Gold prices briefly reclaimed the $1,500 mark in overnight trading and rose to highs near the $1,505 area following the emergence of sporadic bargain hunting and a modicum of weakness in the US dollar. Crude oil and assorted other commodities also exhibited mild gains in the wee hours as the dollar hovered near the 75 area on the trade-weighted index following Thursday's release of relatively weak US economic statistics.
In particular, commodity bulls, whose continued speculative success still depends almost entirely on the Fed continuing to be ultra-accommodative in its monetary policy, bid their favorite ounce of metal or barrel of oil higher after manufacturing growth figures and existing home sales for April both came out on the disappointing side. This morning however, the greenback managed to hold its ground at 75.25 on the index relatively well, as the euro took several selling slaps from eurozone-related debt jitters.
The perception that, despite what was concluded by parsing the FOMC meeting minutes just a couple of days ago, the Fed might need to push back its coming exit from low interest rates by some factor (a few more months?) emboldened the spec trade and resulted in the pop to higher price ground we saw late last night and early this morning.
The commodity markets however still remain largely shaped by the warring factions of the bulls who see the Fed standing pat until well into 2012 and the...other camp that expects the Fed's veering away from "zero" and its shrinking of its 2.6 trillion dollar swollen wallet to dampen the torrid pace of investment in the niche sooner rather than later. Economist and publisher Dennis Gartman opines that the odds of us seeing any kind of Fed-sourced "QE3" might be slim to none.
Gold prices turned fairly choppy soon after the opening of New York trading and ran across a range of from $1,486 on the low end and up to $1506.00 on the higher end of the spectrum. All was still not well in the silver pits however, as the white metal sank to $34.34 losing 60 cents in the process. The US dollar's gains and a hefty, $1.69 drop in black gold were blamed by traders we contacted in New York. Platinum dropped $5 to the $1,758.00 mark per ounce, while palladium was unchanged at $725.00 the ounce. No change was reported in rhodium, still bid at $1,900.00 per troy ounce. Gold keeps trying to push higher and it is still possible that a convincing rise perhaps as far up as $1,540.00 could materialize, but the going has been anything but easy this week.
Meanwhile, at least one component of the gold market has (perhaps not so quietly, but certainly visibly) morphed into a potential threat to unhindered progress towards...the Moon, price-wise. Good as jewelry demand has been reported to be in places such as China by the World Gold Council yesterday, it turns out that as far as the West is concerned, the same sector of formerly critical demand is now actually contributing more supply of the yellow metal than it is demanding.
According to the London-based metals consultancy firm GFMS, US gold jewelry consumption for example, peaked back in 2001 at the start of the current bullish cycle in gold while European jewelry-related bullion demand saw its heyday back in 1992. In fact, last year Western gold jewelry offtake dropped to only 300 metric tons of metal while supplies of scrap gold vaulted to around 500 tons.
"As a result, Western jewelry has become a notable supplier to the international market, a position it first attained in 2009," GFMS noted in its most recent newsletter, titled "The Spectre of Net Negative Western Jewellery Consumption." GFMS also noted that, "This clearly has bearish implications if the factors driving this [phenomenon] are independent of the gold price and if the phenomenon were to spread to other parts of the world. It seems fair to argue that short-term drivers, in particular rising gold prices and economic austerity, have contributed to the slide [in jewelry offtake], largely explaining the acceleration in the average annual loss from 4% in the first half of the decade to 18% in the last three years."
We've said it here before; the gold market appears to be morphing into a different paradigm, with increases in mine and scrap supply, a notable dip in the historical pillar of demand from jewelry, the near-total disappearance of the important price-support agent that mine de-hedging has been in the past decade, and an utter over-dependence on speculative investment demand, which, as everyone realizes, is a cyclical phenomenon that ebbs, as well as flows.
Worth further highlighting is the fact that, as regards mining company de-hedging, the GFMS Global Hedge Book Analysis report observes that "for the full-year , de-hedging amounted to 3.31 million ounces (103 tonnes).This left the remaining [global hedge book] book standing at just 4.86 million ounces (151 tonnes) at end-December." And yet, some say, fundamentals no longer matter, as we have entered a "brave new world" where this time "it's different." Perhaps nothing illustrates the recent findings by GFMS on the issue of baubles versus...recycled baubles better than this picture:
Meanwhile, in the same GMFS publication, veteran market analyst and long time friend Rhona O'Connell notes that the beleaguered greenback may have taken much of a shellacking this spring, but that, perhaps, just maybe, it could be reaching the bottom if its hitherto weak cycle. Ms. O'Connell notes that, at a juncture where the US dollar keeps sinking not matter what the news out there might be, there is "a feeling in the market that the US dollar may be reaching its lows as it discounts several elements of 'bad news.' The dollar-euro rate, at $1.48, is at a level last seen in early December 2009, while the G-6 trade-weighted dollar has not been this low since early August 2008." To a contrarian, that is the stuff of dreams. To the dollar shorts, quite conceivably, the material for less than pleasant ones.
Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.