Good Day,

Following the setting of a fresh record at $1.80 above the $1070 mark in overnight trade, gold prices pulled back by a tiny amount in early NY session action. Once again, the dynamics were mainly dollar-centric as the US currency tried to hang on to the mid-75 zone in the trade-weighted index. Crude oil advanced half a dollar, reaching $74.65 per barrel. This morning's action in NY thus far shows that gold would be down based on actual selling (by anywhere from 5 to 9 dollars) were it not for the $3 gain it is being offset by, due to dollar weakness - all as shown on the KGX index, now one week old, on this site.

Almost lost in the deafening bullion bull media noise over recent days, were the usual flows of statistical data that give shape to the US economic picture. This morning's numbers reveal a smaller-than-anticipated decline in US retails sales for September. Taking out car sales (which were a slam-dunk for a big fall following the C-4-C hoopla), there was a 0.5% increase in US retail sales last month.

Calling that level of sales 'healthy' may be in order, considering what the expectations (and former numbers) were. However, the Fed's Mr. Kohn gives us a different alphabet soup this morning, calling not for a V-shaped US economic recovery, but one the resembles the letter U in a rather extended stretch. Kohn's comments helped push the greenback to a 14-month nadir against the euro earlier this morning. The anti-dollar bettors continue to bet on rates near zero for eons to come.

A spec play? The MOAB (Mother Of All Bubbles)? Or just an inverse-dollar frenzy phase that will peter out in the same fashion as those in the past - most recently in 1995? Thus far, the most reliable evidence anyone has on hand, is that rumours are in large part shaping the market. Surely, everyone knows by now that wealthy sources bought a truckload of gold recently and demanded physical delivery of same from a couple of large banks that were unable to come up with the bullion or that George Soros bought $473 billion worth of gold while dumping all of his US dollars or that OPEC nations have secretly opted to leave the dollar for dead - This is old news right? Well, dig a bit deeper then, as did DNA:

Last week, the global currency markets were rattled by the detonation of what some analysts saw as a monetary nuclear bomb of cosmic proportions.  A report in a British newspaper claimed sensationally that Gulf oil-producing states were in secret talks with China, Russia, Japan and France to end the pricing of oil in US dollars and move to a basket of currencies.

Such a move, which would tie in with long-nursed concerns about a weakening US dollar and the pile-up of excessive US government debt, would (if confirmed as true) signal the beginning of the end of the dollar's status as the preferred currency of global trade (or the global 'reserve currency'). The report was denied by all the principal players, but given these uncertain times, it sounded plausible to many, and the dollar fell in response. Countless other doomsday scenarios for the dollar abound, and not a day passes without some over-the-top hyperbolic pronouncement by 'dollar bears' about the 'coming collapse of the dollar'.

The perception that even the US administration, skating on thin ice economically and politically, seems to favour a weak dollar to rebalance its economy has amplified the bears' growls. Yet, the conspiracy theories about the imminent erosion of the dollar's status as reserve currency and the emerging alternatives are wide off the mark and low on economic and realpolitik wisdom. 'Reserve currencies' do not come about as a result of political negotiation among a few players, in the way the British newspaper report implied; they come about organically over years, perhaps decades, on the strength and financial depth of the underlying economy, the convenience of using that currency, and the network effect of many others using it.

One economist likens it to using the Windows operating system for your computer; sure, it's expensive and has bugs, and sure there are freeware alternatives, but it's more convenient to use Windows because 'everyone else is using it'. And like Windows, reserve currencies enjoy an 'incumbency advantage': unless a new currency can demonstrate that is offers vastly superior benefits, it cannot dislodge the entrenched one. The choice of a reserve currency also comes with an implicit bargain: the underlying economy has to run trade deficits and current account deficits to provide liquidity to the rest of the world.

It must also open itself up to the risk of seeing hostile governments or traders short-sell your currency for political or economic reasons, as is happening with the dollar today. Not everyone wants that responsibility and the headache: just ask China, which is clamouring the loudest for a change from the dollar standard. Most of the 'dollar bear' growls you hear today are motivated by power politics or profits. In China's case, its concerns over the dollar have forced US policymakers to tone down their rhetoric on China's currency manipulation and its human rights record.

Similarly, the most extreme 'death to the dollar' chants come from 'bullion bulls' who expect to gain from higher gold prices when the dollar weakens. Every up tick in the price of gold in US dollars is celebrated, despite the fact that against other currencies like the Australian dollar, gold prices have actually fallen over the past six months. Even in India, it's true that gold prices have appreciated about 45 percent since their recent low in October 2008. But over the same period, the Sensex has returned 70 per cent, which puts the 'gold rally' in perspective. All this is not to say the dollar won't weaken in the short term; it will. And over time, as other economic powers rise and US' share of the global economy shrinks, other reserve currencies could organically emerge. But the only ones who are profiting from short-term volatility driven by market hysteria of a 'dollar collapse' are dollar bears and bullion bulls who are looking to make jackasses of us others.

