Poor Man's Gold Shows Poor Fundamentals

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Good Afternoon,

Gold prices meandered within a ten dollar channel on Monday but worked hard to maintain gains in the wake of once again record values in crude oil ($119.93) following a UK pipeline shutdown and an attack on oil facilities in Nigeria. Black gold is still showing an 82% gain over the past year, while gold is currently having difficulties maintaining a 30% gain over the same period. Investment funds have taken note of the fact and have been drifting out of bullion since it peaked near $1034 last month (see below). Demand from Dubai and India was on the lukewarm side, but it was better nonetheless than in the previous days. Locals we surveyed expect a bounce in offtake as May 7th approaches but see that overall demand remains lower than a year ago and buyers are still apprehensive about market volatility.

New York spot trading was ahead less than 1% at last check, quoted at $893.20 bid on this, the first day of the final week of what has been quite a turbulent month. Today's action consisted largely of some speculative positioning as there was no economic data release to take into account and as players geared up for a busy week of US statistics as well as the all-important Fed meeting. The dollar was drifting near 72.65 on the index and near 1.564 against the euro while crude oil was still showing a 40 cent gain at $118.93 per barrel. Silver was up 17 cents on the day, quoted at $17.01 while platinum rose $14 at $1971 and palladium fell $5 at $437 per ounce.

Platinum prices continue just under $2000 per ounce and although declines in sympathy with gold are possible, analysts see them as limited to the $1700/$1800 area as the metal's supplies continue to be tight and as a near half million ounce shortfall is still seen as the eventual tally for the current year. South African power issues remain a background supportive factor while buoyant automotive demand adds to the equation. London research group GFMS envisions the possibility that the noble metal may spike to $2400 later in the year.

Evidently, no such luck for silver at this juncture. The market's fundamentals are seen as less than auspicious, despite a lot of noise coming from casual observers trying to sell you newsletters. Mineweb reports this morning that:

"Investment money flooding into silver has overwhelmed poor fundamentals and helped it to outperform gold, but the tide could be turning for precious metals and the probability of large losses is rising. Silver's price falls in percentage terms are likely to dwarf those seen in gold, which some fund managers say has stronger supply/demand fundamentals.

"History shows that when you get a substantial correction in precious metals, silver falls more than gold ... It's a more volatile market and smaller in value terms," said Stephen Briggs, analyst at Societe Generale.

One big reason behind surging prices has been the tumbling dollar, making commodities priced in dollars cheaper for holders of other currencies. The weak dollar also prompts producers to raise prices to protect profit margins. Last week the dollar fell to record lows against the euro, to beyond $1.60, an event which has caused many to question whether further losses can be sustained and whether it has bottomed.

"The dollar is not going to keep on depreciating forever," Briggs said. He expects gold prices to average around $900 an ounce next year from $1,025 this year and silver to average $15.50 compared with $19.20.

Financial uncertainty, which has underpinned precious metals since last August is to some extent becoming less important to investors seeking the higher returns stocks and bonds offer. With a weakened case for holding precious metals, prices have started to slip. Spot gold is now around $893 an ounce compared with a record high of $1,030.80 on March 17 and silver at $17 from a 27-year high of $21.24. Goldman Sachs recently said it expects to see gold prices at $835 an ounce in 12 months and silver at around $15.50.

From the end of last year to March 17, silver prices surged by more than 40 percent, while gold was up more than 20 percent. Silver's heftier gains were built on investor flows.