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Commodities & Precious Metal Markets Weekly Analysis

Precious Metals
Gold for February delivery was nearly unchanged (down 0.3%) for the week, going from $426.90 to $425.80, following last weeks 1.01% increase in price. Silver (March contract) was also largely unchanged, also being down 0.3% for the week. The March contract fell 2.5 cents to close at $6.795 an ounce. Silver stocks were up 1,074 troy ounces at 102.4 million troy ounces. April Platinum closed at $872.30 an ounce and was up $3 and 0.34% for the week.

Precious metals traded in a range bound fashion ahead of the G7 meeting. Gold is stuck in $421-$430 zone and a break of either of these levels will provide direction. Silver is trading in $665 - $695 range and will continue to do so. A break over $695 will result in $707.

Other metals futures in New York were largely higher on Friday and were slightly higher for the week. March palladium ended at $192.15 an ounce, up 40 cents. It was up $0.10 for the week. Copper saw its March contract close at $1.4385 a pound, up 1.15 cents for the session and up 0.3 percent for the week . Copper supplies or inventories were down 472 short tons at 45,817 short tons as of late Thursday, according to Nymex.

Commodities, represented by the Reuters CRB Index (basic components include hard tangible assets such as Metals, Textiles and Fibers, Livestock and Products, Fats and Oils, Raw Industrials, Foodstuffs) was unchanged for the week at 284.20 points and still hovering at multi year highs.

Energy Prices
Oil (NYMEX March crude) settled at $47.18 down from $48.53 last week to close down 2.8% for the week. February heating oil dropped 5.89 cents, or 4.2 percent, to end at $1.338 a gallon, down 3.3 percent for the week. OPEC producers have agreed to keep output limits on hold, convinced that oil prices near $50 a barrel are not stifling world growth. The Organization of the Petroleum Exporting Countries took little time Sunday to settle on no change in supply quotas, despite worries among consumer nations about inflated fuel costs. Mainstream economists agree there is little sign yet of an energy price shock, partly because the U.S. dollar's decline on currency markets has protected non-US importers from the rise in dollar denominated oil prices.

February unleaded gasoline closed at $1.3082 a gallon, down 4.37 cents for the day, but up 0.7 from last Friday. Natural gas prices inched closer to two-week low with some traders starting to expect there will be adequate supplies of the fuel for the remainder of the winter season. March natural gas fell to a Friday low of $6.15 per million British thermal units, a level last seen Jan. 18. The contract closed at $6.259, down 9.3 cents, or 1.5 percent. For the week, it lost less than 0.1 percent.

The US$, Currency, Stock and Bond Markets
The euro edged up to $1.3042 in late trading from $1.3033 late Thursday to be largely unchanged for the week. The dollar was unable to strengthen back through resistance at 1.2940 and the US currency weakened to a low of 1.3120. Movement was generally limited ahead of the key events over the forthcoming week. From a medium-term perspective there is likely to be further Euro buying below the 1.30 level against the dollar, especially with global central banks rebalancing their reserves in favour of the Euro. This will limit the potential for dollar gains.

The Dow Jones industrial average eked out its first weekly gain for the year, closing up 0.33 percent to end at 10,427.20. The broader Standard & Poor's 500 Index also squeaked out a 0.3 percent gain to end at 1,171.36, while the Nasdaq Composite Index is nearly unchanged, up just 0.08 percent to 2,035.83. However, the indexes look like they'll end in negative territory for the month of January. The Dow is down 3.3 percent since the beginning of the year, the S&P 500 is off 3.35 percent and the tech-heavy Nasdaq is 6.4 percent lower. Investors were unnerved by a Commerce Department report that estimated that the gross domestic product, the measure of overall U.S. economic activity, grew at a rate of 3.1 percent, below economists' expectations. And if that wasn't enough, the Federal Reserve is widely expected to raise the nation's benchmark interest rate from 2.25 percent to 2.5 percent when it meets Wednesday. But the week's small gains were, at least, gains and broke the New Year's three-week losing streak. For 2005, the Dow Industrials are down 355.81 points or some 3.3%. Interestingly the Dow Jones Industrial Average is currently below it's level at the start of 2004. This would seem to suggest that we are still in a bear market since 2000 and we have just experienced a lengthy multi month bear market rally.

The author of the best selling 'Bull's Eye Investing', John Mauldin in his respected weekly newsletter entitled 'Insiders Send a Signal' pointed out two important bearish indicators for the stock market. These are the mutual fund inflow/outflow statistics and the insider selling statistics.

Both are flashing warning signals. Mauldin says that "Current insider trading patterns suggest that overall market risk remains high. We will monitor short-term rallies carefully to see if insiders sell into them." He continues, "typically, mutual fund inflows are positive in January. Last year we saw $28 billion flowing into mutual funds. So far this month, we have seen a net estimated outflow of $9 billion. Since the markets are well off the last two days, it is likely that number is worse.

