The Edge of Gold Hedging

Volatility and indecision patterns dominated Thursday’s trade in gold and silver while platinum and palladium posted solid gains on the session. The yellow metal darted back and forth from gains to losses and traded over a relatively wide, $20 range as market participants attempted to capitalize on the most recent increase in jobless claims, then on the hefty decline in US May consumer prices, and finally on the continuing flow of euro crisis-related news.

The final session of this week opened in New York this morning with an equal lack of directional conviction in precious metals. Gold fell $3 to the $1,620 mark while silver was off by six pennies at $28.58 the ounce. Platinum was down $5 at $1,483 while palladium declined $2 to $629 per ounce. Background markets showed crude oil up 18 cents at $84.09 and the US dollar up 0.06 at 81.93 on the index. The euro managed to tread water just above the $1.26 level and stock index futures were pointing higher on central bank “pep” talk regarding their readiness to step in if events warrant on Monday.

Bullion is still confined to the $1,550-$1650 trading range and on the technical side of its paradigm there is nothing much new to report. Michael Shaoul, the New York-based chairman of Marketfield Asset Management said that gold prices may decline to as low a level as $1,300 later this year after they breach support at $1,520 per ounce. Mr. Shaoul remarked that gold is not a “viable alternative” to [fiat] currencies. Speaking at a Bloomberg Link conference in Boston on Thursday, Mr. Shaoul cautioned that monetary easing by various central banks will not “inevitably” lead to a moonshot in gold prices.

For the time being, with Sunday’s Greek elections and next week’s FOMC meeting still looming, few players were evidently willing to go beyond a few quick intra-day plays and they were mainly shadowing movements in the US dollar and the euro. Economic data is taking a back seat with speculators these days, unless it points to a potential scenario whereby the Fed might bestow additional free money on the markets.

In terms of no fresh bullish news, the situation is not a whole lot different on the retail physical investment scene. India’s Commerce Ministry reported a 52% decline in May’s gold and silver imports into the country. The Economic Times reports that gold-based ETFs have seen net outflow of Rs 41 crore [a crore is equal to ten million] in May, according to data reported by the Association of Mutual Funds in India. Meanwhile, Indian jewelers still report opportunity-driven gold sales by local consumers.

As noted, would-be gold buyers in India remain sidelined while sellers outnumber them as they all watch record prices in local terms persist. Then again, huge numbers of that country’s denizens are undergoing an existential struggle to simply feed themselves. At the same time, there has not been any notable increase in European offtake despite the reported 600 to 900 million euros’ worth of outflows from Greek bank deposits on a daily basis. The Swiss franc and the dollar appear to be drawing those safe-haven bids for the time being.

Thomson Reuters GFMS just released its QI global gold hedge book analysis and it contains a number of notable findings. First and foremost, is the fact that the global outstanding producer hedge book is now down to a paltry 158 tonnes. Second, GMFS believes that in 2012 we will once again be witnessing slight net hedging by producers. You recall that 2010 and 2011 saw the first emergent signs of hedging among miners. In fact, the bulk of the first quarter’s activity in this niche came from hedgers and there was little active de-hedging.

We once again bring this important paradigm shift to your attention owing to the fact that the extended period of time during which miners took metal from the market in the process of de-hedging, as well as the amounts that were involved in the process, have contributed a significant bump to the price of gold that might not otherwise be manifest today. But let’s allow a picture – courtesy of Thomson/Reuters GMFS – to do the “talking” in this instance. Albeit it might better be titled as “The Net Impact of Producer DE-Hedging” you get the picture:

 

Also on the physical metals’ side of the equation, this time for platinum, production difficulties in South Africa have once again made the news with the closure this week of the Angloplats Aquarius Marikana mine in the wake of more labor strife. The platinum market’s one-year high in short positions is seen by Standard Bank (SA) analysts as adding to the possibility of a short-covering rally if news of this type continues. Supply/demand balances in the platinum market are seen as tilting towards an erasure of surplus conditions.

The other type of news that is contributing to robustness in platinum prices is health-related. Two days ago the World Health Organization warned that there is a direct link between diesel engine exhaust and certain types of cancer. It is thought that if more nations begin to impose stricter emissions controls regulation, then the demand for platinum in automobile catalytic converters might grow strongly as well. Platinum loadings are essential in diesel engine-powered cars require platinum. Most gas-powered vehicles can rely on palladium loadings even though they also use platinum in the catalytic application.

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