The Gold and Silver Report - Punch-Drunk

  on March 01 2012 11:26 AM

Precious metals opened with gains this morning as market participants were hard at work trying to repair at least part of the substantial damage that was incurred on Wednesday. A knee-jerk reaction was to be expected after such a rout, but there is still apprehension in the pits related to margin calls, a change in open interest, and the upcoming slow seasonal period in gold (extending up to May/June). Ironically, the plunge in gold came on the same day that Mr. Ahmadinejad's regime welcomed payments for black gold in...gold. Oops. To be continued...

Standard Bank (SA) analyst who track gold physical flows point out that the physical market appear to be reluctant to load up on gold above $1,700 and that it seems more interested in acquiring it at prices nearer $1,600 to $1,650 the ounce. Spot gold moved $13 higher to open near $1,710 the ounce while silver advanced 20 cents to the $34.84 bid level. Platinum rose $12 to start at $1,687 and traded at a discount of only $30 to gold at this point. Palladium was virtually unchanged at $701 per ounce.

EW trend analysis indicates that so long as gold does not overtake the $1,791 mark (an event which might usher in another push to higher ground) the metal is poised to stair-step towards the $1,300 level. Silver's sharp reversal could find support on the $30.50 to $31.83 zone and then try again for the near-$38 area. On the other hand a convincing breach of $30.50 would point to $26 as a potential price target.

The noble metals remained on 'alert' following a 'shot across the bow' to the industry by Zimbabwe Minister Saviour Kasukuwere who warned that he will go ahead with a takeover of that country's largest platinum mine -Zimplats- unless its owners comply with orders to hand over more controlling stakes in the firm to black interests. In 2011, Zimplats ceded 10% of its holdings to a local community trust but Mr. Kasukuwere's government has ordered another 30% to be handed over by the middle of this month. The PGM saga rolls on...

Background market metrics had the US dollar up a tad at 78.85 on the index and crude oil inching 39 cents higher to $107.46 per barrel. Almost all was quiet on the European front as market watchers were trying to digest the Bundesbank's frontal attack on the ECB on the matter of the latter's loans intended to address the region's financial crisis.

The epic sell-off in gold (5% lost in one session) that took place yesterday has now been computed as the worst of its kind in three years. In fact, gold ended the month of February with a net loss of 2.5% after having been on course for a second month of gains up to the very opening hour on Wednesday. We won't mention the near-$4 range that was manifest in silver during the same stormy session, but, suffice it to say, the 7% cratering in the white metal was equally headline-worthy and pocketbook-damaging.

Trading volume in both metals mushroomed amid trading room chatter that indicated that a seller of as much as one million ounces (31 metric tonnes!) of gold had decided that Mr. Bernanke's Congressional testimony was tantamount to a curtain call on easy money and that remaining overloaded in the yellow metal is probably not the wisest course of action going forward. The slightest hint that ultra-cheap money will cease to be on offer forever has a way of unnerving the crowd that has become more addicted to it than Ms. Lindsay Lohan ever was to certain...substances.

In a nutshell, here is what Mr. Bernanke did not say in front of a silver coin-waving Ron Paul (who still takes his cues on monetary policy from the Hayek school of thought) on Wednesday (he let Philly Fed President Charles Plosser do the spelling out for him): The Federal Reserve's statement that it plans to hold rates steady until late 2014 if economic conditions evolve as expected doesn't mean very much. At the end of the day, we will change policy when the economy tells us to change policy. The economy is doing a lot better than it was last summer.

Mr. Plosser then added that: The Fed may have to change course sooner than a lot of people expect, and will be sooner than 2014, barring a catastrophe. Right now, I see the economy that is going to be gradually firming. If the performance on employment and the economy continue to improve as we've seen them over the last six months, if they proceed for another six months, I think that would be pretty good cause for thinking maybe we need to ease off on the gas pedal a little bit.  'Nuff said.

There is in fact a bit of a disconnect present in all of this sentiment and perception-based action that we witnessed yesterday. When one looks at what the Fed Chairman did say, the words he used should have actually emboldened the trading crowd to continue to push gold, silver, oil, etc. to higher ground:

At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives. We have to assume that the absence of the words for x more years or forever after the word policy in the above sentence is what did the trick for some players.

The America/Dollar/System Will Fail Any Minute Now team was also handed another heavy blow yesterday when on the back of continually improving US economic metrics Mr. Bernanke did not appear to offer more indefinite servings from the punchbowl of liquidity that has engendered the mega-rallies in many assets (esp. gold and silver) during the past three years.

MiningWatch Canada alleges that Some companies dump their mining wastes into the oceans of other countries, even though their home countries have bans or restrictions against it. We found that of the world's largest mining companies, only one has policies against dumping in rivers and oceans, and none against dumping in lakes.

Until tomorrow,

Jon Nadler

Senior Metals Analyst Kitco Metals Inc. North America

Blog: http://www.kitco.com/ind/index.html#nadler

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