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Kitcommentary from Kitco Metals Inc. - "Motions Of No Confidence"

Category: Investment, Gold, Mining

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December 4, 2012 ( Mining stocks newswire) Gold prices broke to under the pivotal $1,700 mark overnight, and did so despite a slightly weaker US dollar, despite a firmer euro, but alongside almost 1% weaker crude oil values. The decline to a fresh four-week low was partially attributed to an overall slide in commodities (albeit copper did not join the crowd) on account of the apparently stalled US Fiscal You-Know-What negotiations in Washington. Risk aversion on = gold and silver off (on the price charts, that is).

Spot prices touched lows at $1,695 before returning to the round figure but the battle appeared intense as the NY markets opened for business at 8:20 this morning. The latest Kitco spot quotes had gold trading $ 17 lower at $1,699 on the nose, spot silver down 64 cents at $33.02 per ounce, spot platinum down $15 at $1,588 and spot palladium down $8 at $680 the ounce. No changes were noted in rhodium at $1,150 per ounce.

Sharps Pixley's Ross Norman questioned the events (and found some answers to them) as follows: "Gold received another body blow in mid-Asian trading hours which saw spot prices dip briefly below $1700 before finding support at the technically important $1705 level - the low seen on Nov 15th; a failure of this level after the US opening exposes us to a decline to the next level of technical support at $1672.

Mr. Norman queries: "So, what the heck is going on here - isn't the dollar weak - aren't we nearing the edge of the fabled fiscal cliff - doesn't the US reach its debt ceiling in 8 weeks' time - isn't this traditionally the season for high physical demand ??? The newswires are awash with forecasts suggesting record prices next year [you can say that again, Ross] but, like the gold price today, it lacks a certain conviction...The underlying sentiment in gold - at the moment - totally lacks confidence."

The new trading week started with a small (80-cents net to $1,716/oz. at the 5:15 PM close in NY) recovery in gold prices following Friday's close which constituted a loss on the day, week, and the month. Analysis from Saxo Bank characterizes gold's November behavior as reflecting a "confidence crisis" after prices failed to break above $1,750 and keep sailing to $1,800 or higher, as had been widely expected.

The yellow metal's "violent sell-off" that occurred last Wednesday apparently "caught many traders off-guard and helped dent confidence." Despite its oft-mentioned "safe haven" attributes, gold did not manage to benefit from the rally in risk assets that unfolded last week. That's two ‘motions' (and displays of emotions) of no-confidence within the span of one week, and ultimately, in most things financial, it all boils down to confidence levels or the lack thereof.

More importantly, the Saxo Bank report concludes that "having seen a drop in forward US inflation expectations during November gold has for now returned to trade just like another risky asset, taking its cue from stock markets and the dollar. And with the sentiment in stock and forex markets being disturbed due to confusion (read: no confidence) about the (lack of) progress in the fiscal cliff negotiations gold was pushed over the edge following pessimistic comments which saw stocks drop and the dollar rise." Thus, the expectation is that –at least until after the December 11-12 FOMC meeting-gold might remain trapped in the $1,705-$1,755 range that appears to be well-worn, "technically" speaking.

On the physical side of the gold market, news from India reveals little or no change in buying patterns by locals. The Hindu Business Line reports that "physical demand in India remains modest. Slowdown in sales after Diwali festival is palpable. A weaker rupee continues to push local prices higher. While gold bulls and other interested entities continue to lure buyers and investors with glib talks of further price gains, policymakers are constantly talking about restricting high volumes of gold imports which are seen as a drain on the country's foreign exchange."

Meanwhile, the Indian government appears to be cognizant that –despite its efforts to curb the gold demand appetite of Indians-it cannot resort to a total ban on bullion imports as smuggling would swiftly mushroom under such conditions. As far as officials are concerned, one of the most effective ways by which imported tonnage will decrease going forward, is a successful outcome in the combat against Indian inflation levels.

However, the latest reports from that country reveal that the RBI and other government bodies' efforts to dampen the golden inflow are bearing some fruit: "[The] doubling of the excise duty to 4 per cent in the last budget and the curbs that RBI imposed on gold loan value (down from 85-90 per cent of the value of jewellery to 60 per cent) and banning banks from funding gold purchase by loan companies have led to [a] drop in imports. In [the] April-October [period], imports declined 35 per cent year-on-year and overall imports is [sic] set to drop over 17 per cent to 800 tonnes this year."

Part of the dampened Indian demand for gold this year can be explained by taking a look at scrap flows of the metal within that country. The Economic Times reports that "A price push-up in gold has increased the entry of recycled gold in the Indian market. In the first three quarters of 2012, the country recycled 89 tonnes of gold as against 36 tonnes in the same period last year. Market sources said a large portion of recycled gold has come from farmers who have offloaded it to meet rising input costs. "With gold prices going through the roof, consumers are trading old jewellery for new as well. While there have been reports of rural offloading of gold, a large section of people have opted for this route to meet the wedding season demand," said Ketan Shroff, director of Penta Gold. Incidentally, 70% of India's gold demand comes from rural buyers."

On the topic of the market-positioning side of gold's present paradigm, Standard Bank's analyst opine that the latest CFTC data reflects (aside from the addition of almost 30 tonnes to net spec length) a body of participants who keep looking for continued monetary accommodation (and not just by the Fed). As regards silver however, the SB analysts conclude that the rise in net spec length to 23.8% of open interest, coupled with "the apparent ambivalence" among players spells a particularly vulnerable [to sell-offs] silver market.

