Motions of No Confidence in Precious Metals

Gold prices broke to under the pivotal $1,700 mark overnight, and did so despite a slightly weaker US dollar, despite a firmer euro, but alongside almost 1% weaker crude oil values. The decline to a fresh four-week low was partially attributed to an overall slide in commodities (albeit copper did not join the crowd) on account of the apparently stalled US Fiscal You-Know-What negotiations in Washington. Risk aversion on = gold and silver off (on the price charts, that is).

Spot prices touched lows at $1,695 before returning to the round figure but the battle appeared intense as the NY markets opened for business at 8:20 this morning. The latest Kitco spot quotes had gold trading $ 17 lower at $1,699 on the nose, spot silver down 64 cents at $33.02 per ounce, spot platinum down $15 at $1,588 and spot palladium down $8 at $680 the ounce. No changes were noted in rhodium at $1,150 per ounce.

Sharps Pixley’s Ross Norman questioned the events (and found some answers to them) as follows: “Gold received another body blow in mid-Asian trading hours which saw spot prices dip briefly below $1700 before finding support at the technically important $1705 level - the low seen on Nov 15th; a failure of this level after the US opening exposes us to a decline to the next level of technical support at $1672. Mr. Norman queries: “So, what the heck is going on here - isn't the dollar weak - aren't we nearing the edge of the fabled fiscal cliff - doesn't the US reach its debt ceiling in 8 weeks’ time - isn't this traditionally the season for high physical demand ??? The newswires are awash with forecasts suggesting record prices next year [you can say that again, Ross] but, like the gold price today, it lacks a certain conviction…The underlying sentiment in gold - at the moment - totally lacks confidence.”

The new trading week started with a small (80-cents net to $1,716/oz. at the 5:15 PM close in NY) recovery in gold prices following Friday’s close which constituted a loss on the day, week, and the month. Analysis from Saxo Bank characterizes gold’s November behavior as reflecting a “confidence crisis” after prices failed to break above $1,750 and keep sailing to $1,800 or higher, as had been widely expected.

The yellow metal’s “violent sell-off” that occurred last Wednesday apparently “caught many traders off-guard and helped dent confidence.” Despite its oft-mentioned “safe haven” attributes, gold did not manage to benefit from the rally in risk assets that unfolded last week. That’s two ‘motions’ (and displays of emotions) of no-confidence within the span of one week, and ultimately, in most things financial, it all boils down to confidence levels or the lack thereof.

More importantly, the Saxo Bank report concludes that “having seen a drop in forward US inflation expectations during November gold has for now returned to trade just like another risky asset, taking its cue from stock markets and the dollar. And with the sentiment in stock and forex markets being disturbed due to confusion (read: no confidence) about the (lack of) progress in the fiscal cliff negotiations gold was pushed over the edge following pessimistic comments which saw stocks drop and the dollar rise.” Thus, the expectation is that – at least until after the Dec. 11-12 FOMC meeting-gold might remain trapped in the $1,705-$1,755 range that appears to be well-worn, “technically” speaking.

On the physical side of the gold market, news from India reveals little or no change in buying patterns by locals. The Hindu Business Line reports that “physical demand in India remains modest. Slowdown in sales after Diwali festival is palpable. A weaker rupee continues to push local prices higher. While gold bulls and other interested entities continue to lure buyers and investors with glib talks of further price gains, policymakers are constantly talking about restricting high volumes of gold imports which are seen as a drain on the country’s foreign exchange.”

Meanwhile, the Indian government appears to be cognizant that – despite its efforts to curb the gold demand appetite of Indians-it cannot resort to a total ban on bullion imports as smuggling would swiftly mushroom under such conditions. As far as officials are concerned, one of the most effective ways by which imported tonnage will decrease going forward, is a successful outcome in the combat against Indian inflation levels.

However, the latest reports from that country reveal that the RBI and other government bodies’ efforts to dampen the golden inflow are bearing some fruit: “[The] doubling of the excise duty to 4 per cent in the last budget and the curbs that RBI imposed on gold loan value (down from 85-90 per cent of the value of jewellery to 60 per cent) and banning banks from funding gold purchase by loan companies have led to [a] drop in imports. In [the] April-October [period], imports declined 35 per cent year-on-year and overall imports is [sic] set to drop over 17 per cent to 800 tonnes this year.”

Part of the dampened Indian demand for gold this year can be explained by taking a look at scrap flows of the metal within that country. The Economic Times reports that “A price push-up in gold has increased the entry of recycled gold in the Indian market. In the first three quarters of 2012, the country recycled 89 tonnes of gold as against 36 tonnes in the same period last year. Market sources said a large portion of recycled gold has come from farmers who have offloaded it to meet rising input costs. "With gold prices going through the roof, consumers are trading old jewellery for new as well. While there have been reports of rural offloading of gold, a large section of people have opted for this route to meet the wedding season demand," said Ketan Shroff, director of Penta Gold. Incidentally, 70% of India's gold demand comes from rural buyers.”

On the topic of the market-positioning side of gold’s present paradigm, Standard Bank’s analyst opine that the latest CFTC data reflects (aside from the addition of almost 30 tonnes to net spec length) a body of participants who keep looking for continued monetary accommodation (and not just by the Fed). As regards silver however, the SB analysts conclude that the rise in net spec length to 23.8% of open interest, coupled with “the apparent ambivalence” among players spells a particularly vulnerable [to sell-offs] silver market.

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