At last check, gold prices had recovered from lows near $1055 and were once again showing only minor losses of about $2, trading near $1062 per ounce. The complete absence of corrections (save for a minor dip on the 9th) continues to unnerve market observers on both sides of the pond. Analysts at BullionDesk in London, albeit seeing a need to remain bullish so long as dollar selling is the feature of the day, said today that: Given the scale and pace of recent gains and with gold flirting with overbought territory on the charts, the metal is in much need of consolidation/correction to avoid a more substantial price drop.

Silver climbed four cents higher this morning, trading at $17.82 per ounce. The white metal has had a noticeable flattening out on the 3-day chart, following a one dollar/ one week spike of its own. It has outpaced gold's returns by at least 2:1 thus far this year. Platinum fell $2 to $1354 and palladium lost $3 to ease to $323 per troy ounce. The noble metals sank following reports that platinum's global surplus may widen next year, as an increase in mine supplies and recycling outpaces a recovery in demand. Bloomberg reports:

Next year it will be certainly a surplus again, Peter Ryan said in an interview in Tokyo yesterday. The excess volume could be a little bit higher than the 11.3 metric tons estimated for this year, he added. Ryan joined London-based GFMS in 2004 after about 30 years with platinum researcher and refiner Johnson Matthey Plc.

Platinum, used in auto catalysts and jewelry, has gained 45 percent this year as investors bought precious metals as an alternative to the sliding dollar. The metal reached a record $2,301.50 an ounce on March 4, 2008, as power shortages in South Africa reduced output in the largest producer, before tumbling to a five-year low of $744.25 on Oct. 27 amid global financial market turmoil. Operational difficulties that cut South African output from 2007 to 2009 are unlikely to recur in 2010 and production will rise from this year's forecast 183.4 tons as supply becomes available from new mines, Ryan said.  

Platinum prices, which have averaged $1,135 an ounce so far this year, may average $1,250 next year, if investment demand expands regardless of fundamentals, Ryan forecast. At the moment we are trading ahead of fundamentals, he said after a seminar in Tokyo by GFMS. Net investment in the metal through exchange-traded funds will rise to an estimated 8.6 tons this year from 3.2 tons last year, according to Ryan.

Prices of palladium, mainly used in vehicle exhaust systems, may average $300 an ounce next year, compared with $233 so far this year, as the global market stays in deficit following a shortage estimated at 11.3 tons this year, he said.  Russia, the world's largest palladium producer, may sell 40.4 tons of the metal from the state stockpiles this year, compared with 39.8 tons in 2008, Ryan said. The country will continue to sell similar volumes next year, capping the gain in prices, he added.

Something else that appears to be in surplus mode right about now, is the amount of gold hanging from the hooks of vendors stretching from Dubai to Mumbai. Want to buy gold? Below spot? You actually can. Just book a ticket to exotic locales. Daily News and Analysis reports on the strangest of twist now taking place in the gold biz. And, it is NOT a scam! The merchants need to make a living, folks. Gold demand remains elusive in India, even as the biggest gold-buying related festival of Dhanteras fast approaches. Let's see if the shoppers will bite - at all:

The international price of gold may be at its precious highest, $1068.80 (Dh3922) an ounce yesterday, but jewellery retailers are offering major discounts to combat dwindling sales. The Dubai Gold and Jewellery Group, that tracks and sets the price for Dubai markets, yesterday, had 24 carat gold selling for Dh126.50 a gram and 22 carat at Dh118.25 a gram. At souqs and malls across the emirate, the precious metal in its 22 carat form was retailing for much lower than the above benchmark.

In terms of the per gram value the price of 22 carat gold now ranges anywhere between Dh106 a gram to Dh118 a gram, a gold dealer told Emirates Business. Calculation of the per gram selling price of 22 carat gold involves calculating 92 per cent of the price of prevailing market price and then adding a suitable premium. It's primarily the premium that traders are willing to concede to bring back the customers, market sources said.

Low retail demand of gold is forcing jewellers to dispose their gold at prices lower than the prevailing market rates, said Sajith Kumar PK, CEO of JRG International Brokerage, DMCC. The retailers are not selling at a loss though. Sajith explains that gold being disposed at a discount now was bought months earlier at much lower prices.

Jeffrey Rhodes, CEO of INTL Commodities, warned that prices can fall sharply if all speculators head for the exit doors at the same time. Gold could drop to a low of $920 an ounce in the medium term, Sajith said. Gold yesterday rose to a record in New York and London on speculation that a weakening dollar and faster inflation will boost the appeal of precious metals. Futures reached $1,069.70 an ounce in New York, while spot gold climbed to $1,068.63 in London.

And thus the market goes. Rumour, opinion, emotion, proclamations.

May we live in interesting times is no longer  a 'may'...

Jon Nadler

Senior Analyst