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Kitcommentary from Kitco Metals Inc. - "TEOTWAWKI – Apocalypse... Not Now"

Category: Investment, Gold, Mining

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December 21, 2012 (Investorideas.com Mining stocks newswire) If you are reading this, well, then, it appears that rogue planet Nibiru has somehow managed not to smash into our little ball of dirt called Earth and end life as we know it. This also means that Aussie PM Ms. Gillard was really off-base when she made this Public Service Announcement not that long ago. Oh, well. The current score is Mayan Calendar Hype 0: Earth 1. On the other hand, there has been plenty of price-smashing going on in the precious metals' markets this entire week to be remembered for quite some time to come.

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Chalk it up to thin, pre-holiday markets, year-end tax-related selling, frustration with the failing Fiscal-You- By-Now-Know-What arm-wrestling match on Capitol Hill, the better-than-fathomed US Q3 GDP number, not-so-comforting economic growth trends coming from China, or any number of invisible "sinister" Asian "mystery" sellers who once again allegedly stayed up all night just to watch gold and silver prices once again collapse to multi-month lows; the end result was one and the same: carnage in the trading pits and sorely disillusioned small retail investors. Credit Suisse analyst Tobias Merath summed by saying that "the days of very easy gains, when you could just buy gold, hold it, and see it rise 10, 11, 12 percent each year are over."

Let's quantify this week's damage thus far and not mince words. Tuesday's markets saw gold falling $27.20 to $1,670.90 at the close (silver finished at $31.64). If that was not sufficient damage, then Thursday's selling spree was even more furious a few hours prior to the close. When the day's low bids came in, they were recorded at $1,634.30 in gold and at $29.51 per ounce in silver. By the way, the title of this December 6 article may well go down as 2012's most accurate –if inadvertently made- short term "call" on gold.

Bullion dealer Sharps Pixley's CEO Ross Norman was quoted as saying that "The test of a market is how it behaves under adversity, and gold did not perform well." One perspective we can give you on these numbers is the fact that, at those fresh four-month lows, gold was only showing a 2.2% gain for the entire year and that silver was ahead by only 2.5% on the current year. If the year in gold finished around these return levels, they will be chalked up as the smallest annual gains in the yellow metal since 2008.

The other notable perspective is the fact that gold breached its 200-day moving average that was in place at the $1,661 level. Business Insider's Joe Weisenthal noted that "there's been an increase in real interest rates (bad for gold) and some investors that have been uber-long gold this year, are probably getting freaked out, hitting the bid, and bracing for redemptions. This is all new stuff, and thus one of the most crowded, most popular, and most poorly understood trades of the last few years is getting ugly in its reversal."

The final perspective is that, if you think those numbers are not so good, then consider the ones being linked to the "performance" of gold mining equities. Over the past three months the share prices of Newmont Mining are down about 21%, Gold Corp's are down about 22%, Barrick Gold are down about 20%, and RandGold's are down by about 17%. Consider such performance the next time you hear promises of imminent $3K gold from the leaders of such firms.

The fast-slimming year-to-date profit figures (we had tallied gold as being ahead by 6.2% in our early Tuesday posting) came on the heels of a year during which the yellow and white metals fought hard to maintain their stellar track records of previous years. However, such gains as had been achieved (up to the October highs of $1,791.75 and $34.96 in silver -basis the London PM Fix) were almost solely owed to the overriding obsession with the Fed and its QE programs. Such gains were overtly ignoring the ebbing Chinese and Indian demand for physical gold, the resilience and resurgence we saw in the US economy and also the US dollar.

There is however something else that may have played into this week's price rout in precious metals, and specifically in gold. Our reader recall that for the better part of the year all kinds of market analyses alluded to the so-called "risk-on/off" trade and how gold traded in BFF fashion with equities and even Treasury yields. After rising and falling independently for decades, prices for stocks and commodities rose "in lockstep" from 2008 through 2011, when the central bank conducted its first series of securities purchases, said Ruchir Sharma, head of emerging market equities and global macro at Morgan Stanley Investment Management in New York.

Well, it appears that in recent sessions those correlations were thrown under the bus. Gold fell despite players bidding up risk assets and despite the US dollar dropping to very near the 79 level on the trade-weighted index. Such shifts are sometimes just flukes and do not tend to last very long. However, on occasion, such flips are as important as the Earth's poles switching place and they may usher in a whole new way of evaluating certain market positions.

While the breach of the $1,700 and then of the $1,660 levels were quite significant this week, there is one school of thought that believes that if the $1,600 level is taken out, we will indeed be looking at a tectonic shift that will not spare those who choose to remain overloaded in the yellow metal based on erroneous assumptions about economic and other macro-level matters. The FT's Izabella Kaminska brilliantly seized on the breakdown of one of the aforementioned correlations in her December 7 piece entitled "Capping the Gold Price." Here is a visual to help you see what has been happening:

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The breakdown of the gold and 10-year TIPS real yield was one of the factors that prompted bankers Goldman Sachs to recently dial back their gold price projections for 2013. It was, in effect, a statement by GS that "not all QE are created equal" and that the over-dependence on QE could come back to haunt market participants.

Now, factor in the reality that Operation Twist did not add to the monetary base (as many too many wrongly expected it would) as it did not require reserve creation, and that it ended up supporting short-term rates, and you have the beginning of the end of the great gold bull run –circa August of this year (sentiment-wise) after one last stampede, and circa September of last year (price-wise).

Ms. Kaminska notes that "it's tempting to speculate that the reason that gold has come to flat-line since the end of last year is largely connected to nominal yields on the short-side having come up against the zero bound. Since they can't really go any lower, there's not much potential for the gold price to rise higher." We noted the other day that, in our humble opinion, gold had its best shot at vindicating certain views back in 2008 when the sky actually fell –financially speaking. Of course, every year has its favorite theme and favorite investment. We close today's post with a colorful reminder of what was hot and when, courtesy of Josh Brown – The Reformed Broker. Nice assemblage, Josh.

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In any case, should the above table not end up containing an entry for 2013 due to what might happen today, we will leave you with the words of a very wise man. He once said:

"I hope the world ends during the day. I'd like to catch the film at eleven." - George Carlin

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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