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Kitcommentary from Kitco Metals Inc. - "Price Does Not Equal Value"

Category: Investment, Gold, Mining

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November 30, 2012 ( Mining stocks newswire) Spot gold dealings started the final session of this turbulent week with a loss of about $6 in the price of the yellow metal, at $1,720 per ounce. Gold prices had recovered by about half a percent on Thursday but are now poised to record their largest weekly loss in four weeks in the wake of Wednesday's sizeable slide in values. In lieu of convincingly breaking out above the $1,750 area gold skirted the $1,700 pivot point after a large sale of about 771,000 ounces had to be absorbed by the market (at a price that is). Friday's New York session opened with a 15-cent decline in spot silver (quoted at $34.12 an ounce) and with a $2 loss in platinum (quoted with a bid at $1,609 per ounce). Palladium advanced $5 to the $684 mark and it appeared to be heading for tis best monthly gain since 2010.

Reuters News reports that "concerns about supply and technical buying helped send palladium to a 2-1/2-month high of $689 on Thursday. "It might be a trade of choice for 2013," said a Hong Kong-based trader. "People don't want to miss it and are pressured to jump in now." Norilsk Nickel, the world's largest producer of palladium and nickel, expects the palladium market to remain in a deficit in the next several years largely due to a near depletion of Russian state supplies." Rhodium was indicated at $1,150 on the bid. Background markets showed crude oil stalled at $88 per barrel and the US dollar at 80.30 on the index.

Late Wednesday EW chart analysis characterized the selloff in gold as "impulsive" and developing a five-wave shape. The only event that would change a forecast of significantly lower prices to come would be gold being able to rally beyond last Friday's high that was just shy of $1,755 per ounce. Similarly, so long as silver does not take out the $34.37 level (last Friday's high) on the upside, EW contends that it could be headed for "the support shelf surrounding $26.11, and eventually lower."

On the physical side of the market, despite recent rosy interpretations of Indian festival-related gold demand, that country's officials have noted that the period from April to September has witnessed an $8.8 billion (30.3%) decline in the value of the metal's imports to a total of $20.2 billion. The Minister of State for Finance remarked that the "decline may have occurred due to the increase in Customs duty on gold imports."

Blame for Wednesday morning's price collapse ($36 at one point) was laid on everything from global warming to the bark beetle (not to mention on certain sinister, manipulative forces at work trying to shake small investors' faith in the market) but, at the end of the day, the event only revealed what can happen when a spec fund decides to make some money before the year ends and it unleashes an avalanche of computer-driven algorithm trades.

Sharps Pixley Ltd.'s Ross Norman summed up the Wednesday "event" in a more…pragmatic fashion: "The motivation (other than profit) for the trade is clear. It is a bet that the U.S. fiscal cliff will be averted and that the Democrats and Republicans will find common ground in their polarized positions on revenue raising between tax increases and austerity cuts. It is also arguably a bet that the U.S. will be out of the mire well before both Europe and Emerging Nations with the dollar positive environment being — by extension — gold negative. In other words, while looking for a fiscal cliff we actually found a gold cliff.

Little mention was made of the fact that the US dollar had risen as high as 80.59 on the trade-weighted index earlier in the day and that it contributed to a larger than $1 slide in silver prices without the presence of a similar fund seller as was seen in gold. Also lost in the noise being made about the "intervention" in the gold market was the little detail of the S&P GSCI Spot Index of raw materials' decline of 1.4% that morning. The index fell after the co-chairman of President Obama's fiscal commission opine that he thought it unlikely that Congress and Mr. Obama will seal a deal before December 31 that might avoid a plunge off the Fiscal-You-Know-What. Risk assets turned radioactive for most longs after that bit of news.

According to Bloomberg News, "the most-traded gold options [on Tuesday, the day prior to the "event"] were bets on further price drops. Exchange data show 9,573 put options traded, giving owners the right to sell gold at $1,700 on the Comex by January. That compares with 461 contracts traded a day earlier. Each contract is for 100 ounces. The next-most-traded contracts were January puts giving owners the right to sell at $1,690 and at $1,695." Now go and try to tell any of the above to the forums that continue to see the Dark Side at work in a market that they claim is a one-way highway to [insert your favorite gold price target here].

We noted in our last article that long-time gold market maven Paul van Eeden believes that gold is presently overvalued. The hyperlinked interview reveals in detail why Paul takes this stance and why he feels that the shopworn arguments for stratospheric gold prices (inflation, hyperinflation, currency supply, etc.) are leading to false expectations and incorrect perceptions. He also explains the difference between "price" and "value" as regards gold. Finally, he remarks that "Copper, like gold, is very expensive. So is silver. The other base metals, such as aluminum, zinc, lead and nickel, are much more reasonably priced. Oil is also very reasonably priced at $85/barrel. I see less systemic risk in those sectors than I see in gold, silver or copper."

However, Mr. van Eeden is not alone in making the claim that gold appears to be expensive at this juncture. Calafia Beach Pundit's Scott Grannis notes that relative to the average real price of gold over the past 100 years, gold is trading at a premium of 230%. Mr. Grannis assigns such a premium to the Fed's recent "easy money" policies; ones which have prompted investors to seek the protection from inflation they believe gold can offer. Could they be wrong about inflation and about the Fed's ability to contain it –the same argument that Paul van Eeden makes in his interview?

Mr. Grannis explains that "If the Fed continues its massively accommodative monetary policy, gold prices conceivably could move higher. But I think that would require some evidence that inflation is picking up, and that evidence is still lacking. In my view, gold is essentially priced to a significant increase in inflation already. The premium that investors are willing to pay for gold today (defined as the amount by which today's price exceeds the average historical real price) is almost as much as it was in early 1980, when inflation had already attained double-digit levels. By this same logic, if the Fed were to even suggest that it is contemplating a reversal of its quantitative easing (which could be accomplished by raising the rate it pays on reserves, or by draining reserves), then gold would be quite vulnerable to losses. Gold today is a very expensive inflation hedge."

One might also wish to consider what happens in coming months and years if in fact UBS declaration that "the super-cycle that drove a huge boom in commodity investment over the last decade is well and truly over." Australia's Financial Standard relays that UBS Head of Investment Strategy, Mark Rider, remarks that "while many commentators have argued that a continuation of the Fed's quantitative easing policy should support fresh highs in precious metals such as gold and silver, he believes gold prices could weaken if inflation is held in check by sustained excess capacity."

Mr. Rider cautions that "A more aggressive phase of QE with outright monetisation of government debts may be required for the gold price to sustain new highs. The commodity super cycle's end is at hand. There's no better cure for high prices than high prices themselves, which incentivise new supply and encourage substitution. The scene is set for a momentum shift."

Until next time,

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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