Commodities Firm to End Up Quarter

According to Bloomberg News, investors are loading up on palladium at the fastest clip in over a year as perceptions that the noble metal will outperform gold this year are gaining traction. The combination of rising autocatalyst demand and falling Russian official sector supplies are making the investment community very interested in the metal; to wit, palladium ETF holdings have risen by 14% this year. That kind of addition in balances is something the gold ETF niche only wishes it could be witnessing. Recently made price projections call for an average of $850 per ounce for this year for palladium. That would be a 31% gain from present values, more than double of what is expected in gold by surveyed analysts.

We now continue with our dissection of the most recent facts and figures from the gold market as brought to us by CPM Group New York’s latest Gold Yearbook 2012. This most valuable publication is, in our estimation, the most accurate source for an individual investor to obtain the required knowledge for making better investment decisions and to dispel some of the many erroneous myths being propagated by parts of an agenda-driven community of hard money publications.

CPM goes to great lengths to educate the investment community about the actual goings-on in the marketplace. For example, in Wednesday’s post we examined gold CPM’s take on investment demand (down 5.8% last year), the myths of gold as an inflation hedge, and related issues. When it comes to gathering all the pertinent information, the firm’s researchers are without peer. It is also worth mentioning that when it comes to making reasonable price projections for precious metals, one of the CPM analysts, Mr. Rohit Savant, has come out on top of the LBMA’s 2011 list of the most accurate forecasters for gold and for platinum.

The total supply of gold climbed once again in 2011, rising to 3,372 tonnes, owing primarily to gains in mine output and secondary recovery from scrap gold (up to 1,275 tonnes). The world’s miners dug up 2,538 tonnes of new gold as strong jumps were recorded in Mexican (up 22.2%), Canadian (up 17.3%) and Chinese (up 5.9%) production. Consider those metrics the next time you hear one or another mining firm CEO warning about peak gold and vanishing production. The cumulative world production of gold now stands at nearly 156,500 tonnes and prior to 1800 only some 4,800 tonnes of the metal had been produced in aggregate.

Even hitherto falling South African mine production experienced a smaller decline in 2011 – roughly half of the level at which it was contracting in 2009. At current cash cost-to-market price margins it is a safe bet to fathom that the gentlemen will keep finding a way to produce the precious metal in abundant quantities. Consider the more than $8 billion that was spent on gold exploration in 2011 – an amount more than 51% higher than that tallied in 2010. There should be no doubts about how much influence the lofty price of bullion has had, and is having on such expenditures, and that they will most likely bear more “golden fruit” at the end of the day.

On the official sector front, CPM estimates that central banks did indeed buy a net of about 395 tonnes of the yellow metal last year (not the 500+ tonnes that some over-optimistic sources would have you believe) but it also found that such net purchases were mainly a result of a decline in gross sales, rather than the outcome of a jump in gross purchases. In fact, contrary to popular perception, central bank gross purchases have been trending lower over the past 36 months, falling from 846 tonnes in 2009 to 416 tonnes last year.

Moving to the other side of the gold market’s ledger sheet, CPM’s 2012 Gold Yearbook notes a very modest 0.6% gain in total gold fabrication demand for last year. A total of 2,270 tonnes (268 tonnes less than global mine output) went into the niche in 2011. Jewellery fabrication demand climbed 0.5% from 2010 levels and it continued to show a sector that is highly price-sensitive. In 2011 the US, Japanese, and European offtake for baubles declined, while Chinese, Indian and Middle Eastern demand for such fabrication climbed. Industrial-oriented gold demand (mainly electronics) remained steady (277 tonnes) while dental and medical applications demanded fewer ounces (66 tonnes) of the metal once again.

HSBC reported yesterday that some of the same emerging market central banks that had been identified as buyers last year (Turkey and Russia among them) sold modest amounts of their holdings last month. Thus, the best thing we can say about central banks and gold is that the process of individual policy decisions will continue and that some will buy gold while others sell it. On the other hand, the promises we have been given about massive Chinese or other central bank buyers stepping up and absorbing huge gold tonnage from the market have not, and will likely not materialize.

Speaking of central banks, the Fed, money, gold, and such, let us take a quick walk down Memory Lane and examine what happened (or better yet, what did not happen) when the US went off the gold standard. Authors Simon Johnson and James Kwak, in their new (upcoming on April 3) book entitled “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You” give us a glimpse of what the US dollar, America’s debt, deficits, taxes, and a host of other currently hot topics are all about.

However, in an excerpt from the book that can be seen on Bloomberg News, we also get a quick history lesson about gold and the gold standard, and why its abandonment did not prove to be lethal to the USA. Yours truly discussed this very topic with Bloomberg’s Tom Keene just the other day. Brace yourselves; here is the link to a good dose of weekend reading and much-needed perspective (worth its weight in…gold), courtesy of MIT’s Simon Johnson and Harvard’s James Kwak. The Honorable Ron Paul might wish to order an advance copy for his own library. We are reasonably sure that Mr. Bernanke already has. A couple of “teasers” to ponder for now:

Surprisingly, going off gold and abrogating gold indexation clauses did not destroy the [U.S.] government’s credit. The market reaction was almost nonexistent. The convertibility of paper into metal had been suspended often enough under the gold standard that the abrogation of the gold indexation clauses was not in itself grounds for panic. Most importantly, going off the gold standard and devaluing the dollar almost certainly helped the American economy overcome deflationary pressures and begin to recover from the depths of the Great Depression.”

The gold standard was blamed for exacerbating the worst economic crisis of the industrial age. In January 1934, Roosevelt officially reset the value of the dollar against gold at $35 per ounce -- a fall in the dollar’s value from $20.67 per ounce, where it had been since 1834. Some of Roosevelt’s advisers were worried about going off gold; budget director Lewis Douglas famously remarked, “This is the end of Western civilization.”  It wasn’t. Instead, the dollar would replace gold as the backbone of world trade. One of the most important events in modern economic history, the United Nations Monetary and Financial Conference, held in Bretton Woods, New Hampshire, in July 1944, would see to that.

Have a nice weekend.

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