Good Morning,

Follow-through buying in precious and not-so-precious metals continued overnight, as the confidence inspired by yesterday's breach of technical levels emboldened additional latecomers to the party. Early action this morning appeared no different, as gold continued towards a test of the wills up near $990.00 and silver tried the same towards the $16 level. The US dollar was 0.27 lower on the index, quoted at 78.11 after having lost some ground against the euro earlier. ECB rate decision time is upon us, but no one expects a change in posture.

Officials from Mr. Geither to Mr. Trichet appear fairly firm in their 'steady-as-she-goes' stance. Read: things are looking up, but not quite enough to start taking the baby bottle away from the neonate (recovery) just yet. Read: low interest rate environment to continue into 2010.

New York spot metals dealings opened with a $6.80 gain in gold, which was quoted at $985.40 per ounce. Silver added 36 cents to start the session at $15.74 per ounce. Recent holdouts, platinum and palladium joined the party and rose $10.00 and 5.00 respectively. The former was seen at $1240.00 an ounce, while the latter opened at $290 per troy ounce this morning. Players will be watching for signs of emerging profit-taking following the breathless rally observed yesterday. More definition could be provided to the trading scene by the release of US labour statistics today and tomorrow. The gateway to four digits remains obscured by the $980/990 area and passage to higher ground is not baked into the equation (see Fitch Rating analysis below).

The biggest rally in Chinese stocks in half a year (the SC Index gained 4.8%) helped metals and financials issues gain in value and boosted crude oil prices by more than $1.25 in early Thursday trade. The Chinese market roller-coaster appears to have no intentions of being shut down just to prevent whiplash among its many riders.

After rallying 103 percent since last November, the index lost 22 percent last month. Now, we get 5 percent comebacks in a single day. Wheee! Almost all of the grossly uneven sine wave that the Shanghai index has traced over the course of the near-term has been determined by official posturing as regards the availability of credit and/or possible support for the markets. The latest twist involves a positive reading of the tea leaves by investors, as China's national day approaches on Oct. 1st.

Back to a quick overview of fundamentals and analyst observations. Yes, even in the midst of this long-awaited upward pop in prices, there are cautionary signs aplenty for latecomers and other uni-dimensional speculators to heed.

First, the statistical finding that India's 2009 gold imports may well end up being off by two-thirds. The world's largest gold consumer appears set to only bring in about 250 tonnes of the shiny stuff this year. The usual suspect is first cited: too high a price in the eyes of local would-be buyers. To that, we can add poor rupee values, and bad weather -as in not enough rain to allow for bountiful crops. - This, according to Mining Weekly.com

Also on the gold side of matters, Fitch Ratings sees a metal that will still remain confined within a certain range, current developments notwithstanding:

The price of gold is not expected to move too much in the short term, at least until the next real shift in global markets, Fitch Ratings said on Wednesday. In a report on the outlook for the yellow metal, Fitch analysts predict that, while the gold price remains near historic highs, as a result of investors seeking safety from more volatile assets, prices will likely remain range-bound in the short term.

The precious metal has largely hovered around the $920/oz to $965/oz range over the last three months, although it was a bit stronger on Wednesday afternoon, at $977/oz, buoyed by weaker equity markets and economic concerns. Of course, waves of loss of confidence in the economy or weakening of the dollar will continue to send investors scuttling back to the safety of gold, which seemed to be the case on Wednesday.

But we don't expect it to move around much from where it's currently been trading, until 'the next new thing' happens, Fitch Ratings director Monica Bonar said in an interview from New York. And that could be until markets recover enough that people really start saying: 'Why have I got stuck in gold bars when I can capture upside in the debt market, or the equity market, or the housing market?'.

While gold exchange-traded funds saw record inflows during the first quarter of the year, activity has since slowed, with the funds themselves reporting flat and even sometimes slightly lower gold holdings. It does looks like investors are already nipping at other asset classes, Bonar commented.

And if the inflation expectations that have helped underpin investment demand for gold wane in the short term, this would also back the case for a 'pause' in overall demand.

In the longer term, Fitch views investment demand as robust and expects that it should support relatively high prices over an extended period, first supported by a flight to quality, then as a currency hedge and finally, when the cycle turns, as a store of wealth in the emerging markets, according to the report published on Wednesday.

As can be expected in a high-price environment, jewellery and industrial gold demand remain subdued, and are expected to stay that way through the down cycle. On the supply side, the stronger gold prices seen this year have resulted in high levels of scrap coming onto the market, particularly in the first quarter.

Most of the 'distressed' selling of gold in so-called Western markets (Europe and North America) has likely peaked by now, while consumers in Asian, the Middle East and Latin America, or emerging markets, will probably remain price sensitive - selling scrap when prices appear high in local currency and buying jewelry, coins or bars when prices are below expectations, Bonar said.

From a supply point of view, central bank gold sales are not expected to play any role at all. So, its really a question of, will the people with money in gold leave it there, on the western side, or, on the eastern side, will there be more people selling at high prices? she commented.

Another aspect to consider is that any improvements in global economies and financial markets would likely be accompanied by strong growth in emerging economies. This means that the potential decline in investment demand, as less risk-averse investors move their money into other asset classes, would probably be partly offset by higher physical demand from emerging market consumers, who are in a better position to accumulate gold.

The precious metal traded as low as $250/oz in early 2001, but was catapulted to an all-time peak of $1 030,80/oz in March last year, as investors sought safe haven from riskier assets. The gold price ventured back into four-digit territory again in February this year, before declining again.

Second, we have the uncertainty about price prospects in platinum-group sector. This, after the US auto-scrapping scheme has come to a halt, and is now being followed by the cessation of a similar programme in Germany. Analysts at Mineweb believe that scrap supplies of the noble metals are inevitably going to rise -and rise significantly- after so many 'clunkers' have been flattened and their entrails recycled. Between them, the US and Germany have thus far taken in nearly 3 million older cars - however, many of those were indeed fitted with pgm-based catalysts. The firm does expect a better recovery in palladium prices in 2010.

Best Regards,

Jon Nadler
Senior Analyst
 
Kitco Metals Inc.
North America