Good Morning,

Gold prices made some additional advances overnight, while waiting for a better sense of direction and some results from the London G-20 summit. Deutsche Bank traders are concerned that gold has not been able to build on the gains it recorded early in the year. In the meantime, the ECB announced that is has sold 35.5 tonnes of the metal under the terms of the CBGA. Okay, chalk another $1 billion-plus up to the coffers. Proceeds might be used to help the IMF in its struggle to aid...most everyone, but could also indicate that the prospects for better returns are seen in areas that do not involve gold.

Precious metals were buoyant at the start of the midweek session, but the moves to higher ground were still seen as range-bound and not as the turning of a new page (see below for SocGen outlook on gold). Spot dealings opened with a $7.70 per ounce gain, quoted at $925.70 as participants tried for tests above $930 for a change. Silver rose 8 cents to start at $13.05 while platinum climbed $4 to $1129 and palladium added $2 to $216 per ounce. Stuck in a price rut until the fate of the automakers is official. Someone just needs to put these entities out of their misery and start fresh. What possible choices is the UAW left with now? President Obama is said to be in favor of 'easing' GM/Chrysler into Chapter 10.5 as the list of 'what to do' options runs slimmer and slimmer. Meanwhile, Fiat's debt was downgraded to 'junk' status by S&P - and this is the adoptive parent of Chrysler? (!).

It's official: there is no state left in the United States that is not in a recession. One would have to look back as far as 1982 to find a similarly grim and widespread set of economic conditions. Even then, seven states escaped the downturn. Here is a graphic representation of the state of the States, courtesy of Marketwatch:

Not quite dead, but red

This is not to day that things are exactly looking pink, or rosy, over in other parts of the world. Asia has contracted the flu and is showing pretty much the same bloody face to the world: Japan's Tankan sentiment index sank to the lowest level since it was created as a tracking tool. Chinese manufacturing activity continued to shrink faster than its leaders could saturate the public airwaves with words like stimuli and S.Korean exports fell for a fifth month in a row. Complicating background conditions, N.Korea still plans to export what it appears to be quite adept at manufacturing; long-range missiles. The country has warned Japan that if it tries to shoot the thing down, well, better not. April 4 to 8 will be an instant replay of the spring of 2006. Or, will it?

The euro did not quite leap ahead this morning, as the Union's jobless rate revealed worsening economic conditions and touched a 36-month high. Citigroup believes that the greenback will climb to a six-month high against the yen at least, as it forecasts a target of 104 or higher (from the current 98.78 exchange rate). The dollar did retrace on the index this morning anyway, as uncertainties continue to be manifest. Speaking of manifest, London is caught up in manifestations (of anger) and the Financial Fool's Day could make for a few handcuffs to be handed out later on. Factoid du jour: the judicial outrage of the year quietly came and went in the US. Senator Stevens lived to see the day when all charges were dropped against him. Abandon all hope.

So long as we are on the topic of hope, here is a bit of a Mineweb distillation of Societe Generale's take on gold and the likely price path it might take, versus the lunar-orbital prices that are being hoped for (make that, being demanded) in certain forums.

Investment bank Société Générale is calling gold down to below $800 by the end of this year as a stalling in investment is unlikely to be offset by an equivalent recovery in jewellery demand.  The fact that prices fell very sharply when investment faltered over the turn of February and March is cited as a potential precursor to more of the same later in the year. 

The latest quarterly Commodities Review from the bank notes that in late March the major Exchange Traded Funds held 1,589 tonnes of gold, which was a twelve-month increase of 656 tonnes [since then they have added a further 14 tonnes], but that more significantly they had acquired 390 tonnes since the turn of investor appetite in mid-January.  Between then and early February there were only nine days on which there were net redemptions and six of these were concentrated between February 24 th and March 6 th .  During that period, just four tonnes were sold from the funds, but the loss of this inward investment momentum took 10% off the price over that period plus a further three days. 

Noting that investment activity is clearly not the only price driver in the market, the bank points out that it is currently one of the few bullish influences.  Absorption of 198 tonnes into the funds in the first three weeks of February accompanied a price increase of $80 or 9%, and then flat activity in the two following weeks saw that gain wiped out, highlighting the importance of sustained investor purchasing if international prices are to remain high. 

At the retail level, coin demand has been extremely strong  (although it is much smaller than ETF or Over the Counter investment activity) with US Mint figures showing sales of gold in American Eagle coins running at nine tonnes in the first twelve weeks of the year, more than three times the amount in the full first quarter of 2008.  This coin demand had helped to put substantial pressure on refinery capacity earlier in the year, but this has now changed as a result of a supply-side response to high local prices.

The bank comments that the flood of old gold scrap from jewellery means that refineries are now well-furnished with gold supply and the liquidity in the market is reflected by low lease rates - although rates have generally been low for some considerable time, with market demand showing up more in terms of extended waiting lists and elevated physical premia. 

The supply-demand analysis suggest that the surplus of physical supplies over fabrication demand and bar hoarding will be as much as 635 tonnes this year as jewellery demand will remain depressed in the face of high prices and the economic environment. 

The banks review contains an in-depth analysis of the regional and global economic background and is relatively sanguine about the state of the Indian market (given the global environment); consumption in general in the country is holding up well, with seasonally-adjusted consumer spending in the fourth quarter of 2008 running at its long-term trend of 6%, up for m3% in Q3. 

Industrial production was hit by the OECD downturn but was down just 2% year-on-year in December.,  The bank is looking for growth of 4.2% in India and 6.8% in China this year, roughly half the rates of 2007, but substantially better than the rate of growth in the OECD economies that are mired in recession. 

Even so, the Indian jewellery market has been hard hit with local Indian prices averaging almost Rp14,500 per ten grammes between the start of the year and late March.  They are currently just over Rp 15,100 per ten grammes and the study points out that while the market is gradually becoming used to these prices, the price range over the quarter was a wide 24% and that had a negative impact on sentiment.  There were times in the quarter when Indian jewellers stocked up into price weakness; at other times there were reports of resting orders in anticipation of lower prices.  

The bank points out that India acts as a microcosm of the price-elastic jewellery market as a whole and suggests that demand will improve when price volatility ebbs away.  For the time being, however, it remains slow and well-supplied by scrap return. 

This is a key feature behind the high tonnage that the market is expected to have to absorb if international prices are to remain high.  Industrial fabrication is under a cloud and dehedging has dropped substantially - although so have central bank sales.  Société Générale questions whether investors, who have so far been up to the task of absorbing all the metal that the market can throw at them, can sustain this level of activity.  For the short term, further investment activity is likely and higher prices are expected to come with it.  For the longer term, though, the investor is expected to take his foot off the pedal and this will put gold prices under substantial pressure.

In case you did not dig through the archives, a few words of a pre-emptive nature: 1) Yes, SocGen has also been bullish on gold before. 2) Yes, SocGen's outlook has been used by perma-bulls to bolster their case, on more than one occasion. 3) No, none of the above implied you should be without your gold insurance. 4) Yes, the study brings back into focus the five pillars of the gold market, without which there would be no gold market. One such pillar or two have had ample airtime in these columns: India, and scrap supplies. and 5) Charts (to the extent you believe in them as valid tools) are said not to lie.

Today's self-quiz is one pertaining to one's leanings towards the short-term versus the opposite, and towards the ownership of gold for a profit motive versus that of an allocation to a liability-free asset of last resort.

Happy Soul Searching.