Good Day,

Gold relinquished the $1,000 level in the hours prior to yesterday afternoon's final tick, but it was a slow, stubborn retreat. Such action persisted during the nighttime hours, fueled by additional dollar strength and profit-taking in crude oil. Today's G-7 meeting in Istanbul might set the stage for more dollar-focused talks among financial officials. Certainly, if one parses yesterday's mini-jawboning from Sweden, the message of support for Tim Geithner's pro strong dollar stance was warmly welcomed.

Finance ministers and VIPs from Holland to Belgium, and France to the ECB all underscored the need for currency market stability and the importance of a strong dollar to the international financial system. Apparently, Mr. Geithner assuaged recent worries about the slide in the US currency - at least to this small group. In parallel, the head of the IMF, Dominique Strauss-Kahn, reiterated the fact that his institution has a mandate to become the lender of last resort to the world's central banks.

More specifically, the IMF could thwart the tilts that have developed in foreign exchange markets (read: shorting the dollar into the ground) and utilize pooled reserves (or other 'weapons' at its disposal?) of countries running surpluses to combat such speculative movements. The statements, taken as a whole, constituted enough of a yellow flag for speculators to let up on the dollar-selling gas pedal and apply the brakes on gold's most recent attempt to solidify its presence at levels above the four-digit mark.

New York spot gold dealings opened their Friday session in the immediate sub-$1K trading zone of $995-$999 even as the dollar made only small progress on the trade-weighted index, rising 0.07 to 77.23 at last check. Spot gold bid was last seen at $997.70 per ounce, showing a $2.40 drop. Black gold lost a bit over a dollar, easing to $69.71 - itself having difficulty parting with a key number - $70 pbbl. Overnight action in the Nikkei pretty much mirrored yesterday's hefty slide in the Dow, and showed a 246-point loss when it was all over.

Silver started the day with a 15-cent loss at $16.20 per ounce. Platinum fell $9 to $1270.00 per ounce, and palladium managed a $1 climb, rising to $290.00 an ounce. A stunning 45% drop in August GM sales (other nameplates fared better but still showed sizeable declines) underscored the transitional nature of the cash-for-clunkers tsunami. The hangover for car dealers may last well into the year's home stretch. Or, beyond.

Another data-laden day awaits the speculative crowd. Key jobs numbers are due to hit the wires this morning, and expectations are that if non-farm payrolls show a larger than the anticipated 180,000 positions lost in the US economy, the dollar's safe haven appeal could receive a nitro boost for the day. Such figures are seen as among the key indicators of the state of health of the US economic recovery process.

The numbers are now in, and apprehensions were indeed, warranted. The US labour market lost 263,000 jobs last month - the 21st consecutive month of such bloodletting. 15.1 million US workers are out of a job. So much for today's risk appetite in oil and gold and other riskier assets favoured by the specs.

More traders are beginning to see gold's mini-rallies as profit-taking opportunities, but the largest slice of positions (still a staggering and record high 237,000 or so longs hanging on -especially of the fund variety) have not cashed in any significant number of chips. The getting has been good, but profits are a powerful opiate. Thus, the vigorous attempts to push higher could still stay with us.

But, is all well in the fundamental picture for gold? No, and we have attempted to bring such developments to or audience even as the price was being pushed higher by hungry hedge funds. If it were an ideal situation, where supply was falling, scrap was tight, banks were falling all over themselves to buy, and individuals formed blockbuster lines around coin dealer shops, you could count us among the first lines of offense in the bull camp. Here is a summary of the World Gold Council's tally on the gold market for Q2 - released just hours ago. Numbers do not lie. Newsletter vendors, on the other hand...

World gold demand fell 9 percent in the second quarter to 719.5 tonnes as rising prices and the impact of the global recession curbed jewellery consumption, the World Gold Council said on Wednesday. However, a sharp rise in identifiable investment demand to 222.4 tonnes from 151.9 tonnes a year earlier limited the decline, with demand for gold-backed exchange-traded funds rising sharply year-on-year.

The global economic downturn has certainly had a major impact on the purchasing power of gold consumers, as have high local prices and dollar volatility, said WGC chief executive Aram Shishmanian. However, he added: Investment demand in particular witnessed a strong quarter, and we believe this indicates a growing recognition of gold as an important and independent asset class.

ETF inflows slipped to 56.7 tonnes in the second quarter from a record 465.10 tonnes in the first three months of the year, but were still well ahead of last year's second-quarter inflows of just 4 tonnes. Net retail investment -- which covers small investment products such as bars and coins -- climbed 12 percent year-on-year to 165.7 tonnes.

Jewellery demand fell 22 percent year-on-year in the second quarter to 404.1 tonnes from 517.8 tonnes previously. Demand from India, traditionally the world's biggest gold consumer, slid 31 percent to 88.0 tonnes from 175.1 tonnes. The local gold price hovered at near record highs during the quarter, and the domestic economy remained under pressure from the global recession, the WGC noted in its report.

