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Kitcommentary from Kitco Metals Inc. - "Fed Launches Minutesman Missile – Film At Eleven"

Category: Investment, Gold, Mining

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January 4, 2013 ( Mining stocks newswire) Gold's "Cliff Relief" rally fizzled out in a hurry on Thursday and the yellow metal lost as much as 1.5% ($25) in turbulent trading action during the afternoon hours in New York. Spot bullion finished the session at $1,663.80 on the bid-side. The Thursday selling spree continued after hours last night with gold prices falling to a low of $1,625 and losing $39 more per ounce while silver spot quotes printed a low of $29.13 the ounce, declining by another 2% on top of the previous day's losses. If nothing else, the fallout from the Fed minutes (see below) is likely to put a cap on gold and silver prices that is far below a level that the bulls were anticipating for 2013.

Several convergent factors contributed to the steep metals' sell-off- one which came on the heels of gold bullion having reached a high not seen since mid-December after US lawmakers passed a bill intended to take the nation back from its slide off the Fiscal Cliff. Chief among the price-impacting agents was the release of the FOMC meeting minutes. More on the Fed will follow later.

Of course, a 0.80% gain in the US dollar (rising –make that: breaking out- to 80.47 on the index yesterday and to 80.81 this morning) also made conditions...not exactly conducive to the typical first-week-of-the-New Year-rally that the bulls had gotten very much accustomed to in previous years. The greenback was initially boosted by the ADP private-sector December jobs report that showed a gain of 187,000 positions against a previously anticipated addition of 149,000 positions. The Thursday sell-off more than erased Wednesday's gains in the yellow metal and it also resulted in a 2.85% (90-cent) slide in spot silver prices.

Platinum prices held up relatively well on Thursday as the noble metal posted a loss of only $3 on the session at $1,561 bid, while palladium fell 1.7% to ease to $692 per ounce. The noble metals, which tend to exaggerate moves seen in gold and silver, were likely supported by US automotive sales news. The past year ended with robust sales figures being reported during December.

Carmaker Chrysler tallied a 10% bump in units sold last month and a 21% gain in overall 2012 sales. In the US we are now close to the carmakers being able to report an annual sales total of 14.5 million units –the most since 2007. Estimated sales for 2013 begin at, or above the 15 million unit level among automotive analysts. Indeed, that could be good news for platinum/palladium fans out there.

This morning's spot price roundup revealed major additional damage in the complex for precious metals. 0Spot gold was off by $30.00 at $1,634-and-change while spot silver was down by 70 cents at $29.40 per ounce. Platinum suffered a $19 setback to $1,542.00 at the market opening while palladium lost $9 to ease to $683 per ounce. Gold and silver are both solidly under their respective 200-day moving averages (at $1,661 and $29.62) and however "overdone" this sell-off may be, the effects of speculative sentiment will stay with us for some time to come. The Fed as game-changer- whodathunkit? Try reading some of the archived articles right here at "In The Lead."

Sharps Pixley's Austin Kiddle notes from London that "Analysts are split on the outlook for gold price this year. Based on the World Gold Council's data, overall gold demand in the first three quarters in 2012 fell about 8% year-on-year, although ETF demand and official sector purchases grew. A turn in investment demand for gold will not bode well for gold prices. Chartists pointed out that buyers and sellers of gold have been struggling to gain control of gold prices in the past five quarters, and expected more range trading in 2013. However, most people agree that the central bank demand and the continued money printing by the major central banks will put a floor to the gold prices."

Yes, perhaps central banks (some of them anyway) might step in for the "rescue" but the question remains (as you will see below) where that certain price "floor" might reside in gold. There is at least one school of gold market thought that still equates central bank gold activity as a failsafe contrarian indicator. See...ummm...[British] history.

In essence however, we begin the year pretty much where we left off in 2012 –that is, with gold bulls utterly fixated on the Fed and the US dollar while the underlying physical market conditions do not offer too much in the way of promise. Yesterday's gold market "event" offers ample proof for that assertion. Who needs "mysterious" Asian sellers of gold when you have Ben Bernanke's Fed looking to perhaps "exit stage left" and do so...this very year?!!!

Yes, indeed, the "QE to Infinity" crowd was dealt a potentially fatal blow on Thursday with the release of the latest set of FOMC meeting minutes. Marketwatch posted a terse summary as follows [all of the underscores are ours and we want you to pay special attention to them]:

"There was a general sense among Federal Reserve officials that their new bond-buying program would last, at most, until the end of the year, according to the minutes of their December meeting released on Thursday. Several Fed officials thought that the central bank would be able to either slow or stop the purchases well before December. A few members said that the plan would likely be needed until about the end of the year. Almost all Fed members thought that the $40 billion per-month program to buy mortgage debt started in September was working, but there was also uncertainty about whether the benefits would last and that the potential costs could rise as the size of the Fed's balance sheet increased. At the December meeting, the Fed boosted their quantitative easing program by adding $45 billion of monthly Treasury purchases."

