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Kitcommentary from Kitco Metals Inc. - "Forecasts! Predictions! Estimates! Guesses! Calculations!"

Category: Investment, Gold, Mining

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December 18, 2012 ( Mining stocks newswire) Following last week's losses of 0.50% and 2.5% respectively, gold and silver started the final full trading week of the year on a muted note. Thinning participation and year-end book-squaring have begun playing a more significant role despite the still-unresolved Fiscal Cliff negotiations in Washington. Last week also turned offered disappointment to those who were expecting one final sizeable pop in prices on the back of the Fed's announcement of what has been termed as QE4 by some.

Marketwatch's Myra P. Saefong noted that "some analysts have said the Fed has now given clear signals of nearly unlimited support for the economy, therefore propping up stocks and giving investors few reasons to hold safe-haven investments such as gold." A recent post at Daily Markets summed up the situation as follows: "The old trader's saying that "a market that does not move higher on bullish news is not really bullish" may apply to the Gold market as of late, as an expansion of "accommodative" monetary policy of the Federal Reserve not only failed to rally prices, but triggered a nearly $30 price decline hours after the announcement."

This may be so, but there are still those who somehow see some dirty fingerprints on these gold and silver markets in the wake of QEs III and IV –without a shred of evidence to bolster their case. Others simply see an upcoming year during which no fresh high are established in the yellow metal and during which the low end of the trading scale might touch prices in the vicinity of $1,400 or so. The CPM Group forecast is especially noteworthy as it addresses some of the many myths still making the rounds among gold's uber-bulls. Note that –at $1,400 give or take- gold would be trading at about $1,000 from its inflation-adjusted high that we have been promised it would reach by now for several years in a row..

Well, 'tis the time of the year to make bold predictions for 2014. As it has traditionally done, Saxo Bank produced a list of (some say) "outrageous" forecasts for the coming year. Among them, a call for a 50% rise in the price of soybeans and a decline in black gold prices to the $50 per barrel level. Whoa. We suspect however that prediction number four is the one that will be of most interest to some of our readers. It goes like this:

"Gold drops to $1,200 an ounce - The strong U.S. economic recovery surprises the market and especially gold investors, which flee the traditional safe haven investment. Additionally, lack of pick up in physical demand from China and India trigger a round of gold liquidation, and the metal falls to $1,200 an ounce before central banks eventually start taking advantage of lower prices."

Speaking of projections and such, we note that the majority of US big banks are counting on a rise in Treasury yields next year. Sound like science fiction? Perhaps, but the T-bond market's 21 primary dealers see a median ten-year yield of 2.25% by this time next year. Compare that to the current 1.7% yield on ten-year notes.

The answer for such an upwardly revised estimate in yields is found in these banks' expectations that "the U.S. economy will not only emerge largely unscathed from year-end budget negotiations to avert a mix of spending cuts and tax increases that could send the economy into recession if they take effect next month, but also gain momentum, particularly in the second half of the year." Something else that appears to be gaining momentum is the contraction in the US' current account deficit. The country's IOU to the rest of the world shrank to its lowest level in almost two years -$107.5 billion in Q3. That number is now at 2.7% of GDP. Why is this so important? Well, BMO Capital Markets sees that "a gradually shrinking current-account deficit means the U.S. is becoming less dependent on foreign funding, which should be a long-term positive for the greenback."

Insofar as projections are concerned –especially formerly made ones regarding the advent of hyperinflation in the USA- it seems that they simply continue to fail to come true. It was noted by the US Labor Department last Friday that US consumer prices fell In November – for the first time in six months. The decline in prices was the largest since May and it was principally owed to a 7.4% fall in gasoline prices. America's inflation rate over the past twelve months has been tracked at 1.8% -not quite the Weimar Republic's runaway rates that we keep getting warned about as being imminent, year after year.

As far as this morning's precious metals prices are concerned, we could only report…more of the same anemic patterns that were on display on Monday. Gold posted a $7 loss and was quoted at $1,691.00 the ounce, while silver dropped by a 8 cents to $32.20 per ounce. Platinum was flat at $1,605 but palladium lost $3 and eased to $694 per ounce. Rhodium remained at $1,100 per ounce quote on the bid-side after having lost $25 in the previous session.

Background markets showed oil rising 17 cents to $87.37 per barrel, copper losing 0.46% and the US dollar slightly lower at 79.52 on the trade-weighted index. The greenback's near tenth-percent loss came on the heels of rising optimism and therefore risk appetite on account of apparent progress in the "Cliff Standoff." NYU Prof. Nouriel Roubini believes that the US will in fact slide off the Fiscal Curb but that the event will not turn out to be as bad as some would have us believe, even though there are downside risks afoot:

"In the long term, I think that the fundamentals of the U.S. are a lot stronger than other advanced countries," he said. "In the short run, I think we will have another year of very anemic economic growth. Next year we will have barely 1.7% including a modest amount of fiscal drag and lots of tail risk could make it worse in the U.S - bigger fiscal cliff, the euro-zone crisis, a Chinese hard landing, maybe tensions will raise oil prices in the Middle East - so the downside scenario is actually having a meaningful probability."