Late Monday afternoon EW silver analysis cautioned that "The most recent weekly Commitment of Traders shows that, at 43,102 net-long contracts, the Large Spec's (the trend-followers) are nearly as net long as they were at the October 1 high at $35.47 (44,355). At the same time, the Commercials (the insiders) are nearly as net-short as the October price high. The current position of the Large Spec's and Commercials is the opposite of their positions at the previous lows." ‘Nuff said.

The CFTC positioning reports revealed that platinum and palladium (and especially the latter) continue to be favorably viewed by speculators – as reflected by bullishly-flavored increases in net spec length that have not been seen in six weeks (Pt) or are the largest since August (Pd).

Detroit automakers posted solid sales gains last month, with Chrysler Group leading the pack on the back of a 14% climb in units sold. In fact, November's sales gain of 15% to the strongest annualized rate since February of 2008 (!) took industry analysts by surprise. It was a pleasant surprise, this one; it was precisely the type of news that is music to the ears of those who are fond investing in the component members of the platinum-group metals, especially palladium.

Standard Bank analysis points out that "Since the US auto market is biased towards using palladium, this again underscores our belief that palladium remains better off than platinum from a demand growth perspective. The other large palladium-consuming auto market, China, also appears to be showing signs of recovery."

November's number of 122,565 cars sold constituted the Chrysler Group's 32nd consecutive month of sales gains since the days when former candidate Romney argued for the euthanizing of US automakers in the midst of the financial crisis. Ford Motor's sales gained 6% and GM sales were up 3.4%. Meanwhile, automakers BMW, Honda, Hyundai, and Nissan all posted their best US November sales ever. While it is true that perhaps 65 up to 80 thousand vehicular sales were likely replacements for some of the more than 250,000 cars that Hurricane Sandy destroyed, the bottom line is that –as one auto executive noted- "we are now surpassing sales records set pre-recession; a true sign that our business has recovered."

A component of the platinum market that is not recovering however is the supply side situation. The coming year offers little in the way of hope that South Africa's mining sector woes are about to become history. One industry analyst warns that "Almost half of the platinum mines in South Africa are either operating at a loss or barely breaking even, as was the case even before they had to pick up these large labour bills rolled out to appease unhappy workers and communities."

South Africa's Business Day reports that "The labour disputes also wiped out a platinum surplus in the market that was depressing prices. Strikes slashed platinum output by 170000oz at Impala, 191000oz at Anglo American Platinum and 110000oz at Lonmin - the biggest production losses in seven years. Other miners, such as Aquarius and Eastern Platinum, were also affected, and most are not yet back at pre-strike production levels. Global supplies of platinum are expected to drop 10% for the year, to 5.84 million ounces. The strikes took the market from a surplus of about 400000oz to a balance or slight deficit supply situation this year. It is therefore reasonable to expect platinum prices to react positively to the change in supply and demand fundamentals."

Turmoil continues in the gold mining niche as well, with yet more management changes being reported at top gold extraction firms. The latest CEO shuffle will have Newmont's (the world's #2 gold producer) CEO Richard O'Brien stepping aside on March 1st of next year, to be replaced by Gary Goldberg who has been with the firm for 12 months at this point. Similar CEO replacements have now taken place at Barrick Gold and at Kinross Gold Corp within the past six months. Public Enemy #1 for embattled gold mining firm executives: soaring (some say out of control). This, amid some hefty margins between market prices and production cash costs.

The week in progress is, and will continue to be, quite data-heavy, to say the least. Metrics ranging from manufacturing activity to joblessness are all in the various markets' cross-hairs and are sure to make for a few out-sized moves (and maybe some head-fakes as well) in certain assets before Friday's sessions conclude. Yesterday was a day to parse the various surveys on manufacturing from around the globe. The results were mixed, to be sure.

First out of the gate, China reported a swing back to "expansion" mode in the privately compiled HSBC PMI index (to 50.5 from 49.5 in October). Albeit the number is encouraging (prompting some to declare that China is solidly on the road to recovery) there was quite a number of less-than-sanguine takes on the reading to be had as well. In fact, the markets reacted with a dose of skepticism and investors appeared to be holding out for more in the way of corroborative metrics on this front.

European manufacturing activity, on the other hand, experienced its 16th consecutive month of contraction with the release of the Markit PMI that was also released on Monday. The latest reading (at 46.2) remains well below the tipping point (50) between growth and shrinkage and albeit it was a slight bump higher from October's reading, it reveals that the Old World's economic downturn remains deep and prolonged.

Over in the US, we had a mixed bag of manufacturing-oriented news on Monday. First, the similar Markit survey showed a six-month high watermark for state of US manufacturing conditions. Markit's US PMI rose to 52.8 last month. However, the Institute of Supply Management's Index fell to 49.5% last month on the back of sagging new orders and a scaling back in employment plans. Fiscal Cliff-related business uncertainty and apprehensions were partially blamed for the decline in the ISM's reading.

Other significant metrics to look forward to this week: the ADP private payrolls employment report due tomorrow, the weekly jobless claims benefits filings on Thursday, and the November non-farm payrolls report from the USDL on Friday. As Marketwatch forewarned: "Upside surprises would be, well, a big surprise, because of the lingering effects of [Hurricane] Sandy." But, hey, you never know. The Universe is a (with apologies to one who scrutinized the Universe - Mr. Einstein) essentially unpredictable (read: random). You can never quite know what's next.

Until next time...

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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