Folks, let's not mince words here. This is the first time since 2007's beginning of the financial crisis that the Fed has finally launched the first signal flare that it will not engage in "QE to Infinity." Such a hint has every right to shake the gold bugs (and other "easy money" asset aficionados) to their core. Does this mean we will see 4% positive real interest rates in 2014? Of course not. Does it however imply that the four years-long era of ultra-cheap dough is drawing to a close –and doing so far faster than some (make that: every) hard money newsletter had promised you with certainty? You betcha.

The Fed's minutes in effect are saying that: "We Are Nearly Out Of Bullets." Translation:" We've done as much as we are willing/able to do without taking larger risks. You (speculators) are on your own. "This is as epic as it gets, jawboning-wise. You did not hear it here first, but we do hope you take note. The euro certainly took note of the FOMC notebook notes. It promptly sank to a three-week low against the buck (just as gold fell) in the wake of the news release. Analysts noted that both gold and the euro had been primed for a "buy the rumor-sell the fact" type of event after the Fiscal Cliff deal was reached, but who (no one) could have anticipated the Fed to prime the markets for such an early exit?

Meanwhile, on the physical supply side of the gold market, all indications are that mine output will once more be able to notch a gain this year, as new projects come on line. The physical demand side, meanwhile, is not showing signs of any on-going stampedes- quite the opposite, in fact. It was noted yesterday that Indian authorities are once again considering hiking taxes on imports of gold in order to ease the country's current account deficit burden.

Taking into account the impact of a possible 50% hike in gold import duty levels (to 6%) the Chairman of the All India Gems & Jewellery Trade Federation said that he would extrapolate that a resultant decline of 20 to 25 percent in gold imports by India could ensue in the current year. India is said to have imported about 750 tonnes of gold last year, but firm figures are not yet available. The country's gold imports had already declined from 958 tonnes in 2010 to about 875 tonnes last year, in large part owing to similar governmental efforts to curb gold-consuming appetites. Ultra-high local gold prices also contributed to fewer buyers opting to snap up some precious metal.

Evidently, also fewer Americans opted to load up on gold and/or silver Eagle coins last year. The Treasury Department's US Mint reported full year 2012 gold coin sales down by 25% from 2011 and silver coin sales down 15% from the previous year. The 753,000 ounces of gold Eagle coin sales were the lowest reported sales figures from the US Mint since 2007. The financial crisis of 2008 motivated US investors to soak up as many as 1.4 million ounces in gold coins during 2009. Now that the sky is still firmly in place and now that gold is trading at roughly twice the price it did in that epic year, well, the story has changed... a bit, including the one about alleged shortages of coins at various bullion dealers.

Turning to the technical side of the gold market, we find that the yellow metal is still in a twelve week-old downtrend despite the Fiscal Cliff-related gyrations we witnessed the other day. Wednesday afternoon's EW update noted that the push from the recent $1,635 low up to the $1,695 high observed on Wednesday leaves patterns somewhat open to interpretation, but that a slice through $1,650 would yield a potential drop to at least the 2012 summer low of $1,527 per ounce.

Conversely, it would take a break above $1,724 to alter the bearish case for the metal at the moment. On the other hand, Thomson Reuters' technical analyst Wang Tao believes that "Spot gold is expected to drop into a range of $1,397-$1,447 per ounce over the next three months, as indicated by its wave pattern and a Fibonacci retracement analysis. A correction from the record high of $1,920.30 has not completed, as in terms of depth the correction has reversed no more than 38.2 percent of the gain from the October 2008 low of $680.80 per ounce."

Similar to EW's analysis, the Reuters analyst opines that a break above $1,754, if it were to occur, could portend a potential move in gold to the previous high near $1,920 an ounce. Wang Two anticipates silver to drop to $26.11 an ounce over the next 90 days. The white metal has "obviously confirmed a steady downtrend from [2011's] $49.51 per ounce and is riding on a downward wave C, which started at $35.36 and is capable of travelling far below $26.11."

We close this week with a rather disturbing bit of news from the mining niche (not that it may be "news" to some). According to the Vancouver Sun, it turns out that open-pit and/or alluvial gold and other metals' miners have been given an "F" when it comes to the environment and other regulatory provisions. The "free-for-all" that has been underway in the Cariboo has resulted in nearly three-quarters of gold miners not being in compliance with their permits. One of the side-effects of four-digit gold prices has been the invasion of such regions by placer miners in search of a quick buck (or loonie, as the case may be).

The BC Environment audit report (which was actually completed in May of 2011 but have only seen the light of the media day in October of last year –so who knows what may have taken place in the past 18 months-cited placer miners working in various streams without authorization roughly half the time. Several high-value salmon and trout fisheries have their home in the same region. One might have expected a little more than "they [The Ministry of Environment] are putting much more value over a fish than they are a human and a human making a living" from Cariboo Mining Association president Chris Winther in response to such findings. Really, Mr. Winther? There is at least one resident in the area who disagrees. No spokesman for "a fish" has been located, as yet. Stay tuned.

Until next time,

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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