Mauldin writes how the Leuthold Group note that "in recent years, it has become relatively rare to use the term 'net redemptions' and 'January' in the same sentence. Net outflow did occur in January 2003, but was a relatively small -$1.3 billion. But this year, January is not only shaping up to be a month of net redemptions, but record net redemptions. Unless the final three days show very strong positive cash flow (we'll have a better idea if this is the case in next week's report) it is likely that we'll be reporting a new cash flow record for January. But just not the kind of 'record' we have come to expect."

In the U.S. Treasury bond market, the interest-rate sensitive two-year Treasury note rose 4/32 in price to 99-25/32, lowering its yield to 3.25 percent. On Thursday, it had closed at a 2-1/2 year high of 3.30 percent. The benchmark 10-year note climbed 21/32 to 100-28/32, taking its yield down to 4.14 percent from 4.22 percent late Thursday. The 30-year bond leaped 1-10/32 to 111-17/32, driving its yield down to 4.61 percent from 4.68 percent, as investors seemed to take cheer from the inflation outlook.

As of 28th Jan, 2005 Today 5 Days 1 Year 5 Year
Gold 425.8 -0.4% 6% 48%
Silver 6.79 -0.8% 9% 31%
S&P 1171 -0.3% 4% -14%
ISEQ 6460 -0% 27% 32%
FTSE 4833 0.7% 10% -24%

Weekly Market Commentary
The U.S. economy grew at a weaker-than-expected 3.1 percent annual pace in the final quarter last year, its slowest since the beginning of 2003 as the country's trade performance deteriorated and inflation picked up, a government report on Friday showed. The U.S. Commerce Department said Friday its GDP growth slowed in the fourth quarter to a 3.1 percent annualized rate, hitting the lowest level in seven quarters. Economists expected GDP growth to keep at a 3.5 percent annual rate in the fourth quarter. Once again, the dollar was little moved by the worse than expected economic data. Traders said the market had been shadowed by an atmosphere of uncertainties and few were willing to open new positions.

Next week the ECB and the Federal Reserve will be meeting to discuss changes to monetary policy. Additionally, the finance ministers and central bankers of the G7 nations will meet to discuss the world economy on February 4th and 5th. The markets and particularly the currency markets will focus on what wisdom the G7 declare in their communiqué after the meeting. Market watchers will be nervous of an announcement of some sort of joint currency 'actions' in order to ensure an orderly decline of the dollar. Regarding economic data, the most important release next week will be the U.S. employment report for January.

Some market analysts have claimed tenuously that were the Fed to announce a speeding up of interest rate increases this would be bullish for the dollar and thus bearish for gold. This is highly dubious as it fails to take into account the massive debt and leverage in the US and a significant dependency on extraordinarily low interest rates. It also shows ignorance of gold and interest rates history and the positive correlation between gold and interest rates. Throughout the inflationary 1970's interest rates rose in concert with inflation and the explosive gold bull market of the time. The converse happened in the 1980's and 1990's as interest rates declined so did the price of gold. There is a very high correlation between gold and commodities and interest rates. When price levels of commodities and gold are high, generally inflation is a concern and creditors demand a higher return on their money causing interest rates to rise. Conversely when returns on bonds and cash are high, capital flows into these asset classes seeking yield and thus the gold price drops. Claiming that the Fed raising interest rates this early in the interest rate tightening cycle is dollar bullish and gold bearish is silly and nonsensical.

Traders said both the bulls and bears were unwinding their positions since early January when gold started range bound within $420 ~ $428. They expect spot gold to stay in the tight range until the market gets further cues regarding the direction of the dollar. "The tone this week has been indecisive, with gold traders struggling to find a compass heading of their liking," said Erik Gebhard, president of Altavest Worldwide Trading. The market has been "drifting" amid a lack of compelling reasons for bulls or bears to "stick their necks out and take a firm stand."

The gold open interest is extremely intriguing. It fell another 4607 contracts to 257,904. The specs and major shorts can't exit this market fast enough. The end result is you have a washed out spec market along with extraordinarily bullish gold fundamentals. The Commitment of Traders data would seem to indicate that gold's recent weakness may be coming to a close and it's long term bull market trend ready to reassert itself. The total open interest of traders in gold as dropped by a massive 100,000 contracts from 370,786 contracts on the 22nd of November '04 when gold hit it's recent high of $451.40. Today there only 257,904 contracts outstanding and yet gold is only some $25 off of it's recent highs. Thus there has been a massive liquidation and yet the underlying cash market and demand for physical is creating firm support under the gold market. It also looks like that a lot of the liquidation was by nervous shorts who felt it prudent to unwind their short positions in anticipation of higher prices.

