Physical Gold demand out of Asia remains weak

By John Nadler

After having touched a 2012 high just $7 shy of $1,800 the ounce, gold prices drifted for a third session this week on Wednesday.

The yellow metal was unable to make headway much above the $1,780 mark and sister silver did not manage to penetrate above the $35 level. That said, the gold/silver duo held up relatively well, especially given the steep losses incurred in crude oil and the US dollar's advance to near the pivotal 80.00 figure on the trade-weighted index. The latter gained against the euro and the yen after US economic metrics related to the ADP payrolls report and to the ISM services sector reading came in at better levels than had been expected. More on those numbers, later.

Not much movement was noted in the euro (still near $1.29) or the Dow (up 12 points and just shy of 13,500) either. Markets are apparently bereft of impactful fresh drivers and are drifting in the post-QE3 environment. Fear not; the next 90 days still hold plenty of potential fodder for volatility and for potentially out-sized moves in various assets. Friday's September jobs report might be the first such opportunity for speculator albeit the one thing they can no longer look hopefully towards is QE3 as it is already baked into this market cake.

Small-scale previews of such future moves were on tap this morning as market participants awaited an interest rate decision from the ECB. Gold moved $10 higher ahead of the announcement and it once again neared the Monday high. Silver added $30 cents and traded just above the $35 level. Market participants continue to target the $1,800 and $35.50 closing levels in the gold/silver duo as they could bring in momentum-oriented buyers.

The ECB, on the other hand, deicided...not to decide to tinker with interest rates for the time being. Thus, we can now all go back to fretting about Spain and its on-again/ off-again bailout. Bond yields near the critical 6% mark do not indicate a great amount of confidence in that country's ability to solve its difficulties at this time.

Turning back to gold, the market continues to receive plenty of conflicting news and projections from various analytical and prognosticating sources. Debates continue in the financial media as to what role gold is currently playing given certain supply/demand conditions which are not exactly in its favor. Sharps Pixley analysts note that "while both the fund managers at PIMCO and the UBS Senior International economist agree that gold holds an important position in a diversified portfolio, PIMCO views gold as a currency which does not pay any interest while the UBS economist calls the view that gold is a reserves currency, nonsense - gold supply cannot grow as fast as the rate of the world nominal GDP growth which is about 5 percent p.a."

On the supply side of the market, we have reports that South Africa's wildcat strikes are spreading and afflicting more and more mininig operations (and not just gold ones). Harmony Gold reported an illegal strike at one of its mines while iron miner Kumba Iron Ore reported 300 employees having stopped work. The NUM said that South Africa's mining industry body will restart neogtiations on wages in the coal and gold sectors imminently.

On the other hand, and undeniably, notwithstanding a fresh batch of $2K and $2.2K (and beyond) predictions for that ounce of the preciousss, physical demand remains subdued, at best. It was noted the other day by analysts over at Standard Bank (SA) that "weak [Asian] bullion demand has been in place since mid-September and is the most severe in more than a year." Standard Bank's Marc Ground remarked that gold prices have been pumped up by "stimulus fever" and by expectations of future inflation, but not by underlying physical offtake. India's gold imports declined by 56% in Q2 as previously tallied by the World Gold Council. The country's central bank continues to make efforts aimed at curbing gold demand and the related risks that such demand entails (not the least of which is the worsening of the country's current account deficit).

So, let us take a closer look at what the Standard Bank analytical team's findings were. Their latest daily report notes that "physical gold demand out of Asia remains weak. The current demand weakness comes amid seasonality, which should actually benefit demand." The team says that "looking at our Standard Bank Gold Physical Flow Index (GPFI), physical demand in especially Asia and India has fallen substantially since the start of September. This coincides with the gold price breaking above $1,700 for the first time since April. It is also clear that the demand we are experiencing now is less than this time last year. The current weakness in demand comes despite a substantial appreciation of the Indian rupee."

On the topic of elevated gold prices and the aforementioned "stimulus fever" the Standard Bank researchers wrote that the current numbers "show that gold is already pricing in 15 months of QE from the Fed." They thus conclude that "combined with the weakness in the physical market, we don't see value in adding new long positions in gold at current levels. We still believe that it is a "buy-on-dips" market, but would look for value closer to $1,740." Still, the writers anticipate that gold might average $1,850 per ounce in the current quarter.

Black gold did not have a very good day at all, yesterday. A loss of 4.1% took the price of a barrel of dino juice down to just under $88. The principal cause for the decline was the latest US Energy Department reading on output levels. As it turns out, the US produced more than 6.5 million barrels of goo last week; the most since the end of 1996 (!). Meanwhile, total fuel demand was at its lowest since April.

There was more than just the output numbers that drove prices sharply lower, however. Legitimate worries that China is slowing into what now appears to be a seventh consecutive quarter and the worsening economy in Europe also added to selling pressure. But, at least in this particular commodity's case, at this particular time (post QE3 warm-fuzzies aside) supply/demand fundamentals are apparently still alive and working.

Speaking of China's woes in particular and of those of Asia's in general, the situation is not looking very promising. In fact, it now appears that the days of double-digit growth for many a nation in the region could be history.

