On The Bias(es)

Friday’s initial tilt in the precious metals markets was to the downside as the US dollar continued to strengthen and it reached 79.30 on the trade-weighted index. Gold spot prices fell by about $11 to the $1,706 area as the euro slipped to near $1.32 (once again, below its 100-day moving average despite assertions by European officials that the "contagion" has been "contained") against the greenback and as crude oil moved lower as well, nearing $108 after reports the Saudi Arabia refuted news about a pipeline explosion having taken place.

US gold and silver coin sales experienced a fairly dramatic decline last month as shown in the latest figures from the Treasury Department’s US Mint. Only 21,000 ounces of gold coins were sold to its primary distributors, down by 106,000 ounces from January. Silver coin sales fell by over 75% to 1.49 million ounces from the near-record 6.1 million ounces recorded in January.

HSBC analyst James Steel attributes the decline in sales to the run-up in prices the markets experienced during the month: "The sharp decline in coin sales shows some consumer retrenchment in reaction to the higher prices.” Still, it can also be argued that such sales by the Mint to its distributors are "leading" in nature as the dealer community stocks up on what it believes will be forthcoming demand. In that sense, January’s offtake can be interpreted as indicative of what dealers expected to move into investors’ hands in February, while last month’s small purchases could be pointing to very slow retail sales during the current month.

The Bernanke-triggered “flash” metals’ 5%+ price debacle that occurred in the final trading hours of February is also likely to keep more than a few retail buyers uncertain about what to do (or not to do) in March. Sadly, the interest levels among retail buyers tend to intensify only after a metal has had a sizeable run and when they are suddenly fearful of missing the proverbial “boat.” Finally, while on the subject, it is worth noting that while the February sales numbers do come on the heels of a very strong showing in January, the numbers are also significantly lower than those that were recorded one year ago.

For example, in February of 2011 gold coin sales totaled 92,500 ounces while silver coin sales came in at 3.24 million ounces. We already mentioned the fact that overall investment in the USA in precious metals last year appears to have declined by about $1 billion dollars from the previous year. There is a hint that some kind of potential "saturation" is afoot in the US market following a period of more than a decade’s worth of rising metals prices.

Surveyed metals retailers still indicate fairly low levels on telephone inquiries and relay a feeling of uncertainty among small-scale would-be buyers. This is taking place despite what would normally be regarded as price-supportive background geopolitical developments such as this one. The most commonly posed question by such prospects is: “Do you think the metals might fall some more?”

At this juncture, that is very likely the $64K question of the day/week/month. UBS analyst Edel Tully opines that “gold’s incredible 2012 rally was being held up by the fickle speculator community, known to run for the hills at the first sign of danger.” That first “sign” was flashed courtesy of Mr. Bernanke on Wednesday on Capitol Hill. Ms. Tully then looks at the bargain-hunting that emerged in the wake of gold’s $100+ plunge and remains tentative:

“Our hesitancy right now stems from the fact that the buying on this break has been one-sided so far. And it’s not just the physical market that has been staying out of the action; the same applies for ETFs. So, for now, gold’s short-term destiny is in the hands of the spec community, a group known for its fickleness.”

The “specs” have clearly been in the driver’s seat; this is a fact we (and others such as Ned Schmidt) have been trying to bring to your attention since at least September of last year. For the small investor, this is not a very encouraging paradigm, to be sure. This market needs the physical component to kick in lest it is prepared to clear at a lower price equation.

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