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Kitcommentary from Kitco Metals Inc. - "Top 10 of '12"

Category: Investment, Gold, Mining

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December 31, 2012 ( Mining stocks newswire) Gold finished the holiday-abbreviated week with yet another loss as investors opted to take profits rather than await the outcome of last-minute Fiscal Cliff negotiations taking place at the White House. On Friday gold capped its longest string of week-on-week declines (five of them) in 24 months. On a London PM Fix basis, gold finished this year with a 3.6% gain per ounce –the smallest since 2008. It was, in other words, a perfect setup for a rally of some kind for the last session of 2012. This morning's spot price indications rolled in as follows: Gold up $5 at $1661.30, Silver up 8 cents at $30.11, Platinum up $1 at $1,522 and palladium up $5 at $700 per ounce. The US dollar, the Dow, and crude oil were all stalled as talks to resolve the Fiscal-You-Know-What were continuing at literally the last minutes of 2012.

Last week's weak gold price closing came alongside Reuters News reports that showed that, according to CFTC data, "Hedge funds and money managers have slashed the size of their net long in copper futures and options by almost 40 percent and cut their bullish bets in gold to their lowest levels in four months (to just over 112,000 futures and options contracts). Overall bets being made by hedge funds on gold rallying in 2012 were 28% fewer than those that were made last year.

Strategists at opine that the yellow metal is likely to "face further headwinds in 2013 as outlook for global growth deteriorates" and despite the support that the "highly accommodative policy stance held by central banks across the globe" will provide for prices. On the physical side of the market, it was reported that US-made gold coin demand slipped by 25% in the current year with December's US Mint sales of under 70,000 ounces coming in at half the levels that were attained in November.

The Dow recorded a fifth losing session on Friday as stock market participants appeared not to be placing too much faith in the ability of lawmakers to come up with an 11th hour deal to avert the slide off the aforementioned slippery fiscal slope. Investors in various assets that were being liquidated felt that even if a compromise were to be reached by last night, it would be an imperfect one owing to the fact that the situation came down to the wire. According to the analytical team over at CPM Group New York, "Some investors, and gold marketing groups, have suggested that the fiscal cliff facing the U.S. economy could be bullish for gold and commodities." The latest trader looking-forward price surveys appear to bear such a perception out –at least for the first week or so of the coming year.

However, CPM-in its latest market commentary- is quick to point out that "actually, it seems that the fiscal policy decisions and resolutions of these issues most likely will have negative price implications for both gold and commodities. Gold prices in fact may be supported in December by investor nervousness over the resolution of this political melodrama, but once the soap opera in Washington has played its last scenes out, the actual economic consequences may be seen as disinflationary and thus not positive for gold."

Since this is the final trading as well as calendar day of 2012, let us take a brief and hopefully instructive trip down Memory Lane and revisit some of the top themes and quotes of the year related to the precious metals niche. We call these the Top 10 of 2012. Just one more Top Ten List to bear through, folks:

10. "The often hyped "juniors" have been a disaster unless you've been extremely patient and selective while getting lucky with your timing. The juniors are an excellent tool for speculation and only speculation. They cannot be bought and held. They have to be timed nearly perfectly. Ironically, many advisors who are "doom and gloom" types favor the juniors. Some of these types are super bearish on the USA. They've expatriated, waiting for the collapse of the USA while holding juniors. This foolhardy strategy has helped them sell newsletters but hasn't been too profitable." –Jordan Roy-Byrne, Jan. 03, 2012 See also: In The Lead – Apr.23, Aug. 06,

Yes, the "hype" continued all year long despite some shares still not finding a bottom, or any interested new investors willing to buy too many of them.

9. "India raised its import duties on the two precious metals to 2% and to 6% respectively, from a previously flat-per-weight tariff. These are hefty increases in import duty and the hikes cast a further layer of doubt on just what this all-important country might imports in gold and silver this year, following a not-so-robust showing in 2011 (especially in the latter part of the year)." –In The Lead, Jan. 17, 2012 See also: Jul 25, Nov. 19,

The Indian government's overt efforts to curb the appetite for gold imports continued throughout the year. The RBI identified gold as one of two (the other being oil) imported commodities that have been causing the unwelcome expansion of the country's current account deficit. We do not expect a let-up in such campaigns in 2013.

