having declined from their largest position in ten years, continue to show that what EW calls "the public" is still "overcommitted" to gold.

At any rate, at this juncture, despite Monday's tepid, near-half-percent bounce in prices, a lot of repair work is still necessary in order to rekindle some of the cocksureness that had been on display up to the 5th of October peak in gold near $1,800 an ounce. EW opines that a bounce from here could carry gold to as high a level as $1,725 -give or take.

With last Friday's slide gold was down for four consecutive weeks; a losing streak that has not been witnessed in over a year's time. The US dollar, on the other hand managed a solid jump to well above the pivotal 80.00 mark on the trade-weighted index and it vaulted to a multi-month high against the yen. The euro (as of this writing) is also (still) experiencing difficulties and it trading under $1.28 against the greenback.

Meanwhile, precious metals speculators trimmed another 36+ tonnes of gold from their long-side ledgers in the latest CFTC reporting period. In silver, on the other hand, not only did speculative length fall by over 213 tonnes, but, this time around, the decline was principally attributable to the addition of over 206 tonnes to short positions (the largest such bet since July, and, in the words of Standard Bank (SA) analysts, a "disconcerting" one."

The principal 'culprit' for the massive sell-off in gold and silver was not some nefarious "cartel," but, rather, the effect on the market and on spec sentiment of a relatively modest addition of jobs to the US labor force as reported by the Labor Department for October. While most economists agree that monthly US job creation ought to be nearer the 200.000 positions-added mark in order to label the recovery as meritorious, they were more than pleasantly surprised by Friday's report.

However, immediate doubts about the depth and duration of the Fed's QE3 efforts came into the picture as soon as the data saw the light of day. Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund said that "the gold market is [also] beginning to think about when the Fed will change monetary policy and questioning the "validity of the asset reflation thesis. We believe this re-think process is just getting started."

As it turned out, those looking for Fed handouts "to infinity and beyond!" ended up showing their surprise by voting with their feet and selling commodities as fast as orders could be executed. The GSCI metric of raw materials ended up completely wiping out its year-to-date gains as a result. Ironically, Friday was also the day on which media sources reported the gold trading crowd as feeling the most bullish in more than three months, on account of expectations of...more stimulus. What timing.

Other sources, on the other hand, theorized that ľas of last Friday- gold was effectively "pricing in" a Romney victory at the polls tonight with an "early vote" to sell, and that it was anticipating a tough GOP stance on deficits and a resultant stronger dollar down the road. Curiously, just hours prior to the selling spree, various hard money publishers issued virtual guarantees to their readerships, stating that gold would "win" no matter who wins the White House. Some publications urged their faithful followers to go against their instincts and party affiliations and vote for Mr. Obama as his victory at the polls would "send gold through the roof." Want more irony? Read on:

Libertarian and/or Tea Party-leaning sources begged to differ, claiming that in fact gold bugs should root for Mr. Romney tonight as he would finally make their dreams (of a gold standard returning) come true. The Financial Times' Jack Farchy, on the other hand, warned that "It is [therefore] ironic that the single greatest risk to gold at the moment is probably a Romney victory in next Tuesday's presidential elections." Mr. Romney is seen as very likely to replace the Fed's Mr. Bernanke with a hawkish Chairman and such an appointment could then set off a sizeable slide in gold prices, and a strong rally in the US dollar, according to market observers.

Okay, then. Go cast your ballot. It won't be long before every story you will be reading about the market will make an equally big (or bigger) deal about the "Fiscal Cliff" and what falling or not falling off of it might mean for asset values. Why, it is already happening...

Until next time,

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
US & Canada Toll Free: 1 (877) 839-8036
Websites: www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler
E-mail: jnadler@kitco.com

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