Gold's decline attributed to strength in US Dollar

By John Nadler
Precious metals and Canadian geese were headed in the same cardinal direction Monday morning, but, this development was, of course, attributed to different reasons.

While our winged friends headed off in search of warmer climes and better food supplies, gold and silver sellers were seen lightening up on their speculative positions because of...a warmer US economic climate and a better supply of positive news on that front.

Spot gold prices fell by a little over 2% in early active dealings and reached a one-month low near $1,727 per ounce. This slump took place on the heels of gold's largest weekly decline in two months as Friday's business drew to a close. Silver declined by more than 2.1% on Monday morning and triggered bids just under the $32.50 level per ounce in New York. At that juncture, the white metal was trading some 9.2% lower than its one week ago level.

The most recent Value View Gold Report written by veteran market maven Ned Schmidt notes that "Silver has risen in parabolic fashion, to the top of its trading range. It has stalled, and moved through that parabolic. The only reasonable expectation from the chart is that it should now trade down to the bottom of the trading range. The forecasts of an imminent upward explosion in the price of Silver simply cannot be supported by either the fundamentals or the charts."

Last week, another noted market guru –Dennis Gartman- remarked at a conference in Chicago that "Buying gold is clearly sensible, given how it is moving up on concern about inflation and a weakening dollar amid easy-money central bank policies, but don't get carried away by the bullish dreams of gold bugs." Gartman starkly contradicted those who have visions of President Obama cranking the US dollar printing presses in the basement of the White House on a 24/7/365 basis, by...exposing the truth: i.e., that the US Fed's monetary base is actually declining (!).

Gartman also cautioned that he sensed a sentiment shift in the market and that ignoring market psychology carries sizeable risk to one's money.

He told Kitco News that he was a tad taken aback by the uniform bullishness on display at the aforementioned commodities conference: "The number of people who were bullish on gold at the meeting was disturbing. If everybody owns a bunch, how many are left to buy? I've learned in 40 years to pay attention to a broad number of things, and you get the sense that the big tanker out there that was moving in one direction is suddenly not moving in the same direction."

Gartman reportedly sold a portion (half?) of his gold trading position last week. He continues to assert that he keeps buying gold on occasion, but that he is not a "gold bug."

Other market watchers, be they gold bugs or not, continue to be platinum...partisans. This, for good reason, as it turns out. Take Mackie Research Capital's Matthew O'Keefe, for example. He notes that "A lot of the platinum mines are not economically viable at present; they cannot support new development. Some of the majors are shelving new development projects. Prices need to rise. There is a lot of cost pressure in South Africa on labor and capital costs."

O'Keefe also wants us to learn that "The PGM deposits that have been found outside of South Africa don't have the same amount of platinum, they're mostly palladium, and they're nowhere near as big. There are some other platinum deposits around the world, but, again, it's a cost issue. We really need to see platinum sustained over $2,000/ounce (oz.) to support new development from these lower-grade deposits."

He then concludes that, with a contraction in potential supplies and current labor and other difficulties in producing areas, "Platinum and palladium are timely right now. Prices are running up, for good reasons. The recent disruptions in South Africa have brought to the fore the fact that South Africa is our major supplier of PGMs; extracting that supply is getting more challenging and more expensive. Prices have to go up in response."

The Monday morning sell-off in the yellow metal breached a critical support level thought to hitherto reside at the $1,737 mark per ounce and it took place without any notable rally in the US dollar on the trade-weighted index. In fact, the greenback –at last check-was off by 0.06 at 79.73 and the euro did not lose much ground with a bid-side quote at $1.294 later in the trading day.

Whether or not price decline-driven bargain hunting might emerge from Indian buyers at this juncture remains to be seen. We do know however that last week's conclusion of Chinese "Golden Week" did not result in any notable jump in retail sales in Hong Kong. There were reports of watch and jewellery retailers whose sales actually fell by 5 to 10 percent when compared to last year. Platinum shed $23 to reach $1,627 while palladium lost only $2 to fall to $630 the ounce.

Last week's S&P rating cut of Spain (to one notch above 'junk' status) failed to move to common currency very much at all. Analysts expect that Spain will finally request a formal bailout when and if Moody's does away with the last remaining ratings notch. Meanwhile, if your job is that of a Spanish official, don't say you have not received an "Advertencia!"

The principal reason that traders gave for the slide in gold was basically the same one that was on the radar during last week's string of losing trading sessions; improvements in US economic indicators. Last week the markets took note of significantly lower initial unemployment claims (lowest in four years) and significantly better US consumer sentiment numbers (best in five years). Those statistics came on the heels of the unexpected but most welcome drop in overall US unemployment to 7.8% reported by the BLS.

On Monday morning, the gold-speculative crowd was greeted with the news that US retail sales climbed last month. Add it all up, and the bulls suddenly have a much more difficult time being as sure of continuing Fed stimulus-oriented asset purchases and of trying to push prices higher than they already were last week. They also appeared to dismiss dovish statements coming from NY Fed President Dudley, who said that the Fed was not as aggressive with its QE program(s) as he might have liked. Chinese inflation and credit growth data appear to indicate that the PBOC might not have to reach for the stimulus lever as imminently as some though it might have to.

Standard Bank's morning market roundup confirmed the above shift in certainty about the Fed among gold specs as follows: "It appears as though investors continue to question the ability of QE3 to support prices and/or the longevity of the Fed's open-ended commitment to easing. This has been evident in the price behaviour of gold over the past weeks - it takes very little to spur liquidation. The market looks increasingly vulnerable as net speculative length expressed as a percentage of open interest rises to another high for the year (32.2%)."

Atyant Capital's Vedant Mimani corroborated that take with his own version of the ebbing of the QEuphoria among investors by saying that: "a lot of money piled into risk assets on the assumption that the Fed's quantitative easing programs would drive general prices higher, and now that prices are falling, investors are beginning to question the validity of this investment thesis."

United ICAP's chief technical analyst, Walter Zimmerman Jr. was a little more specific on that topic of gold price "vulnerability" and he defined it as follows: "Gold bulls must be dismayed here. We doubt they expected serious technical weakness to follow from a big, fat QE3 (third quantitative easing). Gold continued to give massive, bearish RSI (relative strength index) divergence from its most bullish extreme since the $1804.40 peak back in November 2011.

Zimmerman added that "the $1,796 [figure] was our ideal resistance [level]. From here we target a drop to $1,550 minimum, with $1400 the next step down from there." Those are number that were last mentioned only during the summer doldrums (near $1,525) and that were subsequently relegated to the realm of "never again" prior to and shortly after QE3 appeared on the market scene. Hmmm...

(The author is the senior metals analyst - Kitco Metals)