Kitcommentary from Kitco Metals Inc. - "Last Call"
Category: Investment, Gold, Mining
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December 7, 2012 (Investorideas.com Mining stocks newswire) A small portion of the 1.6% decline in gold prices that had been recorded in Tuesday and Wednesday's market sessions was offset by yesterday's rebound. After touching early lows just under $1,685 per ounce, the yellow metal managed to turn higher and drew nearer to the $1,700 pivot point after ECB President Mario Draghi was perceived as hinting that his institution might cut interest rates a bit further in order to bolster the EU's sagging economy. However, Commerzbank analysis notes that "Gold remains under pressure and dipped briefly to a 4-week low of $1,685 per troy ounce yesterday. In euro terms, the yellow precious metal has fallen to around €1,290 per troy ounce, actually putting it at its lowest level for 4½ months."
Thursday's (somewhat timid) bargain hunters also emerged in the wake of sentiment that the one-week old selling spree was perhaps overdue for a pause and this February gold finished $1.80 above the round aforementioned round figure. Spot gold finished the Thursday session right at $1,700.00 on the bid-side per ounce. One statistical finding you might not read about in today's gold-bullish press is the one regarding gold flows into mainland China in October. Hong Kong-originating bullion shipments to mainland China fell by more than 30 percent that month, totaling only 47.478 tonnes. That would be the lowest since February according to official data from the Hong Kong Census and Statistics Department released this morning.
This morning the roundup of spot values showed gold trading at $1,697 with a loss of $3 per ounce ahead of the US jobs numbers, while silver was down $0.13 a $32.90 the ounce. The big surprise this morning was, of course, the fact that the US jobs figures…surprised to the upside, and then some. Gold prices promptly fell by as much as $18 (all the way back down to $1,682) in the wake of the report that showed US unemployment falling to 7.7% and the economy adding 146,000 positions in November. Analysts had anticipated anemic number to be revealed in the aftermath of Hurricane Sandy. The dollar moved to 80.60 on the index shortly after the Labor Department's announcement.
Over in the noble metals' complex, we had platinum down $3 at $1,597 and palladium up by $1 at $694 per ounce. BNP Paribas analysts advise keeping an eye on the surge in net-long palladium managed money positions as "this could translate into net ETF inflows in the coming months." The gain in long positions appears to reflect renewed interest in the noble metal. Rhodium continued at $1,125 on the bid after losing $25 earlier in the week. The US dollar advanced another 0.28% on the trade-weighted index, to reach 80.50 at last check. The euro dipped back to under the $1.30 mark as the dollar's rise took its toll.
Late Wednesday afternoon issued EW analysis opines that the yellow metal is likely to meet resistance in the $1,707-$1,732 range and that a forecast for a yet-to-come "strong decline" would only be obviated by a rise in gold to above the $1,755 level per ounce. The bottom line however is that –as of this writing-gold was headed for yet another weekly loss on the order of at least half a percent and also set to record its seventh weekly decline in ten. The picture in silver (on a wave basis) allows for gains in price up to the $33.30-$33.89 zone before the white metal commences to fall once again. An alternative interpretation allows for a rise to possibly above the November 23rd high of $34.47 per ounce. To be continued.
Of course, the story of the week has been the fact that Goldman Sachs decided to trim its three, six, and twelve month gold price forecasts. The firm's commodity analyst, Damien Courvalin, opined that the "top in gold is in" (or could be in before mid-2013). The GS forecast calls for $1,825 gold within three months, a turn lower in the metal after mid-year, a 2013 year-end price of $1,800, a 2014 year-end price of $1,600 and an average price of $1,750 for that same year. While it feels that gold could climb some more early next year, the downside risks compelled the firm to caution that "as a result, we find that the risk-reward of holding a long gold position is diminishing."
The Goldman price revisions and call for the major turn in the dozen year-long gold bull market cycle was met with howls of disbelief (as well as other, much angrier types of howls) despite the fact that a) it allows for the "potential for higher gold prices in early 2013" and that b) it projects prices that remain relatively elevated for the next two years. Recall that analyst Paul van Eeden's recent estimate names $900 as gold's real current value (the remainder of the difference to current prices being attributable to certain misguided inflation expectations and to a good dose of fear that is still present in the market).
Howls and/or growls aside, let us consider a few additional items of interest when trying to dissect the Goldman Sachs edict. First and foremost, Goldman is actually calling for a "renaissance phase" in the commodity markets as a whole. The firm continues to recommend that investors remain "over-weighted" in commodities and it does not proclaim an end to the commodity investment cycle that commenced in the late 1990s.
In this "renaissance" stage of the super-cycle, Goldman envisions that healthy returns will still be available to investors but that prices are not going to rise as much as they did in previous periods. It will likely be a phase during which the defining characteristic of the markets will be price stability and price gyrations triggered more by supply/demand fundamentals of the short-term variety. However, that same stable price pattern is what "could spell trouble for gold." Why? Because, albeit, "In the short term, more monetary easing around the globe and weaker growth could fuel higher prices for the yellow metal, but such catalysts are already largely priced in."
Moreover, the Goldman forecast follows last week's assessment by the firm's highly respected chief economist, Jan Hatzius, that the "economic crisis ends in 2013." Thus, not only does the end of the "crisis" mentality that has suffused the gold bull space bring an additional risk to the metal's present valuation, but the big picture appears to tilt towards the rebound in real interest rates. This turn is much more bothersome (and actually inadmissible) in the bull camp for gold. It (positive real rate of interest) simply is not supposed to ever happen again. Thus, when the question of "What will it take to kill the long-term bull market in gold?" is being asked, the most important answer is: "Positive real interest rates, sooner rather than later."
