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Kitcommentary from Kitco Metals Inc. - "Will The Real Santa Please Stand Up?"

Category: Investment, Gold, Mining

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December 11, 2012 (Investorideas.com Mining stocks newswire) This morning's headlines were dominated by the two remaining stories that really matter to investors for the remainder of this year: the Fed meeting and the Fiscal You-Know-What. In fact, it now appears that the outcome of the former is largely dependent on the progress (or lack thereof) of the other. Namely, the Fed will likely announce an open-ended bond-buying program designed to mitigate the impact of the potential tax increases that a deficit-reduction agreement might yield. One analyst was quoted as saying that the Fed's purchase program would amount to "insurance that if there's a failure to agree between Congress and the president, the Fed is out there to prevent an even bigger downdraft."

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At the same time, the Fed's program could also be seen as an economy-supportive measure in the event America slides off the Fiscal Curb and faces a short-term shock. On this latter angle, Mr. Bernanke is not very confident that he can help much, even if the US central bank does dole out $45 billion per month in a post- Operation Twist...operation. Economists are virtually in unanimous agreement that the Treasuries purchase plan will be implemented tomorrow and that the FOMC will hold out until its March 2013 meeting to indicate when it might begin raising the fed funds rate.

Spot prices opened lower in gold and in silver this morning, higher in platinum, and unchanged in palladium and rhodium. Gold halted its three-day advance but fell less than a dollar to $1,711.90 on the opening bid, while silver dropped 13 cents to $33.14 the ounce. Platinum gained $7 to rise to $1627 while palladium remained at $697 per ounce. The US dollar lost 0.30% on the trade-weighted index but the euro did not manage to overcome the $1.30 level despite a rise in German investor confidence. The political crisis in Italy continues to take its toll on the common currency for the time being.

Precious metals prices had moved a tad higher on Monday as market participants appeared to anticipate that Mr. Bernanke will cut in front of another bearded jolly gentleman and dole out some green-tinged presents to them two weeks early. The recipients of such possible gifts are thought to be likely to do some heavy "shopping" in gold, silver, oil, stocks, and who knows what else, as they have been sidelined since QE3 was launched and more so since the GOP and Democratic "Grinches" have been bickering about the Fiscal You-Know-What in Washington in the post-election period.

To be sure, when it comes to QE (insert your favorite numeral here), it has constituted the tastiest carrot to be dangled in front of gold and other assets for several years now. This year has been no different. At any rate, Reuters News reports that –according to the latest CFTC market positioning data-hedge funds and money managers sharply cut their bullish bets on gold futures last week on profit taking." Speculators also slashed their silver longs in the CFTC Commitment of Traders report that covers the week that ended on December 4th.

Bloomberg News noted that "[Spec] gold holdings fell 25 percent, the biggest drop since March, as Goldman Sachs Group Inc. said the longest winning streak in at least nine decades will peak next year." Standard Bank (SA) analysts relayed that "The cracks in investor confidence [in gold] we saw in the week preceding last, widened considerably this past week: net speculative length dropped by a formidable 148.2 tonnes." The decline in long positions was the largest weekly one since early March of this year.

Veteran gold market analyst Ira Epstein opines that "gold will have great problems getting up to $1,800 an ounce this year." He remarks that "If the US goes over the cliff, while you might get spurts upward in gold prices due to fear, the odds favor that if stock prices fell, gold would fall with it. I continue to see a strong correlation between stock and gold prices." This kind of relationship-as many of you gold aficionados must know by now-is not a normal one.

Go ahead and open up any of your hard asset newsletters from previous years and find the passages that predicted the Dow collapsing and gold on its way to the Andromeda Galaxy at the same exact time. Mr. Epstein also notes that –in terms of technicals- the monthly gold chart remains bullish so long as $1,672.50 is not demolished but that the weekly charts are "clearly bearish." The 18-week closing price moving average in gold is at $1,716.50 and the yellow metal has been trading under that figure up to this point.

On the physical side of the gold market, we must once again note the overt efforts of the Reserve Bank of India to try to dampen the appetite for imports of the yellow metal. Dow Jones Newswires reported on Saturday that the RBI will soon release a report that will contain specific recommendations on how to curb Indian gold imports. The RBI's official gold reserves fell by more than $386 million to $27.8 billion for the week ended November 30.

