Poll Positions for Falling Bullion

GFMS also indicated in its annual review of the gold market that the same fundamentals about which we have been expressing concern here in these articles for the past couple of years now are indeed lining up in a precarious manner for prices unless massive investment demand comes to save the day. Specifically, GMFS cites increases in gold mine output, extremely anemic jewellery fabrication demand, and the shifting tectonic plate in mine hedging activities.

As most of you know, the 80’s and 90’s were characterized by robust levels of producer forward-selling – a phenomenon that at once added new supply of gold to the market and kept a high level of pressure on price advances. That paradigm shifted dramatically over the past decade-plus and it has resulted in a significant amount of physical demand in the marketplace by the very sources that produce the metal. We have estimated mine de-hedging to have probably contributed on the order of $400 to $600 to the price of gold in that period (with at least an equal amount likely added by the advent of gold-based ETFs).

Now, the tables appear to have turned once again. Whereas we once saw hedges to the tune of 3,000 tonnes right around the time when gold was headed for cycle lows near $250 an ounce, we only saw about 150 tonnes left on the books in 2011. In fact, last year turned out to be the first year in more than ten during which miners began to hedge again.

This kind of rare shift in the situation has prompted certain questions among analysts and firms such as GFMS. While the firm’s spokesman did not yet identify an “appetite for strategic hedging against a fall in gold prices” among mining firms (some of their CEOs are in fact the most vocal “gold to da moon!” soothsayers), he did caution that "Producer hedging cannot be a source of demand in future. It can only be a source of supply. The question is: how much supply?" That is something we do not have an answer to. Perhaps the better question might be: “How little in the way of new supply would be needed in the market for gold to “feel” the pressure?”

This morning’s New York-based dealings had gold opening at $1,646.50 per ounce down $12) and silver starting the session at $31.47 per ounce (down 3 cents). The weakness in prices was attributed in part to growing anxieties surrounding the debt situation in Spain and to the perception that, despite the PBOC’s yuan trading decision, the world’s second largest economy is possibly wobbly. The euro briefly dipped under the pivotal $1.30 mark this morning and that development certainly did not help gold.

CFTC reports continue to show that net long positions in gold are being liquidated. 19 tonnes were shed in the latest reporting period on Comex. Long-silver specs unloaded 210+ tonnes from their logbooks and added 110+ tonnes to short positions. The gold and the silver markets are –in the words of Standard Bank analysts- “positioned for weakness.” Not helping silver at least is the projection by Scotia Mocatta the India’s imports of the white metal might drop by nearly one-third this year.

Platinum traded down $12 and was quoted at $1,568.00 while palladium climbed $1 to the $643.00 mark. Speculative market positioning in PGMs shows bearishness on the rise once again in platinum as the net longs experienced the largest decline since last September. Palladium did not fare better either, losing more than 156K ounces’ worth of long positions.

In the background, copper was trading 0.16% lower and crude oil was quoted at $103.17 per barrel; a gain of 34 cents, out of the gate. Dow futures indicated a better trading day ahead as investors appeared to cheer the quite decent and better-than-anticipated (up 0.8%) tally for March US retail sales reported by the Commerce Department. This week will be laden with statistics, mainly on the retail and housing fronts in the US. We will be here to report on all that and much more.

Until Wednesday,

About the Author
Jon Nadler

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

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