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Commodities Firm to End Up Quarter

By Jon Nadler

March 30, 2012 • Reprints

The final precious metals trading session of this week started off on a mildly positive note as commodities overall firmed up and as the US dollar slipped to under the 79 pivot point on the trade-weighted index. Month and quarter-end book-squaring were seen as dominating the action for the remainder of the day but yesterday once again presented a headache for gold bulls who had become somewhat emboldened by certain words of Mr. Bernanke’s earlier in the week.

The first quarter’s performance tally shows gold being ahead by 4% since the first trading day of the year. Platinum, on the other hand, is some 17% higher than it was on Jan. 3. A quick survey of equity indices indicates the S&P 500 is ahead by nearly 12% while the Nasdaq Composite is up by almost 19% on the quarter. Such gains would normally be nice enough if they were the tallies for a full twelve months. Stock market participants continued to receive decent US economic news this week as well; consumer spending climbed above forecasted figures, jobless claims continued at a four-year low level, GDP was un-revised at 3% for the final quarter of 2011.

Analysts at Standard Banks (SA) opine that while commodities had a nice start for first few weeks of the year, players in that space are well-advised to keep an eye out for developments from China. Setbacks in that country’s economy have dampened the strong out-of-the-gate performance in commodities since they first became publicized. Key metrics such as bellwether copper demand, cement production, electricity output, and manufacturing activity in China are critical watch-list items at this juncture.

Standard Bank also reminds us that the principal price-moving agent in commodities in Q1 has been speculative activity of the long kind (save for gold, whose open interest as a percentage of net length fell somewhat) based on QE3 expectations by a crowd that has become more habituated to easy money than Charlie Sheen had been to certain…substances. Practically every gold perma-bull now blames the Fed’s reluctance to provide QE dough to play in the markets with for the souring of the mood in gold. Seeking “salvation” from the US central bank may not prove to be the wisest strategy at this juncture, as you will see below.

Spot dealings opened with a bid-side quoted at $1,667 in gold and at $32.50 in silver. While there is still scope for attempts at taking out overhead resistance near $1,680 and $1,704 in gold (with a possible $1,730 end-target) the going has been anything but smooth amid an absence of not only QE3 but bullish news on the physical or ETF front as well. Over in India, the near fortnight-long strike by that country’s jewelers continued but Finance Minister Mukherjee, according to Marketwatch, “has so far given no hint that the government intends to review the import taxes on gold. “I don’t think the government will change its position,” said Badruddin Khan, an analyst at Angel Broking.

“In general, when they do adjust parts of the budget, it’s for essential commodities, not for bullion.” New Delhi first slapped a 2% hike on gold in January to start plugging the holes in the government’s finances and the country’s current account deficit, a measure of the nation’s debt to foreign creditors. Gold demand was also cited as a factor in the slide of the rupee last year, which lifted the costs of India’s import bill.”

Swiss Bank UBS yesterday trimmed its 2012 gold price forecast by a hefty 18%, down to $1,680 per ounce, as it sees gold as being “at risk” from the US recovery, dollar strength, and the dissipation of QE3 hopes. UBS had previously pegged a $2,050 target for gold for the year. The biggest concern appears to be the fact that, as we have stated here many times, gold has become over-dependent on a single type of offtake – that from investment.

UBS opines that gold is at risk precisely because “it needs persistent inflows of investor money to keep on its upward trajectory.” Such inflows have been – to say the least – tenuous since last year’s volatility in prices increased and following September’s price peak above $1,900. Gold ETF demand tonnage in 2011 sank to the lowest annual level since the launch of such instruments in 2005. Several high-profile funds liquidated part or all of their gold holdings in the latter part of last year.

If there is any good news in the ETF space lately, it might be the fact that not too much gold tonnage has leaked out of such vehicles in the wake of the recent price declines that erased bullion’s February gains and then some. Of late, the strengthening perception that the Fed may be done with the handing out of "free money" in the form of QE accommodation has rattled the confidence levels among gold bulls who expected 2012 to simply be "more of the same" of what we have seen in the market since 2008.

There might also be another explanation as to why the Swiss bank cut its gold price outlook so dramatically. It has to do with capital flows. While UBS did not label the above-mentioned rising gold price formula with anything remotely resembling one Mr. Ponzi’s former scheme, there is one Marketwatch Trading Deck contributor who believes that, even at this juncture, gold is overvalued by 74%. Taking into account the Gold:GSCI (Goldman Sachs Commodity Index) and the Gold:CCI (Continuous Commodity Index) ratios and their historical patterns, there are a couple of conclusions to be drawn.

The first one is that the 2.37 Gold:GSCI ratio (as of March 23)  was 35% higher than the historical average of 1.75 and that gold is probably 35% overvalued with respect to crude oil. The second inference is that a Gold:CCI ratio of 2.89 (also as of March 23) is 74% higher than its 1.66 historical average. And, yes, there is a chart for that metric, over at Insider Monkey. The last time that ratio was at 1.66 was on the day of the collapse of Lehman Bros. The PM Fix in London that day was $775.00 per ounce.

Platinum and palladium also moved higher this morning, with the former posting a $16 gain to $1,640.00 per ounce and the latter advancing by $4 to the $648.00 per ounce mark. PGMs are continuing to be supported by supply concerns which are once again becoming manifest owing to on-going labor action at the Anglo American Platinum and African Rainbow Minerals’ mines down in South Africa. Management and the unions have been engaging in daily talks, but “progress is elusive” according to reports.

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About the Author

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

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Related Terms
US Federal Reserve 8527bank 6455Bloomberg 5254crude oil 3328metal 3075precious metal 869Goldman Sachs 868United Nations 783UBS 607HSBC 543Standard Bank 506White House 506Bernanke 456electronics 284manufacturing activity 170US central bank 157noble metal 130CCI 113Harvard 100Tom Keene 83New Hampshire 64Roosevelt 60MIT 57Lehman Bros. 37CPM Group New York 19Simon Johnson 15Rohit Savant 12Charlie Sheen 8cement production 5Swiss Bank UBS 4bank buyers 4James Kwak 4Mukherjee 4Ponzi 4yellow metal last year 3Angel Broking 2bank gross purchases 2electricity output 2dental and medical applications 2Lewis Douglas 2Badruddin Khan 2

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