Gold $436.50 Silver $6.90 Thursday 9th December, 10pm Sydney
G'day. 24 hours is a long time in the paper commodity markets, isn't it?? Sorry there was no post yesterday, but a confluence of events conspired against us, hence the early one today, so something is waiting when the Minyanfolk fire up those screens. I will expand on this a little later, but let's just have a quick look at what happened yesterday.
Gold and silver were smashed in a concerted effort to drive the metals lower. That the currencies behaved as they did, apart from the Aussie and a few other relative minors, suggests to me this was the cleanout we were looking for and it was pleasing to see the $433-32 level hold, as expected. But today is another day and it may well be brushed aside. Resistance usually becomes support and we all know what sort of resistance we saw at $430-33 on the run up. I am still of the belief that this level should hold and that we aren't gunna be down here for long (not advice). I might be wrong and we go back to $405 but that is gunna take a sheetload of real metal. There is some discussion about the gold ETF and the apparent liquidation of 15 tonnes of gold into a very illiquid ACCESS market. Whatever. The cleanout that everyone wants is here, so let's just get on with it and put it in the rear view mirror. Deal or die time.
Anyway, the bounce off the low $433 back to $440 wasn't surprising. Hitting $433 in such quick time was the surprise! I guess a bit of short covering late in the day won out, and don't be surprised to see another crack at the support at $432 in the next 24 -48 hrs. There are too many people who have an interest in keeping the lid on gold, primarily Central Bankers. Note what Volcker said in his memoirs about the late 70's early 80's, a couple weeks back -(my paraphrasing him)." the mistake we made was not controlling the gold price". Hmmm. There won't be a repeat of that "mistake" this time around, by the looks of it. Who is pushing the buttons or driving the bus is no concern of mine. That the market is apparently not freely traded does concern me.
Even Andy Smith, Mitsui's perma-bear, notes in his recent weekly missive that the ETF has displayed some "interesting" behaviour - "It doesn't take even a cynical judge to suspect that this is not a miracle, but the market maker absorbing genuine mismatches in buy-sell orders and maintaining a still life picture of gold held for the public gallery". Sounds just what Volcker reckoned they shudda done 25 years ago. Why would anyone want gold lower? To give the appearance of dollar strength and to delay the alarm bells that gold has traditionally blared when things get out of whack. "Inflation, what inflation"? "Gold isn't saying so".... blah, blah, blah.
How much more abuse can silver take? I reckon $6.75-85 is pretty fair game looking at the charts. It doesn't overly concern me how much lower it goes. I'm long physical so it makes no difference to me. We know that the world has a REAL silver problem. A substantial supply deficit has existed over the past 15 or so years, and it is growing. 1000 ounce Silver bars are trading today at some 35c per ounce over spot, at www.Kitco.com. I can get it about 20c over spot, but this illustrates that the paper price is just garbage when one looks at getting physical silver. One of these days someone is gonna demand delivery on their Comex Silver and then the fur will fly for sure. I reckon it wouldn't take much capital to seriously disrupt the paper silver market by demanding PHYSICAL delivery. Anyone got a spare US$600 million bucks?? .'coz I reckon that's about all it would take. The main reason the Hunts got toasted in the last bust up to $50, was that they couldn't cough up the dollars to take delivery of their long paper positions. There were billions more ounces above ground available to dump back in the 70's. Not now, the U.S. has sold its more than a billion ounce stockpile. So, who has all the dollars? Who is soaking up commodities all over the globe? Maybe China and Japan will move 1% of their bond holdings and clean out the whole Comex warehouse? Maybe they won't, but it is an eventuality that COULD happen. Remember what De Gaulle did 35 years ago, and remember the U.S. government response was to give France a high hard one, and screwed everyone who held dollars. Sound plausible for a repeat? I dunno, but ya gotta look at all possible scenario's. Just throwing around ideas here.
And so we get to the metal shares. What a freaking nightmare session? But firstly, yesterday I was offered a late invitation to attend the big international cricket match, and as things were pretty quiet around lunchtime, accepted. The phone started ringing as we broke below $447, just as Australia were batting up a storm and looked likely to break all sorts of records. That the Australian team's batting immediately collapsed, was rather ominous.
Funnily enough, even the local wildlife took notice. A bunch of crows landed on top of the grandstand where we were seated . They all just sat around crowing - " faaaarrrrkk". I thought it pretty funny, given the situation. As I walked into the dealing room around about Comex open, the same call was resonating loudly, but I didn't see any birds at all.
