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Kitcommentary from Kitco Metals Inc. - "Basel Bummer"

Category: Investment, Gold, Mining

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January 8, 2013 ( Mining stocks newswire) On Monday of the first full trading week of 2013 spot gold ended the day down by more than $10 and was quoted at $1646.90 per ounce while silver fell 9 cents to close at 30.16 the ounce This morning's indications showed gold and silver partially reversing yesterday's losses with modest gains on the order of $4 and 11 cents, respectively. On the other hand, platinum and palladium each advanced by about one percent in the cash markets. Background markets were showing a 0.24% rise in the US dollar (up to 80.32 on the index), crude oil ahead by half a dollar, and copper making a modest advance.

The first trading sessions of 2013 were intensely disappointing to the gold bulls who had hoped that the start of the year would finally bring the much hoped-for lift that gold did not enjoy in the final month of 2012. Depending on which headline one parsed over the weekend, what we witnessed last week was either "gold's longest losing streak since 1999" (Reuters) or "gold's longest run of weekly losses since 2004" (The Economic Times) or "gold's worst streak in eight years" (Bloomberg). It was, in other words, a terrible, horrible, no good, very bad kind of a market week.

This time, and for a change, the gold price collapse occurred in tandem with the S&P 500 reaching a five-year zenith on Friday. Some correlations are not dead, after all. In any case, the spot price as well as gold ETFs broke their respective 200 DMAs. It really does not matter what single cause one attributes to the washout in values as the technical picture and long losing string of weekly declines speak for themselves.

The series of lower highs and lower lows in place since September 2011's gold price peak prompted a number of institutions and individual advisors to…revise their previous gold forecasts for 2013 and more so for 2014. A quick roundup of gold-centric headlines over at London-based Sharps Pixley tells that story: "Deutsche Bank is latest to cut gold price forecast" "HSBC lowers gold forecast" "UBS expect gold to continue underperforming" "Credit Suisse joins others in lowering gold forecasts" and so on. Deutsche Bank reduced its 2013 average gold price projections by 12.1% while HSBC lowered the same by $90 per ounce to $1,760 the ounce. Both banks retain a still-relatively-bullish posture on the yellow metal as the see continued Fed largesse supporting prices during the current year.

However, as Deutsche Bank analysts pointed out, we need to be mindful of the fact that "Global investment demand for gold has moderated considerably over the past 18 months, largely a function of the apparent success of central bankers in mitigating the risks associated with excessive financial leverage within the Western economic system," he said. "The strength in other more conventional assets, U.S. equities for example, as economic conditions appear to normalize has also resulted in less urgency for investors to buy unorthodox investment instruments such as gold."

On the non-institutional side of forecasting and market analysis, market maven Dennis Gartman remarked that "the minutes of the FOMC's last meeting have shaken the hopes of the most violent "Gold Bugs" malevolently, and have shaken our gold position rather materially. We are, however, rather nicely insulated from the real damage being done to the simplistic gold bugs who have owned and who still own gold predicated upon their thesis that the Fed has lost control of the money supply. That thesis is now in tatters."

Last week, the LBMA's top 2012 gold forecaster, Rene Hochreiter, said that "gold's 12-year bull market is over as US economic growth means investors will switch focus to precious metals that benefit from expansion." Mr. Hochreiter projects gold to trade at an average of $1,600 this year and to mark a possible top near $1,700 an ounce. Last year's average gold price was $1,668.75 versus Mr. Hochreiter's projection of $1,650 per ounce. Last year's LBMA winner was our good friend, Rohit Savant of the CPM Group in New York. Mr. Savant also sees a lower 2103 gold price average (near $1650 the ounce).

That's as close as it gets, soothsaying-wise. The LBMA awards its top forecasters a…one ounce gold bar. Mr. Hochreiter is, however, quite positive on platinum and palladium's price prospects for 2013 and beyond. The noble metals have already outpaced gold's gains recorded last year. Mr. Hochreiter said that "Platinum may take another year or so before it beats gold and then it's going to stay above gold for the next upward cycle which could be five or six years." We have often drawn your attention to the fact that the recent discount in platinum prices vis a vis gold might not endure for very long, given historical premium patterns.