Prof. Roubini's forecast of a possible hard landing by the Chinese economy is perhaps not as outlandish as it might seem. China's policy makers finished their annual central economic work conference two days ago and its upshot was a targeted economic growth rate of 7.5% for the second year in a row. While that figure may not be construed as a "hard landing" it is certainly quite a distance away from the average of more than 10% that the country did record for the past ten years or so.

China's inflation target was set at 3.5% for next year-the lowest such goal since 2010. To be continued. We must once again bring up the issue of China and India constituting 40% of global physical gold demand. If these two countries are slowing in economic growth and/or are actively attempting to curb gold demand (see below) then we must once again ponder where the demand that must fill the gold market's surplus will come from. Some say: "ET[F] Call Home!" We hope so.

On the technical side of the gold market, Daily Market's Mike Zambreski notes that "Looking at the daily chart for February Gold, we notice the steep sell-off on Thursday, as prices failed to rally after the Fed announcement of further bond purchases. It appears that the failure of prices to hold the rally above the 20-day moving average triggered some short-term momentum selling pressure. The 14-day RSI has started to move lower, with a current reading of 43.20. The next major support point for February Gold is seen at the 200-day moving average, currently near 1668.60, with resistance found at the December 12th high of 1725.00 per ounce."

In our last article we brought you news that India's officials would like to "mobilize" at least a portion (ten percent) of that country's massive (an estimated 25,000 tonnes) "mattress" and "temple" gold. The world's largest gold importer would commence to address its burgeoning current account deficit and put a serious dent into the tonnage of the yellow metal that it needs to import if this scheme were to become reality, according to the All India Gems & Jewellery Trade Federation.

A recent Bloomberg News video covered the topic of India's idle gold quite crisply. There are other ways by which the Indian government plans to reduce gold imports under review as well. Among them would be the introduction of gold-backed pension and savings accounts. The pension and savings schemes would essentially function as gold ETFs; tracking gold prices and offering returns similar to those in the underlying metal.

In news related to noble metals market fundamentals, HSBC today upped its forecast for platinum prices in the coming year while cautioning of tightness in supplies. The firm anticipates a 2013 average platinum per ounce price of $1,710 and it projects an average of $1,800 per ounce for the metal in 2014. HSBC envisions a platinum supply deficit on the order of 256,000 ounces next year. The bank left its palladium 2013 forecast unchanged at $750 per ounce.

One of the areas of significant potential future platinum demand comes as a result of the devastating Sendai quake that took place in Japan last year. The Japanese public is becoming quite averse to the country's dependence on nuclear power and officials are reviewing plans to therefore install nearly 1.4 million residential fuel cell units by the year 2020. Fuel cell technology is also making its way-though not as fast as residential applications-into automobiles.

In a sign that perhaps not all was well prior to the massive labor actions we witnessed in South Africa's mining sector this fall, Impala Platinum (Implats) announced that it plans to build an additional 4,500 housing units for its employees in that country and in Zimbabwe. Implats also said that it will increase its financial support for education, healthcare, the development of skills, and local small business development. It is nice to learn that there are concrete reform steps in the works by at least one of these companies that made headlines earlier this year. We hope that more similar stories will follow.

Speaking of tallies, albeit we have almost two weeks to go before throwing out this year's calendars, the precious metals markets are showing an…interesting lineup of percentage performance results. In decreasing order (computed from Jan 3 to Dec 17 via Kitco's historical 2012 PM Fix tables): platinum up 14.7%, silver up 12.9%, gold up 6.2% and palladium up 5.4% per ounce.

On the speculative positioning side of the market it was reported by Bloomberg News that "while money managers raised net-long positions in gold futures and options by 3 percent to 129,865 contracts in the week ended Dec. 11, the total number of speculative long positions fell 1.2 percent, dropping for a second week, U.S. Commodity Futures Trading Commission data show." Hedge funds were reported to have slashed their bullish bets on commodities by the most in one month for the aforementioned CFTC reporting period. Sugar, wheat, and crude oil long positions were especially hard-hit.

We close today with a copper caper. No, not this one. The story is about JP Morgan having received regulatory approval for the launch of the first physically-backed copper ETF. You may recall that back in the days when platinum and/or palladium ETFs were being cooked up, the noble metals rallied in anticipation of the potential absorption of metal from the market in order to back the instruments.

Well, things are a bit…different with the orange metals at this juncture. Analysts at Standard Bank (SA) noted in their daily commodities report that "At best, copper spot prices have largely ignored and, at worst, have been negatively impacted by the threat of possible market disruptions by the announcement that JP Morgan has received regulatory approval to launch the first physically-backed copper ETF in the US." Perhaps the situation will change as launch date approaches. We shall see.

Until next time,

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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