Yet, based on the US economic signals that Goldman sees at the moment, the "modeling suggests that the improving US growth will outweigh further Fed balance sheet expansion" and that "a gradual increase in US real rates on better US economic growth" will take place. The gold price –real interest rate relationship chart is one of the principal motivators of the cycle turn projection that was made by Goldman. Here is how it appears:
The other thing you might wish to consider is the fact that Goldman was not alone in scaling back gold price forecasts this week. While Deutsche Bank analysts believe that the yellow metal will remain "range-bound" into the early part of next year as there seems to be no movement on the part of central banks in terms of monetary action or even jawboning, analysts over at BNP Paribas are more or less echoing the Goldman Sachs projections. Fear not; any of the more moderated gold price outlooks that were issued this week by these firms were swiftly characterized as the sinister product of evil forces lurking behind the market's curtains. That's not news.
Reuters reported the BNP story as follows: "BNP Paribas cut its gold price forecast for 2013, citing cautious market sentiment, and sees prices dropping in 2014, which would be the first annual decline in 14 years. Our downward revision (for 2013) is largely due to mark-to-market considerations rather than a change in our fundamental view," analyst Anne-Laure Tremblay said in a note to clients on Thursday."
The BNP Paribas forecast also calls for a move to higher ground (possibly records) in gold prices in 2013 but warns that once that peak is achieved, gold "is expected to enter a period of gradual decline as the market begins to anticipate the withdrawal of monetary easing measures in line with improving economic growth." The bank also noted that "market sentiment towards gold has been much more uncertain in 2012 than was the case in previous years." BNP anticipates gold to average $1,865 next year and $1,780 in 2014 –for a first annual average price decline in 14 years' time. Nevertheless, just as with the Goldman numbers, these price projections are still to be considered as anything but "cheap" gold.
While we are on the topic of forecasts, here is one that was often heard during the US Presidential campaign and even more often in the alarmist circles of the hard money newsletter publishing niche. It tells the story of how America will soon morph into Greece; a tragedy replete with infinite debt and a dearth of economic growth for decades to come. Some prominent fund managers have aggressively been shorting US Treasuries in the belief that the Hellenization of America is well underway and that such bets will yield legendary returns quite soon. The poster person for that crowd has of course been PIMCO's Bill Gross.
Similarly-flavored bond betting has not panned out at all for those who employed it against Japan, for example. When Japan did not devalue the yen as the bettors had figured it would, their funds ended up losing BIG. Like, 60% big. See: Hayman Capital Management, whose Japan Marco Fund will soon be euthanized without returning any…returns to its hapless investors. They call such anti-government (read: central bank) bets as "The Widow-Maker" trade. But now, the latest such trade to yield potential widows and widowers is the one being made against the US (read: the Fed). Evidently, some fund wizards have either forgotten the tried-and-true adage of "Don't Fight The Fed" or are smugly choosing to ignore it. The firepower they are discounting is, however, immense and potentially lethal.
The other story that is shaping up to be in good shape to…shape the week's flavor in precious metals is the Freeport acquisition of Plains Exploration & Production Co. Tomes have already been written about the mining firm's foray into the energy space with this purchase. The overwhelming majority of the writings on the topic are critical of this acquisition and some analysts have taken the event to possibly mean bigger things than a blundered strategic move.
Never mind (unless of course you hold positions in it) that FCX cratered by 16% on the day of the PXP purchase announcement and that it has already lost more in value since Tuesday ($7.1 billion) than the amount it paid for the energy firm ($6.9 billion). What makes this deal worth deeply thinking about is the angle that regular Kitco contributor Nigam Arora has latched onto. In the same fashion that BlackRock (see below) appeared puzzled that Freeport did not buy a (gold) miner or return cash to its investors, Mr. Arora sees a vote of no-confidence in future gold prices by virtue of this acquisition by Freeport. Let's let Mr. Arora explain:
"Now a major player in the metals business is sending a signal loud and clear that gold and silver prices are not about to skyrocket. Freeport-McMoRan Copper and Gold Inc. is spending $9 billion not to buy another metal company, but to diversify into energy. It stands to reason that if Freeport believed that QE3 will cause gold and silver prices to skyrocket, it would have made acquisitions of gold and silver miners."
What could Freeport have bought with that much cash? Take your pick: Pan American Silver with a market cap of $2.75 billion, Coeur d'Alene with a market cap of 1.99 billion, Hecla Mining with a market cap of $1.60 billion, Kinross Gold with a market cap of $10.84 billion, or Eldorado Gold with a market cap of $9.52 billion. Oh, well, it did not.
The mining sector has already come under heavy fire this week. The world's biggest asset manager -BlackRock-roundly criticized gold producers for "misleading investors by means of faulty metrics." BlackRock Inc. runs the $12 billion World Mining Fund and has an 8 percent stake in Freeport. BlackRock's Evy Hambro "had a harsh appraisal of the industry's recent performance, saying that gold shares have languished despite surging bullion prices because companies have engaged in profligate share issuance to chase production at lower ore grades," writes Mining.com's Marc Howe.
New York Times columnists Christopher Swann and Kevin Allison wrote that the Freeport "deal dilutes Freeport's appeal as a focused copper and gold producer, without adding the benefits of full diversification enjoyed by the likes of BHP Billiton. It makes the acquisitions look a desperate attempt to escape declining production. Freeport would have been better off simply giving the money back to shareholders. Instead, it has exposed a litany of conflicts and bad decisions."
Until next time,
Kitco Metals Inc.
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