The Amex Gold Bugs Index (HUI) traded down to 208 at one stage and did ok to claw back to 215 on the death. I thought I better go see how this stacks up to the last few downdrafts. The HUI spent the month mid-August to mid-September and traded basically 200-210. Gold traded $390-410 in same period. So does that mean gold is headed back to $400? I dunno, but I can't imagine that issues like Golden Star Resources (GSS:NYSE) and Hecla Mining (HL:NYSE) would get hit much further, no matter where the metal goes. Would need to see sub $380 gold, I think, and I you know my thoughts on that. GSS traded at $3.40 at one stage yesterday. This is lower than when gold pulled back to $390 in July. Minyan Paul informs me that GSS President and CEO, Peter Bradford has just purchased 25k additional shares in his company. That's a little different to what we hear about "insiders" in the general equity market. Small beer in the scheme of the GSS market, but that's HIS real cash purchase, not options or other such freebies. Nice to hear but it makes absolutely no difference to my analysis.
HL is currently trading at the similar levels (5.30ish) to when silver was $5.50 an ounce. Just illustrating how valuation means nothing in the current situation. Interesting that Silver can fall nearly 20% in a bloody day, yet our old mates at Pan American Silver (PAAS:NASD), couldn't fall a percent. Newmont (NEM:NYSE) falls only 1% during a $15 down day for gold. That's pretty impressive. I'm especially targeting the most savagely mauled issues, those that have unhedged reserves and resources, especially the high cost guys. Most pain - most gain. Just walking thru the process with you.
I am probably gonna look like the biggest wierdo in the world (if I don't already) by saying this, but I reckon that this is the biggest freaking metals equity bargain, in selected issues, that people will see in the next decade. In 6 months time I doubt people will believe that they could be given such a gift. The fundamentals are unchanged, the dollar is still "crow-ed" and quite frankly, the underlying supply-demand balance in the real metal markets is unchanged. This is a paper move only!!
Massive and increasing demand into rather static supply doesn't help any bears out there. I know it sounds a bit like a tech analyst in 2001/2 saying "no, really, this selloff is completely wrong" blah, blah, blah... but the difference to me is that there is real production, assets and intrinsic value in the companies that we're talking about, not some half-baked idea to send fish to the moon or some such idiocy, that was valued at 2000 times sales or something. Oh well, we'll see in a while, I suppose.
I had a good chat with Sydney's best bullion retailer (bars/jewellery etc.) about 4pm today. She sounded exhausted. They have their own small refinery and assay their own stuff. Inventory is very low, and getting lower by the hour at these prices. Metal and dore is currently being sourced from all over the globe, rather than just locally. It certainly seems to her that there is serious, growing demand, for both investment bars and simple, elegant high-carat jewelry- mostly chain and solid bracelet. This is telling, as the jewelry they design and sell is not overly intricate thereby reducing significantly the fabrication costs. This lets their buyers get their moneys worth of gold, rather than extraordinarily expensive elaborate designs. It just depends what you want to wear - substance or style! I vote for substance - every time.
While on the subject of jewelry, Christmas may see a few of you in the market for something special for someone. Good on you. First thing to remember is to take a magnet. Gold and silver are non-ferrous and as such should have NO magnetic properties. Sterling Silver chain (92.5% silver) may have a little magnetism depending on nickel plating, but I prefer to see no movement via magnetics. Another old ripoff is to stamp the clasp on a bracelet as 925, implying the whole chain is silver, when in fact it is only the clasp that is silver and the chain is crap. Technically true but you get the drift. I would head straight for the jewelry district, most big cities have one, not to a mall store or other retailers. Go to the wholesalers and buy chain by weight and carat, not standard absurd retail mark-ups. I prefer 22 carat, as it is a little tougher than the 24, but infinitely nicer than 18. Just some thoughts for what they're worth.
Expected range next 24 hrs - 10pm Sydney
I don't doubt that there will be more pain in the metals in the coming months as we cop more of these sector specific, widely anticipated technical corrections. I expect we may wear some more in the short term but all my indications, fundamentally, are that this aggressive decline in gold price will be short lived. A day, a week, a month - no matter- the gold bull market is in no way over in my view. I am guessing it's just really getting started (not advice).
Enjoy the day and I suspect this will be another night of no sleep and the feeling that one is constantly jumping in front of the bus, especially the individual equities. Maybe this is a bigger end of season cleanout than I expect, that really bites deep as people ditch positions before year end. Dunno, but I console myself by retracing my fundamental analysis, confirming/altering my assumptions as applicable, and either re-affirm or make the appropriate changes to my conclusions.
Guess what? Nuthin's changed.
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