Precious metals prices opened mixed on Wednesday with gold rising while silver, platinum and palladium staged declines. Spot gold was quoted at $1,797 per ounce, up about $12 while silver fell 2 cents to the $34.88 bid level per ounce. A $6 loss was noted in platinum (quoted at $1,651) while palladium moved $5 lower to reach $663 per troy ounce. Rhodium remained static at $1,675 per ounce on the bid-side.
The noble metal palladium (still our favorite medium-term play) partially benefited from recent robust GM and Toyota car sales figures coming out of China and partially from the replay of the story that Russia's state-owned palladium reserves are running out. In late October a Ministry of Finance official told the media that 2011 is likely to be the last year during which Russia will make any substantial palladium deliveries from its state-run Gokhran depository.
The size of the Russia's palladium stockpile has always been kept secret. Our good friend, Marketwatch's Laura Mandaro interviewed Anton Berlin of Norilsk Nickel about palladium's market fundamentals and the current situation with Russia's inventory. Mr. Berlin covered recent supply and demand facts as well as some of the many interesting applications that this unique metal is sought for. The conclusion is that palladium is either already in a deficit situation or shortly headed into one and that its price prospects are possibly brighter than those of gold or silver, going forward.
Speaking of well-kept secrets, something else that folks cannot get an official handle on, is the location of Germany's gold reserves. Don't bother with your Near Me app; the Bundesbank has not placed any little yellow pins on the world map to let you know where its billions in bullion are stashed. The subject of Germany's 3.401 tonnes of yellow metal was recently raised at European debt crisis meetings and some (France) appear to be pressuring the country to 'mobilize' part of the hoard to help with the fast-deteriorating situation. German officials fired back, saying that its gold reserves (second largest in the world after the USA's) cannot/will not be part of any such discussions.
On the other hand -unwillingness to disclose the address (US or German) of the bullion notwithstanding- the German central bank fired a huge hole into the gold conspiracy camp's listing ship when it categorically stated that no [German] gold is on loan and it also implied that albeit a large share of the country's reserves are indeed on German soil, a [potentially larger] portion is also very likely domiciled in New York, in London, and in Paris for cost, security, and liquidity reasons.
More than sixty global central banks are thought to keep gold reserves in New York, so Germany also keeping some bars there should not come as a surprise to anyone, certainly not when one considers the fact that the country actively sought out that storage location when the threat of the Soviet Union making a grab for it was very real in the 1950s and 1960s. As recently as 2004 the Bundesbank's chairman Hans-Helmut Kotz indicated that the bulk of his country's gold holdings were still parked with the FRB in New York.
In the market background this morning, the US dollar gained a sizeable amount of ground on the trade-weighted index jumping to the 77.60 (up 1.22%) level as the euro collapsed to$1.36 based the twists and turns in the European crisis. Crude oil traded $2.15 lower at $94.66 per barrel while copper lost 2.20% this morning. Dow futures were on the defensive as investors on this side of the ocean eyed Italy for the latest developments in the seemingly interminable European debt saga.
Over in Europe, the borrowing costs for Italian debt touched the 7 percent mark this morning with about the same speed that Prime Minister Berlusconi's government was coming apart at the seams. His resignation remains a matter of very little speculation anymore, as the septuagenarian playboy lost a key vote in parliament and could be handed his walking papers in a manner of speaking.
Eurozone finance ministers reached a consensus on Monday on augmenting the EFSF but they also kept intense levels of direct pressure on Greece and on Italy, both of which now face the prospect of a governmental changing of the guards. The common currency weakened for a third trading session this morning albeit -considering the gravity of the regional situation-it did not lose all that much ground (at $1.379).
The EU's finance ministers indicated they will launch the beefed-up rescue ship in December but they first ordered (!) Greece to furnish written acceptance of the latest set of bailout terms and also intimated that they will seek a similar on-paper promise by Italy when its turn comes. This is fast turning into a game of hardball and it once again underscores the fact that things had come to a too-close-to-the-brink paradigm that had to be addressed immediately. None of the above of course has stopped Mr. Berlusconi from cheerfully denying that he might have to pack his bags and take a long Mediterranean cruise.
Meanwhile, the arguments and counter-arguments that gold is or is not in a bubble continue without pause. An interesting observation has just been made by Marketwatch commentary contest participant Shivaj Thapliyal who writes that while no one can stick their neck out and declare that the metal is indeed inside a spherical object, no one can also declare that it is not inside of one. Moreover, the five most common hand-waving arguments (i.e. non-numerically based ones) in favor of gold do not yield any clear, objective fair value for the yellow metal.
The by-now-nearly-shopworn arguments read as follows: (1) it is a safe haven and we are in a period of extended financial market turmoil (2) it is a hedge against inflation and we are in period in which we will see high inflation (3) it is an under-owned asset and investors have only begun to warm up to Gold (4) the Dollar is falling and Gold is denominated mostly in Dollars (5) all fiat currencies have failed and Gold is the only alternative.
While the author notes that none of the above is a qualitatively incorrect statement, they still do not equate to a credible means by which we can properly value the metal. Conclusions: 1) The only answer to the bubble? question is that there is no answer and 2) Investment managers need to ask themselves whether they possess knowledge and understanding of an asset that can help them create wealth in a systematically repeatable way or if they are just shooting in the dark.
Jon Nadler Senior Metals Analyst
Kitco Metals Inc. North America
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