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Kitcommentary from Kitco Metals Inc. - "The Grinch That Stole The [QE] Year-End Rally"

Category: Investment, Gold, Mining

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December 13, 2012 (Investorideas.com Mining stocks newswire) Friday's precious metals markets opened a tad higher but continued to how their recent lack of energy. Technicians argue that gold needs to remain above a key support near $1,688 lest another $30 decline might be in the cards. The 100-DMA at $1,705 was taken out after the Fed failed to please the bulls and the 200-DMA is not very far beneath current levels. Spot prices were quoted at $1,695 in gold, and at $32.41 in silver. Platinum and palladium bucked the trend with gains of $4 each (at $1,613 and at $696 per ounce, respectively).

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Those who expected "QE to infinity –Part IV" to finally take gold prices to, well,...infinity, instead woke up to gold prices back down under the pivotal $1,700 mark on Thursday morning and with the yellow metal skidding more than $26 overnight, to lows under $1,689 per ounce. Once again, some of those players who got caught on the wrong side of the trade, invoked ‘mysterious' selling sources in Asia as the reason for the hefty price drop. In fact, one Aussie trader identified the disposals as being the result of little more than simple liquidation by funds wanting to lock profits in for the year. The week is shaping up to be the third losing one for gold in a row.

Trouble is, the pressure on the yellow metal did not abate during the New York Thursday session, even though the putative enigmatic seller was by then, likely fast asleep and/or counting the stack of profitable chips that came out of the alleged maneuver. But, hey, every market loves a good conspiracy theory/story. US economic data released during the day did not help gold either; unemployment claims fell to their second lowest level of this year and retail sales notched broad gains in November. At any rate, the midweek session finished with gold down $14.30 (it was down $21.10 in the active February futures contract) and with silver off by 91 cents on the day. Platinum lost $24 but palladium declined a much more modest $2 per ounce.

Perhaps some lessons were not learned from the post QE3 market environment, or perhaps players did not anticipate the Fed tying continued monetary stimulus to a specific US unemployment target percentage. "This announcement is a bit confusing to gold investors as it linked policy to unemployment, etc.," said a Tokyo-based trader cited by Reuters News. "Perhaps the market wanted unlimited QE," said the trader. One should perhaps change "wanted" to "demanded" to more accurately reflect some of the extreme sentiment still to be found among the bulls out there.

At the end of the day (Wednesday and/ or Thursday), however, the result was the same; i.e., the US dollar did not go into atrial fibrillation mode after the FOMC announcement, and gold did not take off to the stratosphere on the back of escalating inflation anxieties arising from the same. One fund manager, Uri Landesman, effectively said "Get used to it." Mr. Landesman opined that "gold was overvalued and [that] it's going to come down dramatically."

Let's dissect this particular hedge fund manager's take on gold for a moment. Is Mr. Landesman calling for a total "collapse" in the yellow metal in 2013? Apparently, not (unless, of course, you just read a firm promise of anywhere from $2,500 to $62,000 gold from some hard money publishing machine). Mr. Landesman argues that gold might trade in a range of from $1,400 to $1,800 per ounce in the coming year.

Marketwatch's "The Tell"..tells us that Mr. Landesman said that "his expectations are based as much on technicals as they are on analysis. "They both support the same thing. There's more downside than upside risk on gold. We've been in a 12 to 13-year super-cycle. Gold was at $200 an ounce in the late 1990s. It's had a pretty nice run, if you punch up the chart on gold. What we're getting now is a standard correction, but it's going to be a big correction." Why an 18 or even 23 percent correction in a bull market that has survived 12 years would come as a shock to some, escapes us. Then again, it also escapes us why some folks still see a powerless, inflation-stoking Fed that will keep on going with QEs V, VI, VII, etc., instead of a Fed that is doing what it is supposed to do as per its mandates.

In fact, as far as Mr. Bernanke is concerned (see the blogs from his press conference)" the Fed isn't providing any more stimulus by replacing Operation Twist bond purchases with outright purchases." Actually," it is not the size of the Fed's balance sheet that matters (it could approach $4 trillion eventually), but how much the Fed is forcing private investors to adjust their own holdings." Mr. Bernanke said that he doesn't see Wednesday's Fed announcement of policy as "a new program." The Fed Chairman also sees inflation at between 1.3 and 2 percent in 2013. "Some of the worst fears of quantitative easing, of a pickup in inflation or a severe devaluation in the dollar, did not come to pass with QE1 or QE2, so while you still hear critics," they "seem to be more subdued this time around," said Dana Saporta, a U.S. economist at Credit Suisse Group AG in New York," as quoted by Bloomberg.

Well, so much for the much-vaunted "Weimar Republic" levels of hyperinflation that were supposed to have materialized by now in the US on the back of four distinct Fed accommodation gestures. On Wednesday, Bloomberg News corroborated such views with the finding that "the bond market shows that, two years after the Fed's second round of asset purchases sparked criticism from Republicans predicting a surge in prices, there's no incipient anxiety of such risk. That confidence in Bernanke's ability to keep inflation in check bolsters policy makers' case for expanding their third round of so-called quantitative easing at the two-day meeting that began yesterday."

After what many had incorrectly labeled as QE4, spot gold actually finished Wednesday's session with a very modest $1.20 gain per ounce. The USD only lost 0.17 on that same session. In all, most markets appeared basically unfazed by that latest Fed maneuver even though it contains unsterilized securities purchases and the new, employment rate-specific trigger to commence raising rates. In essence, the Fed just turned seriously aggressive on turning the employment component of the US economy onto the right track. One commentary opined that the "full-employment mandate [was] finally taken seriously" by it.

