Gold and Silver Report - "Ag, Phone Home!"

By Jon Nadler | April 20, 2012 7:02 PM IST

Turbulent trading conditions were once again manifest in Thursday's markets as an amalgam of price-moving news from Europe, Asia, and the US buffeted commodities, equities, and currency values. Gold prices fell sharply after the open, then touched primary support near $1,630 only to rebound swiftly mid-morning, and then softened once again, to under $1,640 per ounce. In all, gold had a relatively difficult week and appeared set to close it out with a one percent loss despite several attempts not to do so.

Barclays Capital analysts find that the slow but steady leakage of metals tonnage from various ETFs is underscoring the ebbing interest in precious metals at the present time. Gold balances in such vehicles have declined by six tonnes this month, while silver holdings have fallen by 100 tonnes. Last year, gold-based ETFs witnessed the lowest level of bullion intake since their inception in late 2004.

Platinum ETFs shed 15,000 ounces but palladium balances bumped higher by 6,000 ounces. Something or someone else is 'leaking' gold onto the physical market at this time as well; a nation. There are reports that sanction-saddled Syria has been disposing of (at least) part of its 25.8 tonnes of central bank gold reserves.

Also on the physical front, we reported on Wednesday that the RBI had announced to tighten the management of gold loans by [non-bank] financial institutions. HSBC market analysts opine that "tighter standards for gold as collateral could dissuade some holders of bullion from borrowing on their gold and instead sell that bullion into the market. Thus gold that would normally be locked up as collateral for loans may instead be sold onto the market, (which) has negative implications for gold prices."

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India's economy recorded a record trade deficit in Q1, owing mainly to imports of gold and black gold. The revelation prompted Indian Commerce Secretary Rahul Khullar to say that gold imports are expected to decline in the fiscal year 2012-2013 in the wake of freshly-introduced duties and taxes. There is a clear aim on the part of that country's government to dampen the importation and consumption of the yellow metal.

Silver traded across a near-$1 range but was also unable to make significant progress to the upside. The picture was mixed in the PGMs as well; platinum declined but palladium advanced. Crude oil slipped slightly but copper climbed a tad, while the Dow was off half a percent and the US dollar traded on either side of the "unchanged" marker on the index.

Little in the way of real change was noted this morning as the final session of the week got underway in New York. Spot gold hovered around $1,645 while spot silver appeared stuck around the $31.75 area. Well, so as you do not say we do not bring you all sorts of opinion on the markets, here is the view on silver coming from...the stars. Literally.

The New York-based Astrologers Fund calls today as the official beginning of the cusp of silver's demise. Silver is seen as being in the "late stage [of a] bubble" and is being seen as headed for a price target of between $21-$28 per ounce, or lower. It is written. In the stars. Ag, phone home. The AF has had a fairly good...call record up to this point. Keep gazing.

Yesterday, the Silver Institute released its GFMS-compiled World Silver Survey 2012. In the report- much like what was noted by GFMS and CPM when they launched similar gold reviews recently- it is evident that investment demand for silver is net-down, and that supply/demand fundamentals are not favorable for the white metal. To wit: implied net world investment demand fell 11% last year (to 164 million ounces). Global silver fabrication demand fell by 1.5% to 876.6 million ounces.

If one were to remove coin fabrication demand from the total, the decline would have been on the order of 4.1%. Finally, mine output of silver climbed for the ninth straight year and reached a record 761.6 million ounces. All of this also needs to be viewed within the context of a market year that witnessed a silver price volatility of over 34% in Q1 2011, and such gyrations are set to continue this year as well. In any case the relevant question for silver is clearly not "Is there a silver shortage?" but -in the words of GFMS analysts: "will the investment flows be sufficiently strong to absorb the surplus metal that will be on the market?"

As we have noted numerous times in recent articles here, the phenomenal margins in gold and/or silver that are available to those equipped with picks and shovels continue to boost production practically anywhere one cares to look. Like, say, Canada. There is an (excuse the pun) explosion of new mining and exploration projects in British Columbia, the NW Territory, the Yukon, and in Nunavut.

The common thread for all of this is the slogan "If you can make a buck, come on up." The potential problems with such a boom-time are a) what happens if commodity prices drop significantly? and b) what happens after the lifespan of certain projects is up? For example, the $800 million (CAD) gold mine project in Kamloops will run "dry" of its estimated gold deposit within 23 years.

You say that gold prices will never drop again? Well, consider the analysis and projections offered by Chart Prophet Chief Investment Strategist Yoni Jacobs. Mr. Jacobs recently authored a book titled "Gold Bubble; Profiting from Gold's Impending Collapse." But, as ominous as the title of his publication might be, Mr. Jacobs backs his views up with not just wild guesses intended to elicit an emotional reaction.