The strength of physical demand is underpinning the gold price. This demand is global in nature and coming from Central Banks, investors and consumers all over the world but especially in Asia including the Middle East, the Far East, China and India. The John Brimelow Report featured in Bill Murphy's Le Metropole Café showed that on last Friday Indian ex-duty premiums for the import of gold into India were AM $7.00, PM $7.87, with world gold at $426.70 and $425.95.

India is very much the largest importer of gold in the world and it is estimated that they will import some 880 tonnes of gold bullion this year alone. To put 880 tonnes of demand into perspective one must realise that total mine production, the largest element of supply, is only some 3 times larger so that India alone will import a third of all the gold mined this year. Indian ex-duty premiums are a good way of assessing the demand for gold in the world's largest importer India as they show how much Indians are willing to pay for gold. John Brimelow: "... it possible to settle quantitatively the question of whether India is or is not an importer at any point. Indian demand is price sensitive (in rupees). High premiums have been a fairly good indicator of lows in the world gold price. Sometimes, world gold rises high enough that imports are not possible. Very rarely, world prices get so high that the gap between domestic Indian and world prices is not enough to cover the import duty, which creates a negative "ex duty premium." (http://vdare.com/jb/041130_indian.htm) This increasing global demand in the physical gold market is coming at a time of decreasing production due to the very expensive nature of the mining business and the fact that precious metal prices have been in decline since 1980 and thus it became uneconomical to mine and put into production many gold mines.

There was a somewhat interesting but nevertheless nonsensical gold bearish theory posited during the week. The Virtual Metal's analysts, Jessica Cross and Matthew Turner were the source for the story which featured in a Reuters article 'Is Gold Losing the Midas Touch' which was subsequently picked up in other media. The dubious theory posited was the notion that because working class urban youth culture in the Western world had embraced tacky 9 carat gold rings, bracelets, earrings, necklaces and chains somehow this was going to affect the price of investment grade gold bullion as it would make it less attractive to the rich of the world. Presumably because these rich people are such snobs that the sight of rappers dripping in gold would put them off gold, it was claimed that this attraction of hip hoppers for cheap gold was tarnishing gold's image. How this was the case and how this was manifesting itself was not elaborated upon. No proof or examples were given for the notion that BA Baracus', Snoop Doggy Dog's or Eminems choice of jewellery or sartorial elegance might be affecting how rich western men and women view their more 'refined and artistic' rings, bracelets and necklaces. Also the notion that this may affect how Central Banks might view gold as a monetary reserve to protect against currency crisis or how astute wealthy investors might view gold as a safe haven asset is dubious. If anything urban youths embrace of gold as hip can only be construed as positive for the price of gold as it creates more demand for the precious metal. It is a peculiar analysis of the market movements of a commodity and monetary reserve such as gold that fails to look at figures and facts, study basic supply/ demand fundamentals and completely ignores geopolitical realities and macroeconomic fundamentals. In the great Eminem and Snoop Doggy Dogg verses Osama and George Bush debate, somehow I think Osama, Bush and the 'War on Terror' might be more of an influence on gold's 75% increase in 4 years and it's price going forward than Eminem and Snoop.

Of far more significance to the gold price was the survey sponsored by Royal Bank of Scotland Group Plc which showed that Central Banks are boosting their non-US currency holdings, particularly euro holdings, at the expense of the U.S. currency. This is a trend which is likely to continue due to the large US trade and budget deficits. There has already been confirmation that the Russian Central Bank has not only diversified into Euros but has already boosted their gold reserves. This trend is likely to continue due to the increasing tensions between the U.S. and President Putin's Russia. As evidenced by Russias agreement with Germany to start pricing its huge Oil and Gas exports in euro instead of dollars as part of a strategic shift to forge closer ties with the E.U. as reported by The Daily Telegraph.

There have been leaks, rumours and informed speculation that many other Central Banks including the Argentines, Venezuelans, Indonesians, Malaysians and others have been doing likewise. Indeed Ex-Prime Minister of Malaysia Mahathir Mohamad has on many occasions proposed that the Islamic world from Indonesia to Morocco create their own currency. This currency would be a multi country currency similar to the euro but importantly it would be based on and backed by gold. In January 2004, he told Saudi Arabians they should sell oil for gold, not U.S. dollars, to avoid being "short-changed" by a decline in the U.S. currency. "The price of oil is $33, but the U.S. dollar has declined by 40 percent against the euro so you're effectively getting $20," Mahathir told an economic conference in Saudi Arabia's Red Sea city of Jeddah on Sunday. "So you're being short-changed." (Source - CNN)

In a similar vein the words of the Director of the National Economic Research Centre, Beijing, Mr Fan Gang are also ominous for the dollar's long term survival as the petrodollar and global reserve currency. "In our opinion the US dollar can no longer be seen as a stable currency since it constantly depreciates and therefore is a permanent source of problems. So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable reference, say euros, yen, dollars -- those kind of more diversified systems." The Chinese are already scouring the world buying up companies that will help provide them with the food, raw materials, metals and energies required by the rapidly industrialising nation and it's billion people. Should even a small portion of their huge currency reserves, largely consisting of depreciating US dollars, be diversified into gold and silver, it would be an important new stream of significant demand and should result in higher gold prices.

