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Kitcommentary from Kitco Metals Inc. - "Sky Fall?"

Category: Investment, Gold, Mining

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November 13, 2012 ( Mining stocks newswire) Metals markets opened mixed this morning as US dollar strength (@81.20 on the index) kept a lid on advances in gold and in silver but did not manage to hold back those in platinum and palladium (more on the noble metals later on in this posting). Spot gold traded at an overnight low of $1,720 the ounce and it opened at $1,728 with a marginal loss vis a vis yesterday's close. Crude oil was down 70 cents and copper was bid at $2.28 amid reports that imports for October (322,000 tonnes) were at their lowest since July of last year and that bonded warehouse inventories are at record levels (700,000 tonnes).

Thus far, the yellow metal has encountered fairly robust resistance at the $1,738-1,740 zone but EW analysis issued late Monday afternoon allow for an upward push into the $1,745-$1,763 area before the resumption of the larger decline occurs. Only a breach of the $1,703 level would alter that forecast in the near-term. Meanwhile, bold new predictions of new records in gold and in silver –both to come prior to New Year's Eve-have been made (once again), but are lacking explanations as to what the specific drivers (other than, perhaps, the shopworn Fiscal Cliff argument) for such a leap to record levels would be over the next 48 days and a few hours.

Spot silver opened just above $32.50 per once and there is also scope for it (according to EW) to push somewhat higher (near $34 possibly) first. A violation of the $31.50 level could usher in an eventual slide towards a major support area just above the $26 per ounce level. Platinum moved $27 higher this morning and showed at bid of $1,590 while palladium jumped $13 (at +2.15% it was the stand-out mover in the entire complex this morning). There were reports of one fatality at an Anglo Platinum mine and of 22 people having been arrested yesterday near the same facility. Two separate Amplats operations have been non-functioning for two months now.

There is no shortage of news related to on-going labor strife in South Africa's platinum mines, to be sure. Reuters News reports that the number one global platinum producer –Amplats- was uncertain as of Monday about whether or not striking miners would return to work in the wake of a company-issued ultimatum that threatened their firing. Later, the firm extended the return to work offer until tomorrow to its striking workers. Meanwhile, the second-largest producer of platinum-Impala Platinum- projects that the market for the noble metal will shift into a deficit situation for this year and for the next several years as well.

Speculators in this unique niche however appear to be more preoccupied with the currently anemic levels of industrial demand for the noble metal. Still, many will not likely ignore a shift into a net deficit of whatever size in a market as small as that for platinum (or palladium for that matter, which is also anticipated to show a shortfall in supply versus demand next year). The shift into deficit mode in both noble metals was also validated by refiner Johnson Matthey in its latest report. Estimates for the shortfall in platinum are near 355,000-400,000 ounces while those for palladium are closer to 915,000 to 950,000 ounces. Such gaps would be the largest in one decade for these metals. We continue to see them as offering lower downside risk and better upside potential than gold or silver do at the present time.

The latest CFTC positioning reports revealed a decline in net long gold positions for the fourth consecutive week. Similar shrinkage in speculative length was noted in silver as well as in platinum. Palladium speculators bucked the trend with an increase in long positions in the wake of the noble metal having suffered a price setback that engendered the feeling that it had reached an oversold situation. Standard Bank (SA) analysts believe that palladium remains in a favored position to add further speculative longs while platinum appears to be tilting in the opposite direction and could see the addition of more shorts.

On the physical side of the gold market equation, there appears to finally be some good news coming from India in terms of metal purchases. The first day of the Diwali festival period (Sunday's Dhanteras) – a day on which buying precious metals is tantamount to the observance of tradition- generated fairly good but not spectacular levels of local jewellery and coin sales.

There seems to have been a preference for (cheaper) silver among locals this year, however, estimates were that QIV Indian gold demand could climb by 15% or more over 2011 levels, owing to the Hindu calendar. The latest reports from India point to an only 8.3% higher level of demand for gold – a rather muted response, given the season. We are yet to learn what the overall 2012 Indian demand will end up being tallied at, especially in the wake of the almost year-long formal efforts by that country's central bank to dampen the appetite of Indians for gold.

Such efforts, coupled with other factors, appear to have been 'paying off' for the RBI. The Financial Times recently reported that India demanded only 181 tonnes of gold in QII 2012, which was a two-year low. Industry spokesmen (WGC) believe that purchases will remain weak for the rest of the year as gold prices in rupee terms remain relatively high.

This year's weak monsoons have hurt India's agricultural output and they have cut into the traditionally heaviest source of offtake for gold: rural-based demand. The WGC earlier this year estimated that India was likely to end 2012 with a demand tally of about 750 tonnes of gold. That tonnage would be down a hefty 25% from 2011 levels and it would constitute the lowest offtake figure in five years' time.

Unsurprisingly, the industry's hope is now shifting towards China to fill the demand gap in gold. At the LBMA Conference in Hong Kong it was theorized yesterday that China's official gold reserve pile can only "go in one direction." Well, that could be true, but not in the sense that most are expecting. The PBOC has made no secret about the fact that it is comfortable with a gold allocation of from 1.5 to 2 percent of reserves.

