Secrets Exposed - Burn After Reading

Precious metals prices opened mixed on Tuesday with gold and silver retreating a bit while platinum and palladium staged advances. Spot gold was quoted at $1,791 per ounce, down about $5 while silver fell 15 cents to the $34.bid level per ounce. A $2 gain was noted in platinum (quoted at $1,658) while palladium moved $13 higher to reach $673 per troy ounce. Rhodium remained static at $1,675 per ounce on the bid-side.

The noble metal palladium (still our favorite medium-term play) partially benefited from recent robust GM and Toyota car sales figures coming out of China and partially from the replay of the story that Russia's state-owned palladium reserves are running out. In late October a Ministry of Finance official told the media that 2011 is likely to be the last year during which Russia will make any "substantial" palladium deliveries from its state-run Gokhran depository.

The size of the Russia's palladium stockpile has always been kept secret. Our good friend, Marketwatch's Laura Mandaro interviewed Anton Berlin of Norilsk Nickel about palladium's market fundamentals and the current situation with Russia's inventory. Mr. Berlin covered recent supply and demand facts as well as some of the many interesting applications that this unique metal is sought for. The conclusion is that palladium is either already in a deficit situation or shortly headed into one and that its price prospects are possibly brighter than those of gold or silver, going forward.

Speaking of well-kept secrets, something else that folks cannot get an official handle on, is the location of Germany's gold reserves. Don't bother with your "Near Me" app; the Bundesbank has not placed any little yellow pins on the world map to let you know where its billions in bullion are stashed. The subject of Germany's 3.401 tonnes of yellow metal was recently raised at European debt crisis meetings and some (France) appear to be pressuring the country to "mobilize" part of the hoard to help with the fast-deteriorating situation. German officials fired back, saying that its gold reserves (second largest in the world after the USA's) cannot/will not be part of any such discussions.

On the other hand - unwillingness to disclose the address (US or German) of the bullion notwithstanding - the German central bank fired a huge hole into the gold conspiracy camp's listing ship when it categorically stated that "no [German] gold is on loan" and it also implied that albeit "a large share" of the country's reserves are indeed on German soil, a [potentially larger] portion is also very likely domiciled in New York, in London, and in Paris for cost, security, and liquidity reasons.

More than sixty global central banks are thought to keep gold reserves in New York, so Germany also keeping some bars there should not come as a surprise to anyone, certainly not when one considers the fact that the country actively sought out that storage location when the threat of the Soviet Union making a grab for it was very real in the 1950s and 1960s. As recently as 2004 the Bundesbank's chairman Hans-Helmut Kotz indicated that the bulk of his country's gold holdings were still parked with the FRB in New York. So much for secrets and mysteries.

In the market background this morning, the US dollar lost a marginal amount of ground on the trade-weighted index, slipping to the 76.88 level as the euro held ground based on some resurging optimism that the European crisis might be alleviated by a combination of changing governments and an enhanced rescue fund. The Swiss franc was seen falling fairly hard yesterday in the wake of renewed posturing by the Swiss National Bank that it stands ready to intervene if the cap at 1.20 franc/euro shows signs of having to be "defended."

Crude oil traded 58 cents higher at $96.20 per barrel while copper added 0.20% this morning. Dow futures were on the rise as investors on this side of the ocean eyed Italy for the latest twist and turns in the seemingly interminable European debt saga. Speaking of black gold, it traded at its highest level in more than three months ($96.60) in New York while over in London the December Brent variety traded at $116 per barrel.

While there is some reasonable justification for a certain risk premium on the commodity due to resurging Iranian nuclear "issues" (the country appears to actually be working on building nukes instead of trying to produce energy), the current price of crude has some analysts wary of it. In fact, Standard Bank (SA) market watchers note that Brent crude's RSI is "mega-overbought" and that a reversal is "imminent." Brent crude has been "gapping" upwards and while it could reverse back towards the $112 area, a potential break of the $108 level could send it towards the $105 and then the $100 levels (the latter being within a "bear channel").

Over in Europe, the borrowing costs for Italian debt approached the 7% mark this morning with about the same speed that Prime Minister Berlusconi's government was coming apart at the seams. While his resignation remains a matter of speculation the septuagenarian playboy faces the prospects of a confidence vote in parliament this week and could be handed his walking papers in a manner of speaking.

Euro-zone finance ministers reached a consensus last night on augmenting the EFSF but they also kept intense levels of direct pressure on Greece and on Italy, both of which now face the prospect of a governmental changing of the guards. The common currency weakened for a third trading session this morning albeit - considering the gravity of the regional situation - it did not lose all that much ground (at $1.379).

The EU's finance ministers indicated they will launch the beefed-up rescue ship in December but they first ordered (!) Greece to furnish written acceptance of the latest set of bailout terms and also intimated that they will seek a similar "on-paper" promise by Italy when its turn comes. This is fast turning into a game of hardball and it once again underscores the fact that things had come to a too-close-to-the-brink paradigm that had to be addressed immediately. None of the above of course has stopped Mr. Berlusconi from cheerfully denying that he might have to pack his bags and take a long Mediterranean cruise.

Meanwhile, the arguments and counter-arguments that gold is or is not in a bubble continue without pause. An interesting observation has just been made by Marketwatch contributor Shivaji Thapliyal who writes that while no one can stick their neck out and declare that the metal is indeed inside a spherical object, no one can also declare that it is not inside of one. Moreover, the five most common "hand-waving" arguments (i.e. non-numerically based ones) in favor of gold do not yield any clear, objective fair value for the yellow metal.

The by-now-nearly-shopworn arguments read as follows: "(1) it is a safe haven and we are in a period of extended financial market turmoil (2) it is a hedge against inflation and we are in period in which we will see high inflation (3) it is an under-owned asset and investors have only begun to warm up to gold (4) the dollar is falling and gold is denominated mostly in dollars (5) all fiat currencies have failed and gold is the only alternative."

While the author notes that none of the above is a qualitatively incorrect statement, they still do not equate to a credible means by which we can properly value the metal. Conclusions: 1) The only answer to the "bubble?" question is that there is no answer and 2) "Investment managers need to ask themselves whether they possess knowledge and understanding of an asset that can help them create wealth in a systematically repeatable way or if they are just shooting in the dark."

Until tomorrow, keep wondering...

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

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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