However, China, the second largest consumer last year, reported a 6 percent rise in jewellery sales to 72.5 tonnes, with sales in Greater China -- which includes Hong Kong and Taiwan -- up 9 percent to 9,964 tonnes. On the supply side, central banks turned into net purchasers of gold, the WGC said, with 14 tonnes of gold bought by the official sector in the quarter, against net sales of 69 tonnes in the same quarter last year.

Net sales in the first half of the year totalled 38.7 tonnes, it said, the lowest level since the first half of 1997. Central banks outside the Central Bank Gold Agreement have been net purchasers since the second half of 2006 and gross purchases of almost 30 tonnes were recorded by central banks outside the CBGA during Q2 2009, the WGC said.

Although confidentiality issues prevents a detailed dissection of the numbers, it is worth noting that these purchases comprise modest net additions in a number of countries, rather than large purchases by just one or two countries. Elsewhere scrap supply eased to 334 tonnes in the second quarter from a record 566 tonnes in the first quarter, but was up 21 percent from last year's 276 tonnes.

Overall world gold supply was up 14 percent year-on-year to 927 tonnes from 812 tonnes, the WGC said.

Dissect the above any way you like, but the conclusions are inescapable. Namely, that robust though investment demand was on the quarter, it only helped mitigate the overall contraction in demand. The crisis conditions the world witnessed in Q1 resulted in an ETF gold feeding-frenzy that would have really done the trick for $1200 or higher gold. Such appetite slumped in stunning fashion during Q2. A fall from 465 tonnes to but 57 tonnes is hardly a 'slip' - in demand. Nine hundred tonnes of scrap gold in six months, is twice the amount the market absorbs in a 'normal' full year.

Fourteen net tonnes of official sector purchases is most welcome, but is not a sea-change in central bank attitudes. A 113 tonne slump in jewellery demand is hardly offset by a 70 tonne increase in investment demand. A 115 tonne increase in world gold supply does not go unnoticed, either. And these are the conditions that one starry-eyed perma-bull at the Toronto World Resource Investment Conference last weekend called as 'the best he ever has seen.' Aha. These are the same numbers that this writer called 'poor fundamentals' and raised eyebrows with.

Little wonder then, that we keep running into firms and analysts who keep raising fundamental (excuse the pun) questions about where we have been, and where we are going in this market. A full year after the sky officially fell. Another Canadian firm, another report. Yes, you need to read it. Especially if you live in this country:

Not all that glitters is gold. There are a number of reasons why you should invest in gold, but advisors need to be wary of the meteoric price of the metal, which could be the result of over-hype.

According to a report recently issued by Windsor-based Dan Hallett & Associates, gold investors need to be aware that, potentially, much of the demand for gold is being driven by the financial markets rather than substantial shifts in supply and demand. Gold has a unique position with an almost 1:1 inverse correlation with the U.S. dollar, so institutions and retail investors alike have loaded into the asset class for a number of diversification reasons. According to Dan Hallett,CEO of the firm and the author of the report, this does not necessarily make gold a great investment from a valuation perspective.

If you're buying gold today, (at around $1,000 an ounce) you have to have some view at least in broad terms about how far the commodity is going to go above that, he says. One of the risks that you run, particularly with a popular hot asset class, is valuation risk at the time you buy. You're reasons for investing in gold could be well thought out but if you're buying at a very high price, you're going to suffer some downside.

Hallet says data from the World Gold Council, an industry that tracks gold usage, shows more than a doubling in demand from investment instruments like exchange traded funds (ETFs gold during the second quarter of 2009. Meanwhile there have been actual decreases in some physical demand channels, like jewelry demand. Subsequently, Hallet points out Canadian investors in un-hedged bullion products have seen nearly a 50% diminishment of returns, due the drop in the U.S. dollar versus the Canadian dollar.

True, buying gold at the height of fear last year would have worked well, but a falling U.S. dollar would have clipped gains. Buying stocks (as we advised) has worked out much better. So, we present this analysis to warn of the irrational trends we are noticing that could disappoint today's gold buyers, Hallet says. Hallet also points out that investors may not be willing to stomach the volatility that gold investing has historically exhibited. Back in March he conducted a study that looked at gold prices over the last four decades.

I looked at gold in the context of why people recommend it. One is as an inflation hedge, another is to diversify portfolios and a third reason is to have it as kind of disaster protection portfolio insurance, he says. I found that it delivered on all three of those goals, but it did so in a very volatile fashion. You're looking at 19% to 20% a year in annualized volatility. That is well above what you'll get with most stock markets.

 

P.S. Off to London - another week, another conference. We will report from the Terrapinn Commodities Week forum - to the best of our ability, and as the time differentials permit. Have a pleasant weekend.