CPM Smells a Bargain

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Selling pressure resumed in precious metals after Monday's NY close. Gold gave up its conquest of the $800 spot level and fell as low as $782.40 in overnight dealings before stabilizing near $790 early today. The dollar ignored negative financial news on Fannie and Freddie and continued to hover near 77.15 on the index while it traded at 1.469 against the euro. Crude oil eased to under $112 despite on-going problems in Pakistan, Afghanistan, a failed dummy-satellite launch by Iran, and the protracted Russo-Georgian conflict.

The dollar index recovered by about 7% following its spectacular decline of the past year, in the month since mid-July alone. The euro was unable to gain any traction this morning, despite a surprise rise in German investor confidence numbers for the month. Net long gold positions fell by another 33 thousand contracts last week, but are still ahead by over 130,000 vis a vis the shorts on Comex, leaving room for further declines -which some analysts see as touching not only $775 but possibly the $730 area as well.

Tuesday's New York session opened on the downside with gold losing $5.00 at $793.70 amid participant worries that the month thus far only recorded two gaining days in the metal. Outside explanations for gold's recent performance have been ranging from sinister conspiracies, to tacit IMF sales, to negative lease rates (never happened!) and such. Hardly any of the apologists have pointed a finger at index and hedge funds, at metals ETFs, and at deteriorating technicals. Gold may well be a religion to many, but there is not need to shroud its actions in DaVinci Code-flavoured mystery. It is but a market composed of buyers and sellers, currency attributes notwithstanding, and if the trend isn't your friend, it will surely be your enemy. Silver fell 11 cents on the open, starting the day at $12.92 per ounce. The significant drop of the day was in platinum however. The noble metal lost a bit more of its nobility by dropping $67 to $1310 per ounce, while its relative, palladium, fell $9 to $274 per ounce.

Some of the first recognitions of value type of analyses have started to make their way into the daylight. Following a 44% drop from its all-time highs, the price of platinum is now being regarded as quite a bargain. Mineweb's Tessa Kruger reports that Researchers CPM Group New York has taken the magnifying glass to this unique metal and has the following conclusions to offer to investors:

" Platinum is still a relatively attractive investment in the market as the price is set to increase to $2,200 in the first half of next year and to remain at high levels of around $2000- $1,900/ounce through the end of 2009 and 2010, says the CPM Group's commodities expert Jeffrey Christian.

Christian told Mineweb in an interview that the downward movement in the platinum price over the last few weeks was technically driven as new resources funds and hedge funds were simply selling because the platinum price had started to decline.

He said there were no macro economic reasons for the technical sellers' actions, nor were they acting on price fundamentals. The sellers of platinum were following a "gut feeling" and price charts that prompted them to sell when the price declined and to buy when the price increased.

Vehicle manufacturers also played a role in recent platinum price movements as they bought PGMs to add to metal inventories in the first quarter when the South African power crisis erupted, but either sold or lived off their inventories in the second quarter as they fought for survival.

However, Christian said he has seen new buying in the market over the last two weeks by investors driven by platinum's long-term fundamentals. He believes the platinum market is currently tighter compared to nine months ago as the South African power crisis in the fist quarter of the year saw producers and refineries selling off inventories.

Lower prices also dampen selling in the physical market, while the auto industry's use of platinum has probably decreased by 2% and not by 10% as commonly believed. And while South African producers are pushing as much concentrate as possible through their smelters to make up for losses, this would only cause a short-term surge in supply.

As a result, Christian expects the platinum price that has fallen 39% off highs to below $1400/ounce, to reach new highs again over the next three quarters, rising through the first half of next year, before coming off to still high levels in the second half.

Christian believes the price will also remain high in the longer term as power problems in South Africa, that will take years to solve, will stunt growth in platinum production.

"Platinum is looking attractive compared to other investments such as equities, bonds and cash," he said.

"Institutional investors are invested in cash right now, while their other investments are low. Many of them have been in platinum since the price soared from $700/ounce and are still holding. The issue is that if they take profits in platinum, they have to reinvest the money elsewhere and there are few attractive investments at the moment."

The fact that the world economy is awash in cash could bode well for platinum companies as there is a constant search for good investment commodities. Mining companies offer the additional attraction of often paying dividends to shareholders and if the price is sustained company profits should surge.

However, a factor that has gained importance over the past few years in determining the platinum price was the future price expectations of investment holders that lead them to either sell, add to or hold the metal. This comes as there has been a steady increase in resource funds, institutional investors and individuals holding platinum since 2004."

A drop of corresponding magnitude in gold would bring the yellow metal to the $580 area but silver would only have to give up another dollar and a half to reach such a depth in correction. Palladium, on the other hand fulfilled that target when it reached $305 and is now at $275 per ounce.

The quest for liquidity will keep the lid on prices for the moment, and the $775 mark reached last week still presents a compelling short-term target for sellers of gold. Watch the macro-scene but focus on the dollar as it still carries the conductor's baton.

Happy Trading.