The Week in Quotes
"It is inevitable that the dollar will fall much further. The only question is how far, and whether it will be a free fall... the dollar would come down sharply, U.S. inflation and interest rates would be pushed up sharply and the world would follow a much slower growth pattern. Trade would be a big casualty: it would be poison for U.S. trade policy."
Fred Bergsten, Director of the Institute for International Economics, Washington

"In our opinion the US dollar can no longer be seen as a stable currency since it constantly depreciates and therefore is a permanent source of problems. So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable reference, say euros, yen, dollars -- those kind of more diversified systems."
Fan Gang, Director of the National Economic Research Centre, Beijing

"Another salvation may be the economy. It's going to go very bad, folks. You know, if you have not sold your stocks and bought property in Italy, you better do it quick. And the third thing is Europe -- Europe is not going to tolerate us much longer. The rage there is enormous. I'm talking about our old-fashioned allies. We could see something there, collective action against us. Certainly, nobody -- it's going to be an awful lot of dancing on our graves as the dollar goes bad and everybody stops buying our bonds, our credit -- our -- we're spending $2 billion a day to float the debt, and one of these days, the Japanese and the Russians, everybody is going to start buying oil in Euros instead of dollars. We're going to see enormous panic here. But he could get through that. That will be another year, and the damage he's going to do between then and now is enormous. We're going to have some very bad months ahead."
Seymour Hersh, Democracy Now

"Countries go broke gradually, by borrowing so much money that creditors lose confidence in their ability to pay the debt back. Then, they go broke suddenly as creditors stop lending. This has happened to more than a dozen Third World nations, who had the additional misfortune of having to borrow in dollars. As their own currency lost the confidence of world markets, they lost value against the dollar. This only increased their real debt burden. The optimists say, "It can't happen here." First, we're the people who print dollars. So if the dollar is losing value, it just means the money that we owe the rest of the world is getting cheaper. Lucky us. Second, we enjoy a codependency with our creditors. For instance, China, which keeps lending us money to finance our deficits, may be accumulating dollar credits that are losing their real worth. But China needs us to keep absorbing their products, so China will go right on lending. And third, the United States remains the anchor of the world economy. So even though other nations may not like America's immense trade and budget deficits, nobody is going to risk pushing the world into depression by crashing the dollar. That, as I say, is the optimistic view. Well, dream on. Yesterday, the bipartisan Congressional Budget Office, possibly the last intellectually honest government agency in George Bush's Washington, reported that our fiscal situation is even worse than expected."
Kuttner, Boston Globe

"The principal problem is the American consumer's reliance on debt to finance consumption. U.S. consumers are borrowing too heavily by using the value of their homes to back credit. We are in the early stages of a residential property price bubble in the US. Consumers know this and that is why they are turning their homes into a massive ATM machine. Rather than using the fruits of the increased economic activity, US consumers are funding their massive spending spree through borrowing against the inflated values of their homes.... Because they are spending increasingly, as asset dependent consumers extracting value from property, which by the way is clearly entering the stage of being a bubble, and going deeply into floating-rate debt to do that. The self-indulgent American consumer is an accident waiting to happen. There's nobody home on economic policy in America right now. The twin burdens of household and public debt in the United States are unsustainable. This is an insane way to run the world economy. You know that, we know that, but the Federal Reserve is in denial."
Stephen Roach, Chief Economist, Morgan Stanley

Even Kenneth Rogoff, a centrist former chief economist for the International Monetary Fund who is now a professor of economics at Harvard, thinks there's a greater than even chance that the dollar will fall 20 percent. "Americans are so profligate that we're making everyone else look good," says Rogoff. He notes that even the currencies of perennial financial basket cases, such as Brazil and Turkey, have been strengthening recently against the dollar."
David Ignatius, Washington Post

"The possibility of an abrupt and globally damaging correction persists, since the depreciation of the dollar alone seems unlikely to be sufficient to reduce the global imbalances to sustainable levels in an orderly fashion. The global imbalance is between consumption and debt in the United States and ballooning surpluses in many US trading partners. Currency changes by themselves, especially bilateral currency manipulation, will not resolve the problem. Greater global economic cooperation would be needed to avoid a hard landing."
UN Department of Economic and Social Affairs (UNDESA) Report

"It is a bit scary. We're in uncharted territory when the world's reserve currency has so much outstanding debt. The old dollar, it's gonna go down... I'm short the dollar."
Bill Gates, World's Richest Man

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