8. "PGM producer, Lonmin, told attendees at the Africa Mining Conference in Cape Town that the risk of platinum supply disruptions is growing. The firm's CEO, Ian Farmer pointed to "government safety stoppages, labour management difficulties, skills shortages, transformation and equity ownership challenges, rising community expectations, resource nationalism and high electricity prices" –all of which are making operating in South Africa increasingly difficult." –In The Lead, Feb 08, 2012 See also: Jan. 11, May 28, Jun. 13,

The past twelve months proved that Mr. Farmer was correct in his cautionary statements. The combination of the above-listed problem factors lifted platinum by 23% from the beginning of August to October 5th. The noble metal finished 2012 with a gain of 8.6% -five percent better than that achieved by gold. Palladium advanced 24.6% from its July lows to the end of December.

7. "The highly anticipated HSBC figure on China's economic temperature came in at 48.1 and it was the lowest since last November as well as the fifth decline in as many months. Readings under the 50 pivot-point indicate economic contraction underway. In fact, HSBC's chief Hong Kong-based economist believes that China's "growth momentum could slow down further amid a combination of sluggish export new orders and a softening of domestic demand." Coupled with the lowest level of hiring in that country in two years, the conditions prompted 24/7 Wall Street's Douglas McIntyre to opine that the "recession in China has begun." – In The Lead, Apr. 03, 2012 See also: Jan. 20, Apr. 02, Jun. 11, Sep. 10, Oct. 17

Well, China may not have had a recession this year in terms of the classical definition of one, however, the country's growth slowed sufficiently for certain conditions to feel as if a contraction was unfolding. As recently as last month the country's economic stewards basically conceded that if China manages an economic expansion rate of about 7.5% next year, that should be considered pretty darn good. The double-digit growth rates of recent years appear to be headed for the history and record books for the time being.

6. "So, what is going on in Europe? Essentially an experiment by 17 nations to adopt a single currency and single central bank, the European Central Bank, is being sorely tested by the profligate ways of some member countries. When, in 2009, it was revealed that the [Greek] government's annual budget deficit was double what lenders to the government had previously been told, the rot set in. Investors in Greek government bonds - essentially hedge funds, European and Greek banks - began to reassess the riskiness of their investments and became much more reluctant to lend any more. If they did, it was at exorbitant rates. This central cancer in the heart of the euro financial system remains the main focus of efforts to bring about a lasting financial peace." –In The Lead, Jan. 30, 2012 See also: Feb 06, Feb. 21, Jun 29, Jul 04, Jul 30, Sep. 28

Greece really tried very hard to capture as many bold-font headlines of the gloomy variety that it was possible to capture. Alas, Spain (and later Italy) vied for the Euro-flavored buzzword of the year and basically succeeded in terms of headline count. The EU financial mess raged on without pause. Despite all the drama (no, we won't say: "drachma" - although it's tempting) the common currency did not (yet) sink to parity with the US dollar, Greece was not jettisoned into the Aegean Sea, and Germany did not stage any coups in various central banks. We lost count of the number of meetings/summits/conferences/trips that were conducted in order to avoid the worst outcome from materializing in the old World.

5. "Under a gold standard the Fed would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system from collapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster." Unlike 1981, in other words, when the gold standard made a kind of superficial sense as a response to our problems, 2012 is a moment when a gold standard would clearly have worsened our problems. Dramatically, the idea's "proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite. The GOP's move to try to re-adopt the gold standard shows their "increasingly tenuous relationship with reality."

Yes, believe it or not, but in 2012 we were treated to the Tea Party (and the GOP) driving hard to bring back...the gold standard. Then, after a while, reality caught up with them. Project Syndicate's Christopher Mahoney pointed out in great detail why the gold standard would not be workable today (just as it became unworkable several decades ago) and that implementing it would require either a dictatorship or a "Finnish-like national cohesion" – something that America completely lacks. There would be no Fed chairman, no employment level mandate, and the required flexible nominal wages and incomes are the stuff of "fantasyland." Mr. Mahoney dubs gold "the Republican Death Wish."

