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Kitcommentary from Kitco Metals Inc. - "Cliff Notes"

Category: Investment, Gold, Mining

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November 20, 2012 (Investorideas.com Mining stocks newswire) Precious metals markets opened slightly higher in all but spot silver this morning. Gold moved $1.90 higher to start at $1,733.80 on the bid-side, while platinum gained $4 to reach $1,576 the ounce. Palladium climbed $3 to the $642 mark per ounce. A loss of six pennies was noted in silver which opened at $ 33.05 the ounce. Gold retreated into negative territory to near $1,730 within the first hour of trading as mild profit-taking emerged. Markets are slated to commence thinning out following today's close and ahead of the Thanksgiving holiday.

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Background markets indicated a loss of 61 cents in crude oil following yesterday's massive rally, and a decline of 0.10 in the US dollar on the trade-weighted index (to 80.97). On a wave analysis basis, gold's Monday run did not confirm the one seen in silver, once again. However, the latest EW dispatch allows for the yellow metal to still do that and rise, possibly to between $1,750 and $1,775 before the next down-leg would occur. In the interim, support in gold is critical at the $1,705 level.

In the physical markets we noted two items of interest this morning. First, the news that the Reserve Bank of India banned loans for the purchase of gold in any form. The ban not only covers jewellery, bars and coins, but also the lending of funds to cover purchases of gold ETFs and/or gold mutual funds. This bold step continues the central bank's overt efforts to dampen excessive bullion import into the world's historically largest consuming country.

Further, it was noted in the daily commodities brief by Standard Bank (SA) that while the platinum market is clearly shifting into a deficit paradigm, it is doing so against a background in which auto sales are flagging. The bank's report indicates that "auto sales in the four largest auto markets (US, China, Japan and Europe), it is clear that demand momentum has faded relative to last year, but also relative to the start of the year. Furthermore, a big drag on the auto sales numbers are European and Japanese auto sales, which registered 8.5% y/y and 5.7% y/y declines respectively in October. These two markets are large platinum markets." Consequently, the research team's tactical trading range for the noble metal for the time being is $1,500 to $1,600 per ounce.

The constructive tenor of the on-going Fiscal Cliff-avoidance talks in Washington prompted hitherto reticent speculators to jump on the risk asset wagon on Monday. In the process, they made a 0.39% dent in the US dollar while they boosted stock and commodity values in notable fashion. The day's big gainers were crude oil (up 2.55%) and silver (up 2.48%) but neither gold (up 1.06%) nor the Dow (up 1.65%) fared too poorly on the session. In constructive news of another type, it has been reported that Israel is holding off on a ground invasion of Gaza and that US Secretary of State Hillary Clinton is on her way to the region to try to broker a truce between Israel and Hamas.

Such synchronous (and traditionally not customary) moves have defined the markets for the better part of the year –first they were obsessed with the Fed and QE3 and now they are solely gyrating with every news item related to the fiscal-you-know-what. While one can attribute some part of the jump in gold to the continuing and unfortunate hostilities in Gaza, its prime-mover on Monday was good-old risk appetite making its reappearance. Such speculative optimism was not to be found in the latest CFTC positioning reports for last week however.

The reports showed that hedge funds sliced their commodity-bullish positions for a sixth consecutive week up through November 13th –the longest such exodus from the niche since the dark days of August 2008. In fact, commodities are now possibly heading for their first annual loss since that same year amid growing surpluses and few takers on a global basis. The euphoria that arose prior to and in the wake of the Fed's QE3 has now fully dissipated, according to market observers.

One such observer, Citigroup, goes one step further and argues that the much-ballyhooed commodity "Super Cycle" might now be history as the hitherto insatiable (or so some thought) Chinese economy engages into a lower gear and as central bank stimulus programs fail to boost demand for "stuff." The bank's chief commodities research analyst said that "It is now clear that the commodity super cycle is over. No longer will a pure long-only strategy bring the returns expected in 2002 to 2008. Nor will conditions approximating those of the last decade return any time soon."

As can be expected, at least some folks (primarily those with shovels in hand) disagree and do so vehemently. For them, the party in commodities (metals included) remains lively and the "this time is different" paradigm still applies to it, as opposed to the basic math that is normally contained in supply versus demand metrics. Speaking of surpluses, we revert to the gold market snapshot report by the World Gold Council that we tried to dissect here in our last posting. The table below speaks volumes:

Investorideas.com Newswire

Slice and/or dice the above any way you like; you will come back to the same conclusion we drew here several months ago –namely, that investment "appetite" for gold needs to be on the order of $500 million (give or take $3 million) per trading day, day in & day out, for the whole year, in order to mop up those 2,212 tonnes of excess supply of the yellow metal. Almost all hope for such a process to continue to take place has been placed into the hands of ETFs and (to a lesser degree) central banks. Now there's something to ponder, especially since we still keep reading about how ETFs are not "orthodox" gold investment vehicles and how central banks are "the best contrarian indicators" for gold investors.

And now, time for something completely...the same: more CliffNotes about..."The Cliff." While the negotiations related to the fiscal precipice continue on several levels (including President Obama reaching out to a numerous business leaders), the markets remain cautious even after Monday's relief rallies and are pricing in a lower level of 2013 US economic expansion than might otherwise be the case, or, has actually been the case –at least according to some estimates. To wit, economists over at Goldman Sachs reckon that America's GDP likely moved ahead at an annualized 2.9% rate in the third trimester of this year, far higher than the Commerce Department's own 2% growth estimate.

The momentum that the folks at Goldman see increasing is owed to better signals from the housing sector (today's housing starts numbers were the strongest in four year), the nation's (shrinking) trade deficit, and from the all-important consumer spending niche. One remaining worry is whether Hurricane Sandy might shave half a percentage point from fourth quarter GDP. It could turn out to be the case.

However, aside from that, and with the potential resolution to the fiscal base-jumping issue, the US economy is looking at a year ahead in which it finally begins to return towards a roughly 3% GDP annual growth rate and towards an unemployment rate possibly as low as 7.2%. In fact, that is the target that St. Louis Fed President Bullard envisions as attainable next year on the US labor front. He is a bit more optimistic on the expansion front, believing that the US might grow at a 3.5% clip.

Not everyone agrees that economic progress will be as robust as that if taxes go up in America. However, the numbers being talked about are sufficiently sizeable that-if they materialize-the deficit bogey will be dealt a substantial enough blow to make headlines. The New York Post reminds us that "There's a solid argument that limiting high earners' deductions could raise $800 billion or more. A $25,000 cap on deductions, according to The Wall Street Journal, would yield almost $1.3 trillion of added revenue. The Simpson-Bowles commission showed that broadening the tax base could net $1.1 trillion."

While the current discussions in Washington could have a positive outcome, one of the best side-effects of their potential success could turn out to be a stronger dollar and the avoidance of any further credit ratings "events" such as the one witnessed last summer. We learned late yesterday afternoon that France was not able to avoid losing an important alphabet letter from its own rating crown. Bloomberg News reported that "France lost its top credit rating with Moody's Investors Service, dealing a blow to President Francois Hollande's efforts to show budget credibility in the face of a stalled economy. France was cut to Aa1 from Aaa, the rating company said." Paging Mr. Obama! Monsieur Hollande on the line!

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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