For example, he focuses on gold's trading volumes (such as we saw during last September's gold price drop) and the major, extant "disconnect" between bullion and the mining shares (in fact, there is one school of thought that prices gold at under $1,200 given such share prices). He also cites the situation in areas such as shifting monetary policies among central banks, the emergent problems in the Chinese economy, and the high level of speculation present in gold in recent years.

Mr. Jacobs concludes that "based on historical trends and patterns, gold will fall below $1,000 per ounce, on its way to the $700 area." Heresy? Perhaps. But, is anyone prepared for such a possibility? Most likely, not at all. The same could be said about those who posited the possibility of $800 gold back when gold was $250 an ounce. They were just as summarily dismissed (and, therein lies the lesson) by folks convinced of the opposite scenario.

The flow of news that moved these markets on Thursday started off with the revelation that Spain "scraped" through a pivotal bond market test with a $3.3 billion auction which, albeit deemed as "successful" saw yields on its ten-year instruments rise sharply. Just as nervousness related to Spain's travails started to ebb, a rumor that France could be downgraded swept through the markets and rattled already jumpy investors. French government officials quickly said: "Mais Non!" to the rumor. But, is there smoke where there is no fire?

Citigroup, whose most recent research note appeared to be the catalyst for the spreading of the downgrade rumor tried to apply a bit of (presumably French) lipstick to the situation by "clarifying" that it had opined that "it is likely that Moody's will place France's Aaa rating on review for possible downgrade by the autumn, after close examination of the supplementary budget due to be adopted after the extraordinary session of parliament that will follow the June legislative elections."

While bond markets certainly wobbled yesterday, the common currency somehow managed to keep above the pivotal $1.30 mark for the time being. The US dollar appeared resilient despite the euro's relative firmness and despite fresh joblessness statistics. Several analyses opine that the euro will have difficulties ahead, no matter who wins the upcoming elections in France.

Thursday's US Labor Department report on unemployment claims filings showed that although a marginally lower number of individuals applied for such benefits in the week ended April 14, the aggregate level of same remains near a four-month high. It might be too early however to declare that the US labor market is losing recovery momentum. In fact, one might recall the caution that Mr. Bernanke exhibited not that long ago when he noted that such metrics might indeed soften after the initial sharp rebound that was a result of deep layoffs that had taken place during the financial crisis.

Some market observers conclude that perhaps there is too much emphasis being placed on every ten or twenty thousand jobs lost or created when such reports are produced. Bloomberg's Caroline Baum correctly points out that in a labor force of 155 million (that of the USA), even a gain or loss of 100,000 jobs is little more than a "rounding error." When one also takes into account the weather (literally), various holidays (Easter just passed), and the "normal" ebb and flow in the labor market, the "hyperventilating" being done about US jobs (and/or joblessness) is mainly a convenient, agenda-padding thing to do by politicians and Sunday talk shows.

By the way, if you want to talk real serious unemployment troubles, just look across the ocean over to the Old World. A quick scan of the statistical joblessness position of various EU members reveals some truly disturbing numbers: Spain -24%, Italy-9.3%, Greece-21%, Portugal-13.4% and we could go on. Try getting re-elected on those numbers, if you can. The contrast between Europe' so-called periphery and its center- Germany- is staggering. German unemployment is currently running at 6.7% and that constitutes a twenty-year low. The eurozone's overall jobless percentage stood at 10.8% in February- the highest since 2001.

Meanwhile, getting back to the USA, the Conference Board said yesterday that "A gradual improvement in U.S. economic growth is expected past the summer." The CB's index of leading economic indicators increased 0.3% in March as against a 0.2% gain that was anticipated by economists. Conference Board economist Ken Goldstein noted that "Despite relatively weak data on jobs, home building and output in the past month or two, the indicators signal continued economic momentum."

As we go to 'print' the G-20/IMF roundtable is set to become a fundraiser of the type Washington has seen before. The cause, this time, is the building of contagion-preventing firewalls. Said walls are said to cost something north of $400 billion but the "donors" are currently some $80 billion short of the goal. That princely sum of dough is being seen as offering "relief and stability to the global economy." Whether this is going to be summed up as sort of a global QE or not, or whether it will just turn out to be "EU-Aid Part III" remains to be seen. What is pretty certain at this juncture is that the BRICS fellows are coming to this gathering full of vigor and may have a larger say-so in the matter than ever before. Just look at them flexing their biceps in rehearsal a month ago:

photo courtesy AFP

Until Monday, keep up the gym routine.

Jon Nadler

Senior Metals Analyst Kitco Metals Inc. North America

Blog: http://www.kitco.com/ind/index.html#nadler

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