4. "CPM notes that albeit 2011 was a pivotal year for silver (having traded at the half-century per ounce mark), that same year might also come to constitute a turning point in the white metal's fortunes. While the market witnessed a record level of trading activity in 2011, CPM does not expect such fervor to continue this year, or for silver to break above last year's highs, and it expects the precious metal to decline further throughout the remainder of 2012." –In The Lead, May 18, 2012 See also: April 20,

Indeed, 2012 proved to be not as auspicious for silver as some had boldly predicted at the beginning of the year. The white metal did not swiftly rebound to $50, nor did it rise to $75 or to $100 per ounce. It spent the year inside of the $26.70 to $34.96 range and it averaged $31.15 per ounce, which was some $4 lower than the average it achieved in 2011. According to the Silver Institute's annual survey, net world investment demand was down by 11% in 2011 while net mine output reached a record 761.6 million ounces. The relevant question for silver in 2012 became not "Is there a silver shortage?" but –in the words of one GFMS analysts: "will the investment flows be sufficiently strong to absorb the surplus metal that will be on the market?" It appears that such has not been the case, given where silver prices ended up

3. "Investors, stock analysts, and most of all, corporate boards, may have had enough of CEOs who have made a career out of publicly forecasting much, much higher gold prices like clockwork, but have had a knack for driving their own firms' share prices into single-digits, or fractions of a dollar. Abrupt dismissals of such gents have now taken place at Kinross and Barrick and the market analysts who focus on this industry believe that the trend is becoming as fashionable as fall sportswear on the runways in Paris. "We interpret that lack of capital discipline and stock underperformance has reached a breaking point in the mining sector and we expect further management changes to come," noted Jorge Beristain, an analyst at Deutsche Bank." –In The Lead, Aug. 06, 2012 See also: Dec. 14

The juniors may have had a bad year, but when it comes to the heads of some of the majors, well, they had a no-good, very, very bad year –employment-wise. As investors in mining shares found themselves sitting on value erosions of up to 80% and as they realized that two-thirds of the poor performance of certain shares was actually attributable to factors well within the control of some management boards, they turned up the heat until firings and resignations started to materialize. And, boy, did they ever. The second half of the year looked like a bowling alley in full swing or a domino demolition contest in the industry.

2. "Calafa Beach Pundit's Scott Grannis notes that if the Fed continues its massively accommodative monetary policy, gold prices conceivably could move higher. But I think that would require some evidence that inflation is picking up, and that evidence is still lacking. In my view, gold is essentially priced to a significant increase in inflation already. The premium that investors are willing to pay for gold today (defined as the amount by which today's price exceeds the average historical real price) is almost as much as it was in early 1980, when inflation had already attained double-digit levels. By this same logic, if the Fed were to even suggest that it is contemplating a reversal of its quantitative easing (which could be accomplished by raising the rate it pays on reserves, or by draining reserves), then gold would be quite vulnerable to losses. Gold today is a very expensive inflation hedge." –In The Lead, Nov. 30, 2012

What's this? Heretical statements about gold's price tag after eleven years of rising prices? Go figure. Yes, certain shockwaves were set off in certain circles when long-time, respected market mavens (see also: Paul van Eeden, Ned Schmidt, etc.) dared suggest that gold – at $1,600+ may be reflecting many things (fear premium, inflation fear premium, easy money side-effects, etc.) but not "fair value." For some of these "dissident" analysts, gold around $800-$900 appears to be quite a bit more...reasonably priced. Nevertheless, we had our fair share of 2012 predictions that called for $2,000-$2,200 gold but once the year drew to a close, such calls were promptly (or conveniently) "moved" over to 2013 or later.

And the top spot in 2012's roundup of themes and price-moving factors goes to...drum roll....Great Fedspectations. Ben Bernanke and the FOMC (inadvertently?) managed to single-handedly create more peaks and valleys in the price of gold than any other "traditional" market-impacting agents of yonder (geopolitical troubles, stock market swoons, panicky investors, manifest inflation, etc.) We can safely state that 2012 –for gold-will go down as the year of QE obsession.