The aim of the RBI's campaign is the reduction of India's current account deficits. Gold continues to be the second largest import item (aside from oil) to contribute to the CAD that has recently been as high as 3.9% of India's GDP. It is thought that the RBI report will focus on means by which the public could be induced to own gold without physically taking delivery of it. Various gold forums have already declared "Good Luck with that!"

The gold shares space has been breaking down chart-wise since early October and there has been no let-up in the amount of news related to CEO re-shuffling (read: firings) in that niche either. Still, gold perma-bulls continue to tout that a take-off in the sector is...imminent (albeit the timetable keeps getting pushed back, year after painful year). Nobody wants to answer the question of why things are looking as they do below with gold prices being where they are (and have been). Broken promises of putative "ultra-leverage to the gold price" are what we have to live with in this sector. Here is the Market Vectors Gold Miners ETF (NYSEArca) GDX chart to ponder (complete with the 200 DMA and Bollinger Bands):

Investorideas.com Newswire

Also according to Friday's CFTC data, the platinum-group metals witnessed increases in net speculative length. However, even this niche was not completely unfazed by the growing lack of faith in precious metals that was reflected in gold and silver speculative positioning. As regards platinum, albeit the analysts at Standard Bank remain bullish on the metal, they also see the noble metal having some difficulties stretching a price rally significantly beyond $1,650 at the present time. Over the past year platinum has seen lows at $1,367 and highs at $1,722 per ounce.

The SB team writes that "with PGMs still garnering investor interest, it is palladium that continues to be the most favoured among the precious metals. Net speculative length for NYMEX palladium rose an impressive 244.300 ounces — an improvement on the previous week's gains and a 12-month record. With a strong 190.000 ounces added to longs and 54.3 tonnes liquidated from shorts, the futures market is clearly convinced that the metal has further upside potential." The team does however see the current palladium price as "overstretched." Palladium's twelve month track shows a low at $561 and a high at $720 the ounce.

To be sure, bullish bets being slashed by speculators were not limited to gold and silver positions alone. Owing to the on-going Mexican Cliff standoff in DC and to the still feeble outlook for European economic growth, the specs in the broader commodity space reduced net-long positions in 18 different futures and options contracts ranging from wheat to natural gas. The Fiscal "Thing" continues to engender a good dose of fear among players, but, then again, so does the overall economic growth pattern presently on display in Europe, Asia, and the US.

Speaking of Asia and of China in particular, here are two news items from that country that are worth considering. First, the fact that China's trade position weakened considerably last month owing to extremely weak overseas demand for the many goods it produces. Chinese export growth plunged to 2.9% from October's 11.6% while its imports were flat-lined at 2.4% growth. Even though recent factory data and consumer spending patterns in that country offer some reason for optimism, the feeble global demand for Chinese goods is likely to result in exports contributing zip/zilch/nada to this year's economic growth, according to the Associated Press.

The other bit of news that should have some folks up at night in Beijing is the statistical finding that China's wealth inequality has reached "a shockingly high level" –one that is rare in terms of global levels. The wealth gap coefficient (also known as the Gini coefficient) as tracked by the World Bank has averaged 0.44 worldwide but China's figure came in at 0.61 – and that was for 2010 (!).

While the report notes that such disparities are likely to occur in developing economies, the fact that-for example-household income in China's eastern region is 2.7 times higher than in its central and western provinces. Little more than 10% of that country's households hold 57% of all disposable income. Consider those numbers the next time you read about the putative broad-based buying of gold in some glossy, trade-sponsored publication. This Gini is out of the bottle...

We close today with the always exciting subject of...manipulation. We have said it many times: if you believe for even a nanosecond that the gold market is manipulated (in sinister fashion, to the downside) then do yourself the favor of staying out of the market entirely, as you can never hope to be able to "win" over the Dark Side's infinite "firepower." This time, here is a British think-tank that argues for just such a thing (intervention) to be carried out by governments.

Reuters reports that London-based Chatham House advises that "Governments must cooperate to tackle increasingly sharp swings in prices of commodities such as food, metals and oil that threaten stability within and between countries." The think-tank proposes such interventions because "Trade is becoming a frontline for conflicts over resources - at a time when the global economy is more dependent than ever on trade in resources."

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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