Gold takes second runner up

Quarterly performance tallies started to trickle in as the last trading day of the month got underway this morning. Commodities tabulated their worst quarter since late 2008/early 2009 as a 10% decline in the complex was affected by Chinese growth contraction fears and investor sentiment about the fate of the rest of the world's economies. Gold posted a third-best showing with a 12% gain, right behind natural gas and coffee (which rose 20%).

Meanwhile, silver turned up in fourth place with a 6.5% appreciation percentage. What did not do well? Industrial metals, for the most part. Consider zinc's 25% plunge, or nickel's 23% fall. Bellwether copper fell 16% on the quarter and black gold dropped more than 9% since the end of March. Bad as the quarter was for commodities, the index of world equities showed a 13% decline in values for the trimester.

Then again, one could have bought the Shanghai stock market -whose SCI barometer fell 27% in the current year. Such dismal performance has prompted more than one contrarian call for a giant rally. Morgan Stanley analysts envision something on the order of a 65% rally in the Shanghai index, give or take one year. Yesterday however, that market fell 4.3% after the Conference Board revised its leading economic index for the country.

The Dow, in turn, lost 268 points (2.7%) and dipped beneath the 10K level as the same Conference Board's consumer confidence gauge crumbled on economic fears. Translation: what will happen if the US consumer is in no mood to consume at a time when the slack in the economy is nearly as wide as any worn by the zoot suit rioters in 1943 in Los Angeles? The economic pattern letter that comes to mind is just two alphabet positions ahead the letter Z according to some...

The euro regained some of the ground it lost on Tuesday this morning (it rose to above 1.2275 against the greenback), as the ECB announced that loan demand by the region's banks was some 30 billion euros lower than anticipated. Such lessened need for funding may signal a better state of health among European banks than some market participants are seen as perceiving. However, the carry trade may continue its drunken orgy in various assets and still be able to tap into essentially free money until the last quarter of 2010 according to analysts.

Gold prices opened with modest losses this morning after an overnight range that remained on the narrow side (between $1238 and $1245). Spot gold bullion fell by $3.30 to the $1237.50 level on the bid side. The rest of the complex showed declines across the board, with the exception of silver which added $0.07 to rise to $18.58 mark the ounce. The summer lull could be upon the markets following the Independence Day holiday. Trading desks we tang up overnight already show neatly arranged workstations and clean (!) coffee mugs on the cafeteria racks.

No change was reported in rhodium at $2440.00 per ounce. Carmaker Ford is reported to be ready to pay some $4 billion in debt with the aim of bolstering its balance sheet. Its shares surged nearly 4% on the news. This morning's ADP report indicated that 13,000 jobs were added to the US economy's private sector in June -less than the expected figure of circa 60,000 and one of the catalysts to a drop in US stock index futures just half an hour prior to their opening.

Indian buyers remained sidelined as gold at near 19,000 rupees per ten grams continued to weigh on their minds instead of the bazaar owners' scales when ringing up a sale.

In fact, Indian market participants and analysts are zeroing in on the same disconcerting signs that show a gold market totally dependent on ETFs and derivative speculation vehicles' (futures/options) offtake. As such, they see potential declines in value that might not be of the minor variety.

No less than the President of the Bombay Bullion Association was quoted to say that: There is no demand in India or for that matter in the world for gold jewellery or coins. Reports have suggested that physical demand has been on a slide. We see demand only from ETFs. He added that, at this juncture, and with such near-record prices at hand: Those holding ETFs can make profit booking and exit at any time in near future, leading to a severe downfall in the prices. Therefore, I believe this is not the right time to invest in gold. In short term gold prices may hover in the range of $1150 - $1300 an ounce before resorting to a fall.

Part of this may be nostalgia for the good old days of physical gold buying as Mr. Hundia underscored that: Earlier when exchanges did not exist, people bought more gold in physical form. But as exchange traded funds came into existence, the demand for physical gold started reducing and people preferred investing in ETFs rather than buying physical gold and keeping it with them.

The other side of the coin, so to speak, it the fact that the very people involved in the local gold market (still the world's premier source of physical demand -at a price) are of the opinion that the current gold-rush is nothing but a bubble that can burst anytime in absence of physical gold demand, which has been shrinking in recent months owing to exorbitantly high prices. So reports Commodity Online's Rutam Vora from Ahmedabad this morning.

Then again, Aussie market strategists said as much over the weekend. Other still, disagree. All of this, coming at a time when a plethora of articles are still clogging the blogosphere and are erroneously theorizing about the presence/(or mostly, the presumed absence) of gold in ETFs, in the world's mines, etc. For example, the (false) bit of 'information' that would have you believe that gold is actually traded on the LME.

Well, Wikipedia certainly disagrees: Contrary to popular belief, the precious metals, gold and silver are not traded on the London Metal Exchange, but on the OTC market usually referred to as the LBMA. What exactly does it take to get one's facts straight? A visit to Wikipedia, maybe? Nah, that would be asking for way too much.

Want evidence of a gold price manipulation/suppression scheme? An open and shut case, it would seem. Except for the series of squiggly lines which are then offered as 'proof' and deductions made based upon such patterns, which contain all of the conjectural 'insight' that can be applied to coffee-grounds readings by elderly ladies in any Istanbul bazaar. If the (chart) shoe fits (the UFO theory) wear it (foist it upon your readers, they'll buy it). Welcome to The Internets: A series of Setvensian tubes in which sometime sewage disguised as 'information' flows rather freely. Bring your own mask.

This is not to say that there is a total absence of worthwhile reading out there. Take, for example, the erudite expose on Gold and the Theory of Storage that can currently be seen on the Kitco Commentary section. In it, authors Mack Frankfurter and Nell Sloane make a cogent presentation about gold, hedging, storage costs, and implications thereof on supplies and prices. Now there's some real meat to bite into. No smell. Happy Trading. Happy New Quarter.

Jon Nadler Senior Analyst, Kitco Metals Inc.North America US & Canada Toll Free: 1 (877) 839-8036 Websites: www.kitco.com and www.kitco.cn Blog: http://www.kitco.com/ind/index.html#nadler