The Fed-related gold price rollercoaster began its wild ride early on in the year:

"The most recent advance in gold prices comes against a background that not only lacks the advent of the much-promised (by hyperinflation-oriented newsletters) QE3 by the Fed, but actually against statements such as these, coming from...the Fed: "Wall Street analysts are engaging in "wishful thinking" when they forecast more Fed asset purchases." – uttered by Dallas Fed President Richard Fisher yesterday." –In The Lead, Feb. 24, 2012

The drama intensified as the months wore on:

"Underscoring once again just how much of a premium Fed QE3-oriented expectations had added to certain market price equations, gold fell out of bed on Tuesday afternoon after the ritual parsing of the Fed's March 13 meeting minutes left many a smugly hopeful bullish participant with nothing but...hope to hang onto, as their trades/bets (as well as sentiment) soured very fast. Currency strategists at Brown Brothers Harriman had cautioned as early as yesterday morning that while many market players were expecting at least some kind of QE3 hint in the FOMC's meeting minutes, there might not be anything in there but a summary mention of the fact that if conditions dictate, then such measures might be put into motion. The firm's caution was then more than vindicated by a 0.74% rise in the greenback's value on the trade-weighted index (@79.43) by the end of the trading day. Gold headed sharply lower and touched the $1640.00 bid level as panicked sellers pulled the "Bail!" triggers en masse." In The Lead, April 4, 2012

But, wait, there was more:

"The worst month for gold prices in 30 years was suddenly followed by the best daily climb since last August on Friday, the first day of the new month. The principal catalyst for the $66 upward move in bullion was the unexpectedly dismal report on May's US job creation activity as reported by the US Labor Department. Whereas economists had hoped to hear about 150,000 positions having been created in the US in May, the actual number of 69,000 (more on that later) was a stunner that immediately translated into a flare-up of expectations of another round of QE." In The Lead, Jun. 4, 2012

"If there was any previous doubt about the fact that many an asset market was over-dependent on a continuation of easy money policies by the Fed, well, that confirmation came over the past 24 hours. August gold prices cratered by over 3.0% on Thursday ($50.30 an ounce) after the Fed offered only a modicum of an accommodation gesture on Wednesday and the yellow metal appears on course to set its largest weekly decline since last December at this juncture." In The Lead, Jun. 22, 2012

"Gold prices bumped up against long-term (one year in the making) downward resistance levels near $1,780 but remained supported above the $1,730-$1,750 value zone as players attempted to gauge the duration and scale of the US central bank's bond-buying program. A number of decent economic metrics released during the week managed to dial overoptimistic QE expectations back just a tad. Standard Bank (SA) analysts summed it up as follows: "There's not been much follow-through from the Fed's QE of last week, which is consistent with the idea that the market sees significantly declining marginal returns from every new easing policy from the Fed. In fact the lesson increasingly seems to be that investors should buy what the Fed buys (or any other central bank for that matter) but not necessarily expect a much wider impact." In The Lead, Sep. 21, 2012

The patterns in 2012's gold price behavior could be summed up as: UP on Fedspectations / DOWN on any hints that the Fed might not continue to hand out the easy money candy forever. Of course, players in the yellow metal can hardly be blamed for having gotten so accustomed to nice results on the heels of previous QE maneuvers conducted by the US central bank. However, this year proved to be one during which the effects of additional asset purchase announcements by the Fed showed not only seriously diminishing returns for the precious metal but, on occasion, the opposite of what could logically be anticipated. Towards the end of 2012 the latter pattern solidified and we ran across findings such as this one:

"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). 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." In The Lead, Dec. 18, 2012

Thus, we close the year in the midst of a nearly three months-old downward trend in bullion values and with the gold bulls hoping that there will be a sufficient amount of Fed dovishness on tap for 2013 to keep things on the boil. For the moment, the wrangling in DC and the potential effects of a deal/no deal situation coming from said location will take the center stage. As we go to "print" Sen. Harry Reid says that the opposing sides are still "divided" on the issues. Tick...tick..tick...tick...

On the other hand, we come to the end of another year during which we did not witness: a US dollar collapse, an epic stock market crash, a US debt default, an abandonment of US assets by China or anyone else, the demise of the EU, a breakout of a region-wide Middle East conflagration, and the Mayan Calendar's "predictions" turning into reality.

Perhaps it would be wise to be thankful for such forecasts not becoming headline news items.

Thank you for your continued loyal readership. Wishing you all

A Happy, Healthy, and Prosperous 2013!

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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