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Vive La Resistance? Bullish Scribes Dig In |
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Good Day,
Gold extended its losses in overnight Asian and European trading, despite a minor slip in the dollar to 73.25 on the index, and it was also derailed by a further 75 cent drop in crude oil to $121.50. The $915 support was convincingly breached and while overnight lows came in near $903, at this point traders see very little that would prevent bullion from dipping into the high $800's before the month comes to a close. The current 30-day performance reading shows a 2% drop in gold while the year-on-year gauge has narrowed somewhat, to a 36.6 percent gain.
The greenback traded at 1.559 against the euro as confidence in the EU faded to levels no seen since 9/11. The contagion from the US housing cave-in has spread to the confidence index, the manufacturing and service industries, as well as housing and financial firms' performance. Local economists opine that the surveys have "stagflation written all over them." This, while US consumer sentiment gave the dollar a fresh boost yesterday, rising unexpectedly to 51.9. There is a growing possibility that the US is getting close to the daylight edge of the same forest which Europe appears to have entered over the past three months.
New York's midweek session opened with gold registering a smaller $7.50 loss to $910.00 spot bid as participants now gear up for more meaty data coming from the ADP employment survey before deciding what move to make next. The metal has lost more than 11% from the mid-March highs while still trading at a respectable $200 higher than a year ago. Trading remains nervous and continues to exhibit sales of out of the money options and additional book-squaring. However, index funds and speculative rotation out of commodities and into hitherto batter equities continues to be creating difficulties, while the muscle flexing exhibited by the dollar during parts of this summer also has speculators on profit-taking alert. Silver fell 25 cents to $17.06 while the noble group lost more ground on the day, with platinum falling $14 to $1725 and palladium dropping $6 to $377 per ounce.
Two items of interest today, as we will not be able to post an afternoon comment. First, the report from Mining Weekly that platinum forecasts have been scaled back as supply difficulties from S. Africa appear to be on the mend:
"Standard Chartered said it is cutting its platinum forecasts for the fourth quarter of 2008 and full year 2009 as supply fears from major producer South Africa recede. The bank said it has trimmed its fourth-quarter 2008 price forecast to $1 750/oz from $2 050/oz, and its full-year 2009 forecast to $1 675/oz from $2 105/oz.
"We were previously assuming that renewed power outages were likely in South Africa over the winter, which would spark a renewed scramble for material," said Standard Chartered metals analyst Dan Smith.
"While this is still possible, the likelihood of this happening has now faded."
Four out of five ounces of the metal, which is widely used in autocatalysts, is produced in South Africa. Smith said that while the platinum market is expected to remain tight, the risk premium built into current prices is likely to diminish as uncertainty over South African supply fades. Concerns over the weak economic outlook, and its effect on car demand, as well as a firmer tone to the dollar and a fall in overall commodities prices are also weighing on spot prices, the bank said.
"Heading into next year, we expect prices to remain high, but power problems should ease as energy saving measures in South Africa take effect and high platinum prices encourage thrifting," Smith added.
The other, is the periodic update from Marketwatch's Mark Hulbert which highlights gold timing newsletter sentiment. Mr. Hulbert finds the current reading among such publications, worrisome:
"Gold bullion had a bad day on Tuesday, with the nearby futures contract dropping $11.40 an ounce to close at $926.40. Yet not one of the editors of the short-term gold-timing newsletters tracked by the Hulbert Financial Digest reacted by reducing his recommended exposure to the gold market. Therein lies a tale, and its conclusion does not bode well for gold bullion's immediate prospects.
Usually, according to contrarian analysis, advisers become more bullish as the market rises and more pessimistic as the market falls. It's indicative of stubbornly held beliefs when an adviser resists this typical pattern, and when such stubbornly-held beliefs are widely shared, they often prove to be wrong.
That would appear to be what's shaping up now.
Consider the latest readings of the Hulbert Gold Newsletter Sentiment Index (HGNSI), which represents the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Tuesday night, the HGNSI stood at 41.1%, unchanged on the day.
Another straw in the wind suggesting that the typical gold timer is stubbornly clinging to a bullish posture: The HGNSI has only modestly declined over the past two weeks, despite a rather dramatic drop for gold bullion itself. Since July 15, for example, when bullion closed at $986 an ounce, some $60 per ounce higher than where it closed Tuesday, the HGNSI has fallen only a modest 23 percentage points -- from 64.3% to its current 41.1%.
To appreciate just how modest a drop that is, consider where the HGNSI stood in mid-April, when gold bullion was trading at the same level it is today. The HGNSI then stood at minus 10.7%, which meant that the editor of the average gold-timing newsletter was recommending his clients allocate 10.7% of their gold portfolios to shorting the market.
The difference between today's HGNSI level of 41.1% and that mid-April level of minus 10.7% -- nearly 52 percentage points -- is a good indicator of how much more optimistic the typical gold timer is today.
To be sure, sentiment is not the only thing that makes the investment world go round; contrarian analysis should be no more than just one tool in the gold trader's tool chest. That said, contrarians would be more optimistic about gold's short-term prospects if there weren't so many gold timers who have remained stubbornly bullish in the face of gold's recent decline."
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Look for the ADP report's (private sector payrolls rose 9,000 on the month) effects on the dollar, do not discount a brief attempted buying spree before the weekend rolls around, but watch for resistance near $920/925 while supports in this down leg should hold at the round figure, as well as near $890. If all goes well. Choppy conditions prevail.
Two footnotes today:
Happy Trading.
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
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