Mr. Hochreiter also noted that "a rebound in gold jewelry demand won't be enough to keep gold climbing because prices are more dependent on investment. The [gold] price is made because of the insurance, because of what the dollar is doing, not what physical jewelry demand is doing." In other words, Mr. Hochreiter acknowledges that gold's physical supply/demand fundamentals are not good enough to support the "moonshot" we have been promised for years. Now, with "America sorting itself out and the economy starting to move again" the odds of such a lunar-oriented launch have greatly diminished.

The New Year's free-fall in gold prices to below the $1,690 level (to $1,625 last week) has ushered in the potential that a broad corrective move is underway in the yellow metal. The MACD averages currently beneath the zero line and are tilted bearish. Support levels are thought to reside at $1,600, $1,565 and last summer's lows near $1,527 per ounce. Overhead resistances are found at $1,667, $1,693, and at the $1,700 pivot point. Hopefully, pre Chinese New Year physical demand might materialize and help stabilize prices or make for attempted recovery rallies. Technicians note that $1,670 could be in the cards but that resistance overhead is now solidifying fast.

In any case, anyone who claims that the Fed's meeting minutes were not the "straw" that broke the proverbial cameloid spinal cord needs a fast refresher in…reality. Here is a small "hint" from "The Fed's quantitative easing program is viewed by many investors as a major source of liquidity that weakens the U.S. dollar and helps support prices of commodities and other hard assets, including gold." Every single one of the above-mentioned headlines contain stories that allude to the Fed's minutes as the overarching cause of the slide in prices. Those meeting notes displaced the Fiscal Cliff-related price gyrations with a speed that made the latter seem like it never took place.

Last week the markets heard from Fed Presidents Bullard, Plosser, and Lacker and they appeared to be on the same page(s) –namely: "If the economy performs well in 2013, the [FOM] Committee will be in a position to think about going on pause." (Bullard). Mr. Plosser believes that US unemployment could fall to between 6.8 and 7 percent by year's end. Mr. Lacker is (still) opposed to Fed asset purchases and he does not feel that they materially help the US economy.

Don't look now, but when it comes to a (literally) "monetary" role to play, it appears that platinum is seriously muscling in on gold's traditional "territory." At least that's what might happen if one of the many strange ideas that have been floated to try to reduce America's deficits becomes reality (not that it will). Someone has come up with the proposal that the US mint a $1 trillion platinum coin in lieu of continuing the debt ceiling battles raging on in Washington. Aha.

Reuters News reports that "the [platinum] coin petition is one of many wacky requests to alight on the White House's website. People have petitioned the President to nationalize the Twinkie industry, deport British CNN talk show host Piers Morgan for gun control comments he made on air, and give Vice President Joe Biden his own TV show." Don't know about you, but we'd go with the…deportation suggestion.

However, speaking of exotic metals, here is a little something you can sink you investment teeth into; palladium. The noble metal was not only QIV's best performer, but it is on track to record its second year of supply/demand deficit as carmakers keep buying it and miners keep having trouble producing it in adequate quantities. Barclays Plc figures that a larger-than-half-a-million-ounce palladium deficit will be this year's tally.

Speaking of wacky ideas, the ones related to how gold would bask in an entirely new "light" on the heels of the so-called Basel III Rules coming into implementation were dealt a possibly lethal blow with this weekend's announcement that regulators and central bankers have decided to not only water down the proposed rules but also delay their full implementation until…2019 (!). Oops, what a bummer from Basel. There go a dozen newsletter headlines that formerly heralded Basel III as gold's de facto "salvation" in the making. We propose finding other such "game-changing agents" for the next six years' worth of sensationalist hard money publications, folks.

Actually, we cautioned you, back in October of last year, about the fact that such assertions were basically much ado about…nothing. We quoted CPM Group New York on the subject of gold's re-rating under the Basel Committee's new rules as warning that "First, one must point out that it is not at all clear that the Basel Committee on Bank Supervision, which sets these guidelines, will re-rate gold. Even if it did, the purpose on the part of commercial banks in seeking this change is not to allow them to buy more gold. They want to use their existing gold deposits — deposits their clients have made with them of gold — as Tier One assets for the purpose of meeting the tighter liquidity ratios. They are not planning to buy more gold. It would be highly unlikely that any bank would purchase any gold, transferring funds to gold from currencies."

Until next time,

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America
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