The Asian Development Bank said yesterday that China, India, Indonesia, and Thailand –in other words, Emerging Asia- is likely to only report an economic expansion rate of about 6.1% this year and maybe 6.7% next year. Those numbers are barely above the levels of the crisis era of 2008-2009. How, then, is it realistic for certain commodity-bullish prognosticators to reassure us that "the best is yet to come" when it comes to the "insatiable" demand for "stuff" from this region of the globe? Just a question...

The situation is just a bit different in the US. Having entered the global slump first, the American economy (sluggishness and all) appears to also be making its way out of it first. Yesterday's September PMI reading (51.5%) appears to point to the fact that US manufacturing is "back on track" for at least the time being. Other ISM readings related to New Orders and to the Employment Index also fared very well yesterday.

We won't bring into discussion recent consumer spending numbers or certain stats about formerly "defunct" real estate markets (see: Phoenix, AZ) which have jumped 22% (!) higher over the past year. Okay, we did, but that's because several schools of economic thought firmly believe that the keys to US economic progress lie in consumer spending and the housing market. Current figures from those two vital sectors underscore the fact that the abject take on the US economy still manifest in too many financial publications is running on some very stale and scaremongering-flavored fumes, QE3 Fed accommodations notwithstanding. Such metrics contributed to the Dow and the S&P 500 being able to overcome the gloomy Chinese and European reports and stage advances on the session. At least in the case of the US, we might be able to stop using the shopworn "imminent recession" mantra.

We close today with one head-scratcher and with one offer for your scrap gold that...you can't refuse.

First, consider the Iranian rial. No doubt, you have read a plethora of gold-bullish reports over the past year about how the Iranian central bank has been "stacking" hefty amounts of bullion. We suppose the best question to ask about that putative hoarding spree at this unfortunate juncture for that country is: "To what avail?" Behold the staggering 40% plunge in the Iranian rial –over the past week (!). Western economists have diagnosed the neutron star-like implosion of the country's national currency as being the result of a combination of the government's mismanagement and Western sanctions aimed at halting Iran's apparently non-peaceful nuclear development program.

Wikipedia tells us that the purpose of a national gold reserve is to (among other important things) "secure a currency." Iran was recently thought to be holding just over 300 tonnes of gold in central bank reserves, placing it among the top twenty holders of such a hoard. Even if this were not to be the case, and the tally is closer to the original estimates of about 160 tonnes, Iran would still be among the world's top twenty-five holders of gold. So, then, the question that obviously comes to mind is: "Has that reserve of gold managed to avert the virtual collapse of the nation's national currency?" The answer, you already know.

Just for entertainment purposes, let's consider the Kingdom of Sweden. We recently (last commentary) reported that the land of Lutfisk (yummy) can now boast of a national currency (the Kroner) which threatens to replace the age-old Swiss franc as THE safe-haven 'fiat' money of the moment. Go figure. Sweden has a lot less gold than Iran. Somewhere short by 40 to 275 tonnes of what Iran might have. And yet, the Kronor is soaring, and is regarded as bullet-proof while the rial is being dumped by every individual holder still able to do so.

In other words, you (as a nation) may hold as much or as little gold as you might deem it is proper to, and nothing- and we mean NOTHING –will prevent the ascent to respected heights, or the descent into oblivion of your treasury's colorful banknotes. It is a matter –ultimately-of HOW you carry out the day-to-day task of running a nation, its economy, and its affairs. On that score, the current Iranian regime scores an F-minus. Ask the folks in the bazaars that are shutting down every hour on the hour, in Tehran. This story is not over.

Meanwhile, and not too far from Iran, Italy and the gold scrap-buying biz going on in that country provide the next topic for our coverage. As gold prices recently touched a record high in euro terms, so has the "interest" that certain "families" have shown in the "Cash-4-Gold" enterprise in what is known as (Lo Stivale) AKA "The Boot." There are official reports available which note that customs seizures are up 50 (fifty) percent (!) on the Italo-Swiss border as the gold sold by cash-starved Italians makes its (illegal) way towards Swiss refineries.

Gold (legally sourced or...otherwise) has become Italy's fastest growing export, courtesy of the "Cosa Nostra." Capisce? According to AFP News "Legal gold sales to Switzerland totalled 120 tonnes last year -- up from 73 tonnes in 2010 and 64 tonnes in 2009, with foundries built on the border having to work flat out to meet demand and almost daily truckloads crossing over." In so many words, Italy has literally become a gold mine. It would rank seventh in world output by this golden yardstick; just behind Peru and just ahead of Canada.

Mamma Mia! That's a lot-a-gold-ah! There are an estimated 28,000 (!) cash-for-gold shops extant in Italy but only a few hundred have registered with the Bank of Italy. It is believed that more than half of those shops are "Family" controlled. The scrap gold "beeznees" is worth at least 18 billion dollars. Did you think (for a Neapolitan or Palermo minute) that the "GoldFather" would remain a stranger to it? Just another facet of the legacy of current gold price.

Until next time, Arrivderci, but no Omerta

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