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The Bear Facts of the Bullion Market

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"This time around, despite all the denials of the fact and protestations to the contrary, the gold market entered the cave of the bear."

The uber-critical $1,527 line of gold's price defense came into play overnight as we had recently pondered here, and this time around, despite all the denials of the fact and protestations to the contrary, the gold market entered the cave of the bear. Granted that with RSI levels near 20 and with bullish Daily Sentiment indicators perhaps only in the single digits an overdue counter-trend rally might yet delude the bulls, but this is where the market highway junction that really matters is to be found.

A quick round-up of the midweek opening quotes showed gold prices being bid near $1,540 the ounce. The yellow metal has lost $255 per ounce since Feb. 28 and $385 since last September's peak. Spot silver was quoted at $27.55 per ounce and platinum posting a small loss of $1 at $1,426 per ounce. Palladium lost $5 to reach $586 while rhodium was unchanged at $1,325 after having shed $25 recently. In the background, the US dollar hovered near 81.33 on the index but crude oil slipped $1.40 to $92.60 a barrel (a six-month low), copper was off 1.4%, while the euro continued to struggle near $1.27 against the greenback.

While the majority of recent gold market commentaries kept reaching in vain for any possible explanation for gold's continuing melt-away, the simplest of all reasons evidently eluded most of their authors. We have now been treated to excuses that range from the silly to the preposterous, as to why gold is not acting in the manner that we had all been promised it would, when and if serious financial conditions such as we are witnessing these days would materialize.

Thus, we are being treated to gems such as: "Gold is down because the putative 'bankster elite' wants it to be down" and "gold is down because some 'paper market' is deluding people to the 'reality' that, in fact, gold is up and that the demand for coins and bars has never, ever been better" and " advanced algorithms that control commodities and stocks make real price discovery impossible" or "gold is down because we just had a 'Super Full Moon' event." We could go on. . .but it is not worth your time.

If anyone cared to dig just a tad deeper, they would have found the principal agent of change in gold prices staring them in the face; the US dollar. Yep, that debt-ridden, good-only-for-fireplace fodder, no-good, sickening green piece of paper, just recorded its 12th session of gains in value. That kind of streak has not been seen since—in the words of Marketwatch—"at least 1985." Talk of the target level of 90 on the index has suddenly materialized, and such talk could be validated by a breach above the 82 mark on that scale.

If you think that is merely heavy lipstick on a terminally ill pig, the consider the virtual flood of dollar obituaries which have been coming our way for the past six years, and how they might appear to today's readers in light of what has not happened. You get the point. In what may have sounded like trite remark at the time, this writer told Bloomberg's Tom Keene (in an early January interview) that "gold will go where the dollar does not."

That point is that, gold prices, aside from all the unpleasant happenings in Europe, closed at their lowest level of 2012 after having probed even lower (around $1,540) during the trading day on Tuesday. The point is that silver (also purported to be around $80 by now, for sure) tested price zones very close to $27.00 an ounce instead of vaulting three times higher. The point is that the dollar's aforementioned streak has now been updated and that its 13-day long advance has now been classified as the longest winning one ever since the trade-weighted index has been created.

The point also is that, as was the case in 2008, this is the perfect environment for gold to show its mettle and to attract serious amounts of worried global money, and, yet, it is failing to do so. In fact, this May has been so cruel to bullion prices that analysts can now talk about the worst semi-monthly performance in the yellow metal in seven year, and not just since 2008.

If there is any "comfort" to be found by disillusioned gold and silver investors who had loaded up on the metals in anticipation of that which never came, it would be the fact the misery loves company. Commodities as a group fell for a tenth day on Tuesday, putting in their worst losing sequence since 1998. Oil, for example, traded near $92.50 per barrel early this morning.

Copper fell to the lowest level since January. Last week, according to Standard Chartered, investors pulled another quarter billion dollars or more out of this fast-sinking niche. A huge portion of recent gains in this space was attributed to the ear of "easy money" courtesy of the Fed. Now that questions have arisen about the continuation of that kind of largesse, well, you can see the (initial) results; pain and devastation.

Peter Major, an analyst at Cadiz Corporate Solutions, a unit of Cadiz Holdings Ltd., said by phone from Cape Town: "Commodity prices were unrealistically high as a direct result of a combination of easy and cheap money from quantitative easing and the threat of inflation. The market is efficient and it looks ahead. Mining houses have been weak for four or five months now; investors definitely saw weaker prices going forward." Does that sound somewhat familiar? It should, to the regular readers of these columns.

As well, we cannot yet take comfort in the fact that the latest reports indicate that investors such as fund maven John Paulson have not yet lightened up on their GLD holdings. The first quarter may have initially been kind to such portfolios but the tide has swiftly turned against them and new questions are not swirling around as to the fate of at least a portion of such allocations. Shareholders do not take kindly to more than one "explanatory" message from fund managers. They want results, here and now.

Some market watchers expect Mr. Paulson to join the selling herd and cut some of his holdings in gold before the second quarter draws to a close. "There's absolutely no question in my mind that large institutions have been net sellers in gold over the past two weeks," said Adam Sarhan at New York's Sarhan Capital. "The fact that Paulson has been coming under a lot of pressure on his other holdings may force him to liquidate as well."The additional price pressure coming from such liquidations is as yet not fathomable, but is certainly did show its effects on the way up in the gold market. To be continued. . .

Something that we are continuing: our coverage of developments in China and how they relate to the commodities' space. The recent shifts in that country's economy have clearly been contributors to the decline in the price of "stuff" and that includes gold and silver. At the present time, the overriding perception is that China's economic deceleration could increase and that its growth might reach a weak point not seen in circa 13 years. Pimco certainly feels that way, and it projects economic expansion in China to only come in at around the 7% mark this year.

Something else that underscores the deepening slowdown in the planet's second-largest economy is the fact that foreign investment in China fell by 0.7% in April. So-called inbound investment amounted to only $84 billion after the country missed import/export estimates and recorded the slowest level of industrial output since 2009.

China's currency reserves did however grow in the first quarter and that pattern reversed the first quarterly decline since 1998 that was witnessed earlier. However, once again starkly contradicting those who continue to see the mirage of "stealth" Chinese official sector gold buying, China bought. . .US Treasuries. In fact, China bought 1.6% more US government securities in Q1 while Japan bought 2.4% more of the same as well.

And now, to close things out, we go back to the US of A for more perspectives. A string of economic statistics has been making its way into the markets since the start of the week, and most of the data appears to reinforce the take that the Fed will not budge and that QE3 remains only a dream in the sleep of the commodity bulls who have become hooked on such generosity. In fact, the week's most relevant metric—that of inflation falling (largely owing to gas prices caving in)—has not managed to bring about any higher levels of expectations for a new round of QE.

Other than that, we have seen retail sales in April bounce one-tenth of a percent higher in April, US homebuilder sentiment coming in at its best level since the Great Recession, The Empire State manufacturing Index rebounding to 17.1 this month, US industrial production climbing 1.1% and thus beyond expectations in April, housing starts rising by 2.6% in the same month, and capacity utilization—an important metric—increasing to 79.2 percent, i.e., the highest level since April of 2008. That little amalgam of positive economic numbers should be sufficient to silence those who see the "unfolding demise of America" and who only preach fear. Odds are stacked against such a silencing however, as it has become quite fashionable to scare folks into buying that which. . .one offers to sell; be it God, gold, or guns.

Until Friday,

John Nadler,
Resource Investor

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