Roil in Oil

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Gold's Thursday gains stuck, for a change. In fact, the yellow metal had the kind of day we wish would be seen more often; a day when it rose despite collapsing oil, a rising dollar, and continued sell-offs in stocks. While gold had a good day, the other precious metals wilted on economic concerns. New York spot gold trading opened at, and maintained higher levels throughout the session. Although gains were capped at just above $750 and the upward push was likely fund-driven, the metal managed to pull off a de-couple today. Hope it lasts. Silver dipped under $9 again but was last seen only down 17 cents at $9.02. Platinum fell $35 to $773 and palladium lost $6 to $175 per ounce. Crude oil cratered massively, falling to $48.50 for the first time in three years, while the dollar rose to above 88 on the index, and the Dow plumbed new depths, falling 250 points, to the 7750 area.

Investor focus today was to remain on the performance of Citi, but the news that JP Morgan will let 3,000 go from IB and freeze other salaries overtook the agenda. The fate of the Big-but-Getting-Smaller Three, continued to hang in the balance as several Democratic leaders asked them for concrete spending plans on the begged-for $25 billion. They could not come up with an appropriate reply, and were sent home to do more homework and try again in December. Maybe they will just expire in the interim, and do everyone a favor. The scary credit contagion now also appears to be spreading to the commercial real estate niche. US initial jobless claims rose by 27,000 souls out of work. Continuing claims added 109,000 unlucky workers, and hovered at just above 4 million. Not the kind of news amalgam that makes for a better day in the Dow. And, it did not.

The overnight market hours were chock-full of more of the same kind of news. Unwelcome, but evidently necessary news. The Swiss National Bank took the scalpel out once more and cut rates by a full percentage point. Russian PM Putin delivered a "we will do whatever it takes" speech on the ruble and the economy this morning. Apparently, it was effective enough to have the stock market halt trading for an hour, after dropping 9%. The rest of the growing list of "hit parade" announcements reads as follows: Tokyo stocks plunge 570 points, GM walks away from Congress empty-handed, European stocks drop again, Air France profit down 96%, jobs cuts at: Rolls-Royce, Boeing, Isuzu, Mazda, Peugeot, Sanvik, Deutsche Bank, Intevac, Akamai, Sara Lee, and at probably another half dozen firms we missed. On that note...

Wait, the howler of the day came from Somalia, where local drug dealers disguised as pirates suddenly got smarter and instead of demanding silly sums like $10K for ransom on hijacked ships, they have taken a page from Dr. Evil and are now asking $25 million. They think that is a bargain, by the way. Why?

``What we want from this ship is only 25 million dollars because we always charge according to the quality of the ship and the value of the product.'' (!!!)

Seriously, they said that. Oh, and note that they want dollars, not euros, yen, rubles, riyals, or pounds. Couldn't they have demanded gold? Really.

On the research radar this week, the October report on gold and other metals, from London-based Fortis/VM Group. Here are highlights of their findings:

- Global gold hedging fell 2.3 Moz in Q3 2008, taking existing hedging down to just 16.5 Moz, according to the Fortis Hedging and Financial Gold Report. However dehedging rates are forecast to slow dramatically.

- Indian gold imports were 27% lower year-on-year in October, according to the Bombay Bullion Association, recording 44t compared with 60t a year earlier.

- October was a very disappointing month for gold bulls, as the price briefly flirted with $900/oz on 8th and 10th October, but then collapsed spectacularly, hitting its lowest in over a year (London afternoon fix) of $712.50/oz on the 12th. It then managed a small rally back up to $730.75/oz by month-end, and $740-50/oz in early November. Trading however was very volatile.

Why the sudden fall? While it's often debated whether gold is a commodity or a currency, given that almost every commodity saw its price collapse in October, and in the same month almost all currencies (the yen and the yuan being notable exceptions) saw their value fall against the US dollar, perhaps for once it is an academic exercise.

Adding to gold's problems were clear indications that the financial aspect of the current crisis was easing (thanks to major government intervention) . e.g. the TED spread, which shows the difference between US Libor and Treasury bills of the same maturity, peaked on the 10th October at 4.57%, and by 6th November had fallen to 2.08%. The price of gold in euros followed the TED spread quite closely during October. This kind of justification for gold's performance of course will not wash for investors who look at it in dollars, and who thought . and perhaps were led to think . that this was exactly the kind of crisis in which gold would outperform not just some currencies, but all currencies, and not just some assets, but all assets.

Maybe it still will. The rate of physical gold buying has been impressive, and supply remains constrained. Dehedging continues to fade and central bank sales are very weak. The Central Bank Gold Agreement (CBGA) signatories, who need to sell on average 8.6t/week to hit their 500t/year limit, managed 7.8t and 7.6t in the first two weeks of the new CBGA year (from 27th September) but almost nothing (0.05t and 0.1t) in the following two weeks, and a net purchase of 0.05t in week five.

Perhaps when institutional investors, such as hedge funds, have stopped liquidating their holdings, the price will gain. But it needs to do so soon to be convincing. Gold is getting almost impossible to call, with daily price moves of $20/oz no longer rare. We.re mildly bullish, as the dollar's rally is likely to run out of steam. But when might that be? Short-term London PM fix projections: $730/oz-$820/oz."