Why Wall Street is unmoved by gold fever

Imports to India, the biggest gold consumer by far, were running at five times average levels, according to investment bank UBS. Chinese smallholders used their May Day holiday not to head for the beach, as this column naively suggested last week, but to flood the gold dealers in Hong Kong. Turkey bought more gold in April than in any month since the fateful days of August 2008. And so on.

Were the financial pros back in New York and London impressed by this spontaneous outpouring of gold love? Not a bit.

The mood in Bloomberg’s weekly gold analysts’ poll darkened substantially in the May 2 results: 20 gurus predicted falling prices, against nine expecting a rise and four abstainers. A week earlier, the bulls and bears were evenly matched. The latest figures from the U.S. Commodities Futures Trading Commission, published April 30, show swap traders holding nearly twice as many short as long contracts on gold.

What might Wall Street know that moms and pops in developing markets do not? One hint comes from an interesting bit of research published by French bank BNP Paribas last week. It seems — and we should all be thrilled to know this — that structured finance has infected the ancient art of gold trading through an instrument known as a “reverse convertible note.”

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This involves a financial institution lending cash to an asset buyer, at an elevated interest rate, but in return granting the buyer a put option to sell the lender said asset at a pre-agreed price. Investopedia tells us that RCNs “provide a predictable, steady income that can outpace traditional returns.”

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Unless of course the value of the underlying asset falls sharply and the put option triggers. This is just what happened when gold started to tank a few weeks ago. “It’s hard to determine what was the biggest cause for gold’s decline, but structured products played a part in exacerbating the downward spiral,” BNP’s chief of commodity sales, Guillaume Picot, told Bloomberg.

But this latest necromancy with RCNs is just more proof of a bigger picture problem: professional and retail gold buyers are living in separate worlds psychically if not geographically. The pros measure gold’s performance against that of other assets, particularly stocks, and stocks have been killing gold for going on two years now. The S&P 500 SPX -0.37% has climbed by nearly 40% since Oct. 2011; the dominant SPDR Gold Shares ETF GLD -1.16% has lost 15%.

At a certain point all but the hard-core gold bugs will give up on the idea of the metal outperforming. The mid-April market panic seems to have been that point. All the more so as the main intellectual argument for gold — that central bank credit expansion will dilute “fiat” currencies and spur a new bout of monetary inflation — keeps stubbornly failing to come true.

The retail buyers lining up to grab gold at “bargain” prices don’t care about or trust stock markets, for the most part. In India, they are acting on a time-honored tradition that precious metal is a woman’s mad money, her potential salvation in the event of marital disaster or widowhood. Gold stashes are passed down from mother to daughter, or showered on brides as a wearable testament of financial independence. So consumers will always buy more if the price looks affordable.

The retail purchaser has the numbers in the world gold equation. ETF investors sold off 174 tons of metal in April, a record for them and enough to spur a market crash. But jewelry and gold-coin/bar buyers scooped up 222 tons in an average month last year. So a bull run at the shops can easily offset a bear patch on the Street in terms of raw demand.

But the pros can move the market more quickly with cascading instantaneous sell-offs of fund holdings or collateral on their reverse convertibles. Thus, the gold price plunged by 13% in two sessions between April 11-15, and has gained back only half that despite the masses’ positive response.

At the moment the market is in stalemate, having done basically nothing last week. The near-term outlook would have to be called a bit bearish. Institutional investors look determined to shave weightings on gold so long as equities stay buoyant. The retail frenzy has to calm eventually, especially as India’s spring wedding season is winding down this month.

Source: http://www.marketwatch.com/story/why-wall-street-is-unmoved-by-gold-fever-2013-05-0

Palladium’s Prospects Look Great

While the mainstream business news has been obsessing about the recent highs in the stock market, and while gold bugs have been lamenting about the flat performance of gold, a lesser known commodity has been manifesting excellent gains as well as stability over the past few months. That commodity is platinum’s little sister, palladium. Yesterday, palladium traded as high as $755, its strongest level since September 2011.
Pamp Suisse Palladium Bar 10 Ounce

Pamp Suisse Palladium Bar 10 Ounce

“The fundamentals of the market have always been pretty solid and have gained the attention of investors/speculators as of late,” said Robin Bhar, metals analyst with Societe Generale.

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The supply-demand equation for palladium is the tightest of all the precious metals and top analysts such as Bhar and Bart Melek, a head commodities trader with TD Securities, believe this trend will continue into the foreseeable future. Said Bhar, “I’m very positive on the metal. I think this is just the beginning… On an annual basis, we expect palladium to be one of the best performing metals, if not the best performing commodity.”

Over the last quarter, palladium has gained 10%, contrasted with retreats in platinum, gold, silver, and commodities in general. The Standard & Poor’s GSCI Index of 24 raw materials declined 2.9% over the same period. Treasuries were down also, nearly .01%. The forces driving palladium’s recent rise hit both sides of the supply-demand paradigm.

On the supply side there are two principle factors involving the world’s two largest exporting countries, South Africa and Russia. Nearly 80% of all the palladium in the world is mined in these two countries.

The extended mining strikes that have hit South African mines full force last summer continue and have spilled over into the palladium sector, cutting into production. This labor dispute has been intense and with casualties, and analysts predict no quick solution on the immediate horizon. Furthermore, Anglo-American Platinum, the world’s largest primary producer of platinum, earlier this month proposed cutting back some output of platinum group metals so as to improve its profitability. Analysts believe that this could result in well over 100,000 fewer ounces of palladium being available in the marketplace.

The situation in Russia, which accounts for 43% of the world’s palladium mining, is much more grim. Last Friday, Johnson Matthey announced that Russian palladium inventory had dropped 68% in 2012, to 250,000, down from 775,000 ounces in 2011. Peter Duncan, General Manager of Market Research at Johnson Matthey, told reporters that Russian may be only able to supply 90,000 to 100,000 troy ounces this year. Said Duncan, “Russian state stockpiles have been dwindling and are now pretty much exhausted.”

On the demand side, several forces are propelling palladium’s recent appreciation. The US Commodities Futures Trading Commission (CFTC) shows that hedge funds and other large speculators have almost tripled their wagers on higher prices since the beginning of November. Their long positions are at their highest since the end of 2009. This renewed investment interest should be bullish for 2013.

In addition, worldwide auto sales moved up nicely in 2012. Why this is important is that palladium, rhodium, or platinum are utilized in all catalytic converters. Johnson Matthey estimates that, of the total world palladium consumption of 9.725 million ounces for 2012, 6.84 million ounces – over two-thirds – was used for catalytic converters. The record car sales of 2012 should extend palladium’s shortages. Global car sales in 2012 exceeded 80 million for the first time ever and are predicted to increase to about 83 million this year. LMC Automotive, a research company in England, predicts that Americans will buy more for a fourth consecutive year, equaling the longest run increases since the 1940s.

China’s demand for autos continues to surge as well. China’s economy rebounded from a slump in 2012 and along with it, the demand for autos by its ever growing middle and upper classes. Chinese sales figures for passenger vehicles in November were the highest in almost two years, the Chinese Association of Automobile Manufacturers reported last month. That agency is also calling for another 10% increase in 2013. All in all, palladium consumption will beat production by an estimated 500,000 ounces plus in 2013, about what the worldwide car industry devours every seven weeks, according to Barclays. This trend in palladium demand and consumption is forecast by Morgan Stanley to extend to 2017.

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