This Time is...No Different

Precious metals once again attempted to recover as the daily New York trading action got underway on Wednesday. Albeit the US dollar showed little in the way of gains (rising 0.16 on the trade-weighted index to 75.40) it also showed no tendencies to ease much below its recent multi-week highs for the time being. Crude oil led the charge this morning, rising more than $1.20 per barrel and the enthusiasm for black gold spilled over into the silver pits where a 1.68% gain was seen in the early part of the trading morning in New York.

The largest and rather singular (okay, lead lost 0.08% to be fair) damage this morning was inflicted upon rhodium, which fell an additional $70 to touch the $1,930.00 level. A harvest of Japanese statistical data which is due on Thursday might inflict further potential damage to the platinum-group metals. Clearly, the March Sendai quake is very likely to have affected Japan's GDP as well as its industrial output.

The auto sector is a highly visible and significant component of that country's economic wheels and gears. Bear in mind that Japan is normally the taker of roughly a fifth of total global platinum demand, just for example. Thus, it remains to be seen what tomorrow's numbers might bring but they do bear watching closely.

Spot gold traded near the $1,493.00 level on the bid-side, rising 0.34% as players tried to right the golden vessel and push back towards the psychological $1,500 mark once again. Highs overnight in gold came in near the $1,498.00 level. Participants will be on the lookout for the release of the FOMC's minutes later in the day and are sure to parse the same for any clues to near-term and medium-term Fed monetary policy plans that could be found therein.

Fed minutes-based clues or no clues, the shrinkage of gold and silver ETF holding balances continues this month. While we noted quite sizeable Q1 "exits" from gold by Messrs. Soros, Mindich, and Touradji in yesterday's article, the post- May Day metals liquidations have amounted to about another 35 tonnes from gold and 157 tonnes from silver ETF balances.

Perceptions that (on the technical side) gold may have put in a medium-term top in the upper $1,570s before the month got underway probably contributed to the exodus from the ETP niche. However, it did not help matters that gold was largely unresponsive to a plethora of Euro-debt-related and other formerly-thought-to-be-bullish news on the geopolitical and economic fronts.

Market analysts at StandardBank (SA) do not see the Fed as beginning to tighten just yet, however, they are mindful of the possible presence of suggestions that the Fed might begin to reduce the size of its swollen balance sheet. Such actions, says the SB analysis, "will be bearish for commodities in general, but gold specifically." SB finds that "gold has by far the greatest causality with liquidity, followed by crude, and then base metals in general."

CPM Group NY issued its own note of caution on Tuesday, concluding that precious metals prices are "highly vulnerable" to another spike to lower levels in coming market session. They see gold possibly touching $1,450 or $1,425 and silver reaching towards $28, $26 or even $24 per ounce. Moody's Investor Services, addressing silver, [correctly] opines that what drove the white metal past $50 the ounce was "investment activity" [we translate that as: pure speculation] and not its internal supply/demand dynamics of balances.

Thus, says Moody's, expect "more volatility" in the metal, but do not expect its recent sky-high value to be "sustainable." Of course, that is not what the average retail investor is being told at this very moment by a plethora of hard money publications. They continue to point to putative silver coin shortages and high retail premia as the telltale signs that all is well in the land of Argentum. The "this time is different" mantra remains alive and well and every attempt is being made to distance 2011 from the events of 1980-1982.

The trouble is, there are way too many similarities between that era and now. Take, for example, the proliferation of gold-related ads on radio and TV, the explosion of articles, interviews, and "market studies" that all point to one and the same Holy Grail: "Gold to Da Moon." Sadly, something else is also quite 80's like: the Petri dish-like growth in the number of bullion firms whose primary objective is not to enlighten one to the merits of gold ownership as a life insurance policy for one's other investments, but to simply lighten their victim's wallets.

Folks of a certain age might well remember spectacular scandals that took place back then with firms such as International Gold Bullion Exchange made off with $75 million in client monies from 23,000 victims. Many seniors lost their entire life savings in that debacle.

So, what is different today? Nada. Zip. Zilch. Even the names and the dollar amounts involved in the most recently reported (as in: yesterday) scams (as well as their locations) are largely, and eerily, similar. The Federal Trade Commission uncovered a $23 million gold bullion and precious metal scam operation called "Global Bullion Exchange" in...Florida.

So, the next time someone calls you at the dinner hour and offers a "sure thing" in the form of a precious metals investment, you might place them on hold and cruise on over to the Federal Trade Commission's website and read this bit of consumer educational material. The next time you see G. Gordon Liddy, Glenn Beck, or hear Dennis Miller, or Laura Ingraham extolling the virtues of bullion, consider once again going to the FTC website and not falling for their emotional pitches (which, by the way, are amply "rewarded" for the acting jobs that they are).

Consider the following then, a mere bit of Public Service Announcement, from someone who has spent 36 years in this business and has watched a replay of the blockbuster movie from 1980 taking place in 2011. Here is the "A" (as in: you've been Advised) list of the FTC bullet points for would-be precious metals buyers. Invest-igate before you Invest:

  • If you are buying bullion coins or collectible coins, ask for the coin's melt value - the basic intrinsic bullion value of a coin if it were melted and sold. The melt value for virtually all bullion coins and collectible coins is widely available.
  • Consult with a reputable dealer or financial advisor you trust who has specialized knowledge.
  • Get an independent appraisal of the specific gold product you're considering. The seller's appraisal might be inflated.
  • Consider additional costs. You may need to buy insurance, a safe deposit box, or rent offsite storage to safeguard bullion. These costs will cut into the investment potential of bullion.
  • Some sellers deliver bullion or bars to a secured facility rather than to a consumer. When you buy metals without taking delivery, take extra precautions to ensure that the metal exists, is of the quality described, and is properly insured.
  • Walk away from sales pitches that minimize risk or sales representatives who claim that risk disclosures are mere formalities. Reputable sales reps are upfront about the risk of particular investments. Always get a receipt for your transaction.
  • Refuse to "act now." Any sales pitch that urges you to buy immediately is a signal to walk away and hold on to your money.
  • Check out the seller by entering the company's name in a search engine online. Read about other people's experiences with the company. Try to communicate offline if possible to clarify any details. In addition, contact your state Attorney General (www.naag.org) and local consumer protection agency (www.consumeraction.gov). This kind of research is prudent, although it isn't fool-proof: it may be too soon for someone to realize they've been defrauded or to have lodged a complaint with the authorities.

Until tomorrow, keep a tight grip on your wallet.

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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