One little "footnote" to keep in mind: it is related to the Fed's newly stated peg –that 6.5% Holy Grail of unemployment levels. There is one school of thought that sees that number as being achievable by the middle of...next year. Here is the projection of such a potential development based on trend data that focuses on the contraction in the Labor Force Participation –the single largest marginal factor in determining the overall unemployment rate. Incredible (even to the Fed at this time) as it seems:

Investorideas.com Newswire

Reuters market analyst Clyde Russell recently parsed seven gold-oriented research reports and came to a heckuva strange conclusion: hardly any one of them appears concerned with China and India when it comes to the yellow metal. To say, as Mr. Russell notes, that "This is astonishing when you consider that those two nations account for 40 percent of the physical gold market," is an understatement, to say the very least. As you know by now, there is hardly a week during which we do not cover physical market developments in those two key markets in these columns.

Yet, analyses and price forecasts that were recently made by Goldman Sachs, Morgan Stanley, Deutsche Banks, Barclays, etc. lacked coverage of China and India as per Mr. Russell. The nearly exclusive focus of the reports was the Fed's QE, the looming US Fiscal You-Know-What, and the European debt debacle. Mr. Russell reminds us that however much progress to the upside gold has made on account of such developments this year (4.07% according to the Kitco one-year net change ticker), it has "had to swim against the tide of weaker demand from India and China."

Mr. Russell's focus on "ChIndia" reveals that "India, which is still clinging to its top spot in gold demand, has witnessed a recent pick up in buying after a weak first half of the year. But demand in the South Asian nation was still down 28 percent in the year ended September, which equates to a massive 305.9 tonnes, according to calculations using World Gold Council data. Chinese demand has also disappointed, falling to 176.8 tonnes in the third quarter, a drop of 8 percent from the same quarter a year ago and a bare 1 percent rise in year-on-year terms."

This range-bound outcome has confused some of the analysts, says Mr. Russell, with one report saying gold's lacklustre year came despite it having the "perfect set-up" for gains. But, at the end of the day (or shall we say: the year?) Mr. Russell concludes with the fact that "It seems that [even] monetary loosening in the United States [see our coverage of QEs III and IV above], central bank buying and investor interest in ETFs isn't enough to spur a new gold rally." We are guessing that the one forecaster that did project a modest decline in gold in 2013 and made mention of both China and India as factors that do matter, might well have been Goldman.

While on the subject of India and its gold, we note that the country's Gems and Jewellery Trade Federation has taken a page from the RBI's "book" on how to reduce gold imports and said that the nation should "mobilize" the metal that is "lying idle" –whether in the hands of citizens or in various temples. The aim, as the RBI has made it repeatedly clear this year, is the reduction of India's current account deficit (at a record $21.8 billion level in Q1).

The AIGJTF (wow, now there's an acronym) estimates that about 25,000 tonnes (the calculator says 804 million ounces give or take) of gold are available and that if only 10% is gathered and used, then India would not need to import gold (any gold) for the next three years or more. The RBI figures that India's gold imports are responsible for 80% of that nearly $22 billion current account deficit and therefore that the mobilization of a portion of the gold already being hoarded by Indians could definitely make a difference.

Note that this gold mobilization idea is not some "confiscation" scheme by a gold-hating government. In fact, the officials in India acknowledge that the Indian desire for gold will never become extinct. Instead, there are various plans being floated by virtue of which the idle gold can be utilized to a) reduce imports and b) offer its owners substitutes that match its rates of return. This is a story to be continued in 2013...

The other day we mentioned the on-going woes of the gold mining sector. It now appears that such difficulties have just taken a turn for the worse on two separate fronts. First, the investing crowd is evidently fed up with the (mis)management of this $60 billion industry. Buyers of such shares have had to endure two years of successive declines in value- a paradigm not seen since 1998, even as gold soared to above $1,900 in 2011.

Investors are accusing the producers of the yellow metal of being unable to control costs. They are also scratching their heads about the fact that at a time when it costs the miners an average of $585 to extract an ounce of the precioussss, they are failing to post what ought to be good earnings and their stocks are not trading with the previously promised leverage to the price of gold. Meanwhile, the production costs of an ounce of silver actually fell by 12% to its lowest level in five years.

The industry's benchmark HUI index has lost 24% in the past 24 months. Headline losers in the niche are household names among gold-oriented investors: IAM Gold, AngloGold Ashanti, and similar. Majors from Kinross to Barrick and to Newmont have fired CEOs, taken writedowns, or are still trying to figure out how to get out of the slump they are in. One portfolio manager remarked that many or all of the departed and/or still employed CEOs "relied on the gold price to bail them out, which actually is a very bad way to manage a business."

If the above were not enough, now there is talk among US lawmakers that hardrock mine operators ought to cough up royalties on the order of 12.5% and add billions in revenues to the federal budget which is sorely in need of same. The US GAO office said that the time has come for US taxpayers to "also benefit from a gold price surge that has boosted the bottom line for miners." Under current rules there are no royalties being paid by such operators. For example, the royalties on the 1.1 million ounces of gold that were produced by the Goldstrike mine in Nevada would have yielded $150 million to American taxpayers.

A mining law that dates back to 1872 (!) has allowed miners to stake claims on federal land for literally pennies per acre whereas the coal, gas, and oil producers do not enjoy such privileges. Analysts say that it will be more difficult to extract an ounce of concessions from the miners than it is to extract an ounce of gold from deep within the ground. The industry has is seen as very strong political alliances. Thus, lawmakers may instead opt to go for disallowing some of the hefty tax breaks that the mining industry in the US claims every year. This is also a story to be continued in the wake of the Obama administration's quest to cut spending and raise revenues in order to close the nation's budget gap.

Until next time,...mind the gap!

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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