The final week of what has been a tumultuous (to say the least) trading month opened on a downward-trending note for certain precious metals this morning. The mere fact that the market did open for business on Monday was a welcome relief to many who had feared that hurricane Irene was going to leave much of lower Manhattan looking like just another body of water punctuated by high-rise islands. Most markets are expected to try to regain some composure this week as the (market and actual) storms that Jackson Hole and Irene represented have now passed and participants can focus on options expiry and the upcoming long holiday weekend.

Economic data released this morning shows Americans having spent their money at a 0.8% higher rate in July even as incomes only gained 0.3% on the month. The inflation-adjusted personal consumption metric gained 0.5% in July. Something else that also gained last month was inflation; it climbed by 0.4% as based on the reading of the personal consumption expenditure index. Core PCE inflation readings came in at the 1.6% per annum mark. Thus far, US consumers remain hesitant to single-handedly kick-start the sputtering economy as they keep a wary eye on the stubbornness with which the unemployment level remains above the 9% mark.

Later this week we get a plethora of other important economic news heading our way. Chief among them is not a particular statistic, but the reading of the Fed's meeting minutes; you know, the one gathering after which the possibility of keeping rates near zero until sometime in 2013 was mentioned for the first time. For the time being, at least one Fed official, Mr. Bullard, sees that conditions in the US economy are not at a juncture where the Fed needs to ease further. No easing on the mind of the PBOC over in China, at all. The Chinese central bank made good on its promise to turn it up a notch on the tightening front as it broadened banks' reserve requirements to include margin deposits from September 5th forward.

Friday's jobs report will be a 'biggie' as well, as some economists fear that there might have been an outright decline in employment in the USA. Add the ISM report on the state of manufacturing activity in America, and you have a complete picture of what's in the list of 'coming attractions' for traders to ponder.

Spot gold dealings started the Monday trading session with a drop of $15.70 per ounce at the $1,813.40 level on the bid-side. Following Friday's rally that was largely based on anticipation that there is more no-cost money coming in the pipeline courtesy of the Fed the market finished the trading week on an optimistic note despite the 3% give-up in value that gold tallied overall on the period.

Some of gold's safe-haven attributes came into question last week when nearly $215 of value was shaved from its price per ounce tag in a matter of hours (48 or so) at one point. Some technicians noted that Thursday's as well as Friday's advances in price took place against a background of declining volumes; a not-so-comforting signal.

Others, such as Bullish Review of Commodities Insiders' publisher Steve Briese pointed to the market's recent positioning and remarked that the long side of the vast futures and options market has been in weak hands [while] the net short position of traders whose business involves dealing in actual gold has been at near-record levels over the past few weeks. In other words, the smart money, while not always right, has been voting with its dollars that gold will fall. It has mainly been the speculators who have been voting for a continued price rise. 

Meanwhile, certain firms among gold's recent promoters also came under (regulatory) questioning as it turned out that their efforts were geared mainly at separating unwary folks from their life savings. The words Florida and gold scam just do not appear to be in a position to be separated from one another.

CFTC reports released on Friday indicate that net speculative length in gold has ebbed to a point where some may now legitimately question the potential for further sizeable upside in the metal. While net longs have seen a gain in silver, the white metal remains in a fairly precarious position if/when gold sells off strongly (as was the case this morning). Analysts at Standard Bank (SA) note that platinum's net speculative length continued to increase last week and is currently at its second-largest level of 2011 to date.

Over in palladium, the specs on the long side remained relatively weak. The noble metal appeared to ride out last week's gold price storm quite decently. As previously opined, the PGMs present smaller levels of downside risk and could be the niche from which the next sizeable gains in precious metals might well originate, as they are in a superior supply/demand fundamentals' position.

Some of the same aforementioned safe-haven attributes likely also came into question this morning as the yellow metal recorded losses on the order of more than $50 within the first couple of hours of trading. Traders in New York attributed some of the decline as having been prompted by an unwinding in the Fed-related betting on easing and some of it as the result of funds rotating money into rising equities (Dow up 170) and crude oil (WTI up $1.58 to near $87 pbbl.).

The fact that the next Fed meeting will entail two full-day sessions is being seen by some as a quest by Mr. Bernanke to build consensus within his team prior to just pulling the QE lever in automatic fashion. Silver also lost more than 2% in mid-morning dealings and brought the maintenance of the $40 level into question once again.

Given the expansion in volatility traders now have to live with increased margin requirements courtesy of the CME while retail investors need to ponder the widening gap between low/high forecasts being made by market observers. The latest tally of such projections covers a price spectrum that extends from $1,480 up to 2,100 -and all of them cover the next four months (!).

For the moment, for the bulls, the $1,831 area represents a pivot point/ jumping off point to keep an eye upon, but a more important demarcation line for the bears rests down at near the $1,700 level -which, if breached could usher in a slide whose target centers around the $1,480-$1495 value zone. Some of such a retreat needs to be predicated on a resurging dollar. Yes, that same supposedly dead-and-by-now-gone greenback. Talking to the South China Morning Post this morning, Aegis Capital's CIO Stanley Crouch envisions the US dollar outperforming its counterparts in months to come.

Aegis' investment officer therefore takes a very defensive stance on gold, cautioning that it might still offer the risk of a 30% drop going ahead. Mr. Crouch adds that The dollar will be the last man standing because everything else has relative difficulty. If we have the dollar gain its strength as the reserve currency over the years, it [gold] could go lower than that. Aegis Capital manages over $2 billion in investment funds.

No problems in (funding or) finding a lot more gold in Australia's mines, however. Record prices (and margins) have prompted record efforts by miners Down Under to dig up more yellow metal. Gold output by the planet's number two producer has climbed by 10% to a total of 270 tonnes for the fiscal 2010/2011 period. How unsurprising. Yet, also, how worrisome, potentially.

The Sydney Morning Herald reports that [gold] miners are starting to announce bonanza profits. Newcrest Mining, Australia's largest gold miner, recently posted a record full-year profit, as did OZ Minerals. When oil hit its peak in 2008, energy firms announced similar sized results. More money is now going into gold exploration than any other commodity. At this rate, China's miners might wish to be looking in the rearview mirror a bit more often...going forward.

Silver commenced trading this morning with a decline of 52 cents per ounce and a bid-side quote at $40.98 in New York. The book-end figures to watch in the white metal at this juncture are the $44.28 mark on the upper end and the $36.96 level on the lower one. Inside of that relatively wide value zone we have the $39 up to $42 channel to meander within and provide short-term excitement to the specs.

Platinum and palladium diverged a tad in early dealings this morning as the former added $3 to $5 to rise to near the $1,835 level but the latter opened flat and then drifted lower by $1 (to the $755 level) per ounce. No change was reported in rhodium; the noble metal was once again quoted at the $1,875.00 per ounce bid-side level.

No change there, but plenty of change elsewhere to enjoy or endure (as the case may be).

Until tomorrow,

Jon Nadler Senior Metals Analyst 

Kitco Metals Inc. North America

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