China has also made no secret about the fact that it does not intend to "shoot" itself in the proverbial foot by trying to suddenly amass several hundred (or thousand) tonnes of bullion (and doing serious damage to its vast US dollar holdings in the process) –most of which it will find difficult to dispose of in the event of a "rainy day scenario" without doing sizeable price damage to its remaining holdings. However, this does not mean China will not buy any gold as we go forward. It just means no Chinese adoption of some kind of gold standard.

Should the country's foreign exchange reserves continue to grow at the pace they have (something that has come somewhat into doubt this year as the country slowed), then it is logical to expect that the mere maintenance of that 1.5-2% allocation will dictate some continued but modest additions to its gold holdings.

Such acquisitions will however, most likely be done in a discreet, orderly fashion, mainly from domestic sourcing, and without trying to upset the market's apple cart (prices). Recall that the 74% rise in reserves that was announced in 2009 (and which many still erroneously believe was a one-time massive purchase) was the result of over five years' worth of slow, disciplined purchases aimed at the maintenance of the officially-targeted allocation percentage to be held in gold.

Anemia also presently (and perhaps also going forward) defines the European common currency. The recent bounce in the euro and its ability to maintain above the pivotal $1.30 level against the US dollar have both become the subject of skeptical analysis by currency experts. The euro fell to a two-month low against the dollar earlier today; it traded at $1.266, just ticks away from pivotal support putatively offered by the 100-day moving average at the $1.264 level. EW technicians, for one, envision the common currency revisiting its July 25th low of $1.20 against the dollar.

This anemia, is not, by the way, just about the fact that Greece was just granted two more years to get its act together in the manner that European finance ministers would like it to, or that Spain might come knocking on the door for sorely needed aid. Principally, the currency jockeys are of the opinion that while the ECB has not yet adopted a course to monetize some of the region's persistent and still-growing debt, it might need to do so in a move aimed at shoring up the faltering bond market. Such a strategy would inevitably play into further euro weakness and the US dollar would likely be the prime beneficiary of such an outcome.

That's not exactly the outcome that many (too many) have been calling for, when it comes to the American currency. Analysts at point to the post US election environment as being fertile ground for a potential phase of dollar vigor in 2013. The Obama victory is not seen by such sources as the facilitator of endless money-printing but, rather, as the beginning of a serious effort to reduce the US deficit (by, among other things, raising taxes soon). RTT also sees weakness in the euro owing to the woes in Spain and in Greece and the aforementioned ECB efforts to save bond markets.

Based on RTT/ Hurst cycle analysis, indications are that the dominant cycle for the buck in 2013 is "very bullish." One could eventually see a reversal in the USD as a carry trade being used to finance the purchase of risk assets. Here is the RTT Hurst Cycle covering the period of from 1986 to the present for the UUP US Dollar Index Fund: Newswire

The image above does not exactly imply a "falling sky" for the greenback; to the contrary, if cycles cyclical fashion, well, the rest of the curve is fairly easy to draw and complete. Got a marker?

Speaking of botched forecasts, we all remember the ones about how the Western sky would fall in the wake of yet another oil crisis and be totally at the mercy of the Middle East for its fix of black gold. Well, lo and behold, the story has changed, and then some. The International Energy Agency yesterday projected that North America will –by 2020-become the world's largest oil producer, surpassing Saudi Arabia as well as Russia in output.

Meanwhile, the IEA anticipates that the US will reduce its oil imports from the current ten million barrels per day to only four million of same per day. In fact, North America as a whole will likely eliminate its need for imported oil by 2030. Those developments alone should put a few alarmist financial publications out of commission –and much sooner than 2020. We've said it before: the sky has a tendency to remain in place and conventional wisdom is anything but...wise.

Something else that is also not seemingly on the verge of falling is the sky of the US' fiscal cliff. Despite numerous proclamations (certainly in heavy rotation since Election Day) that the plunge is nigh (suddenly, never mind the Mayan calendar!) there are signs that a (bi-partisan!) possible deal is being worked out on Capitol Hill. But, to make sure, President Obama will go to labor and business alike to try to secure their support for higher taxes for the wealthy and for tackling the US deficit.

The progress that is being made just one week after the election to try to avert the "Thelma & Louise" outcome for this American movie is remarkable. Remarkable enough, at least for the world's largest bond fund (PIMCO) to figure the odds of a compromise seeing the light of day prior to January 1st 2013 as being in the 70% range.

Bloomberg News quotes PIMCO's CEO, Mohamed El-Erian as saying that: "No one in their right mind would push our country into recession. The major issue for us is not that we resolve the fiscal cliff but do we do it in a way that allows Washington to pivot to turning headwinds into tailwinds." In other words, if you wish to see sky fall(ing), the movies might be your best bet. Rotten Tomatoes give that film a 91% favorable rating. Alternatively, you could stare at the Fiscal Cliff countdown clock and reach for a fresh Xanax pill for no reason other than the fact that every countdown clock seems so ominous by nature.

Until next time, tick, tick, tick, tick....

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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