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Speculators bid farewell to commodities

A $31 meltdown in value during the overnight hours brought gold to the $775 level far faster than even the most pessimistic expectations we had seen of late. Once the $800 level was breached at 19:40 hours NY time, the metal went into a tailspin the magnitude and viciousness of which was frightening.

While gold will make every headline in today's financial press as it undergoes this now nearly vertical slide that puts even its 2006 drop of $200 into the minor leagues, the bigger story unfolded in the silver market where the white metal lost more than 12% of the value it finished at on Thursday afternoon. Words like 'overdone' or 'oversold' began to no longer apply once the metals penetrated the key psychological round figures that lay at $800, $14, $1400 and $300 for gold, silver, platinum, and palladium.

The prime movers remained the US dollar (which vaulted above 77 on the index and knocked the euro to 1.47) and crude oil (leaking value like a crippled tanker down to $113.50) and they precipitated the stampede for the exit door among funds to the point of crushing any bystanders. We had written months ago that the more than 14% plunge in dollar values we had witnessed over the last year could end up reversing course by as much as one half under certain conditions.

The greenback has now gained nearly 5.5% in just the last month. For another illustration of all of this, just look at the UK pound. It was pounded into the ground following an 11-day losing streak against the dollar – the longest such dip in 37 years (!). Attribute these moves to whatever you like, but do not live in denial. And do not forget to ask your friendly bottom-picking newsletter vendor to confirm (once again, for the n th time) that “this time, this really is IT.” We doubt they might stick their neck out one more time. Let's see when Mr. Hulbert senses capitulation among them.

Friday's New York session opened not quite at the overnight low water mark, but still down $12 at $793.70 as participants added to the growing pile of bloody towels thrown into the market's floor since the first of the month. Investment guru Marc Faber was the first important commodity figurehead to now officially call the fact that “Prices have made a peak.” Mr. Faber does not yet know if $1033.90 was the final such pinnacle or just an intermediate one, but he concedes that values are likely headed lower. Silver continued much lower, losing $1.05 at $13.09 this morning and the descent also continued in the PGM complex where platinum shed $85 to $1389 and palladium fell $12 to $293 per ounce.

We now bring you an overview of the situation from Marketwatch's tireless Myra P. Saefong. In her Commodities Corner weekly focus piece, she finds that gold's safe-haven status has been called into question by the developments over the past month. Bear in mind that the piece was written before last night's core meltdown and please note that if you normally do not like what this writer has to say when reporting the facts, there are several quotes in here by yours truly:

Gold was supposed to be more resilient, both literally and figuratively, to the sell off in commodities — yet prices for the precious metal have dropped more than $100 per ounce in the past two weeks.

The talk of a breakdown in the so-called commodities bubble has started to encompass gold. But the metal's unique quality as a safe-haven investment gives it that special edge that may help it break away from the slump in other commodities.

“The situation is somewhat confusing,” said Frederic Panizzutti, senior vice president at Swiss-based MKS, a precious metals service provider. “Gold remains a safe haven, but its attribute as a commodity links it to the trend of other commodities.”

Gold prices have suffered a drop of almost 12% since July 31. They tacked on nearly $17 on Wednesday and lost it the next day. Oil prices have fallen more than 20% in a month. Corn and wheat futures have also dropped from their record levels this year.

“The speculative allure [gold] had presented to index and hedge funds has all but dissipated,” said Jon Nadler, a senior analyst at Kitco Bullion Dealers.

Oil, wheat, rice and a host of base and precious metals had climbed “clearly beyond the scope of their fundamentals and reached distorted levels,” said Nadler.

And “many were well aware that when the oil surge … would come to a halt or reverse course, that it would carry with it part or all of the group,” he said. “This, in fact, has happened — however, it unfolded a lot quicker than conventional wisdom expected.”

Nadler likens the event to someone piercing a balloon with a pin and expecting a “slow, orderly deflation.”

But it's premature to call the “burst of the commodities bubble,” because prices have only been declining for a few days, said George Milling-Stanley, a director at the World Gold Council.

Gold has merely “backed away” from a historic high set earlier this year, he said. Prices climbed past $1,000 an ounce in March. A year ago, prices traded at just $670.

“The events of a few days, or even a few months, do not necessarily undo what is so far an event that has been going on for seven years,” said Milling-Stanley. Analysts have said the current gold bull market began in 2001.

“A bull market can stand a correction of 30% in the price from time to time and still remain intact,” Milling-Stanley said. Nadler said there's really a “sea-change in attitudes” going on. Attitudes toward the dollar and oil, attitudes on the part of the consumer and about the global economy and the U.S. contagion spreading — “they are all undergoing shifts of an order of magnitude that we have not seen for half a decade,” he said. It's “no wonder that investment postures and asset reallocation are also undergoing a significant transformation.” 

Even so, Nadler said he remains a “strong advocate of a core insurance position in gold bullion. Trouble, it seems, is always but one headline away from undoing the best-laid plans.”

For gold, the dollar as well as declines in oil and other commodities has been key to the steep drop from never-before-seen levels above $1,000 in March. “This collapse in gold has caught the gold bugs wholly off guard,” said Dennis Gartman, editor of the Gartman Letter.

'One gets the sense that the long-only funds have had it 'up to here' with owning commodities — and they want out.'
— Dennis Gartman, Gartman Letter

“Crude and grains have collapsed, and gold is simply following to the downside,” he said. “There is the dollar's strength too, but one gets the sense that the long-only funds have had it 'up to here' with owning commodities — and they want out.” Gold really shouldn't be following oil around, said Ed Bugos, editor of Gold & Options Trader, published by Agora Financial.

“Gold is a counter-cyclical asset — a safe haven of sorts, which should beat to its own drummer rather than follow oil around,” he said. The reason it isn't: “people don't understand the fundamental causes of the bull market in commodities yet,” he said. The cause is “monetary” and gold is “lost in this transition.”

“Bull markets in gold come about because the value of the money we use day-to-day is falling,” Bugos said. Dollars are being created at a rapid rate, said Peter Spina, an analyst at GoldSeek.com. That remains the primary driving force in the gold market and the “cheap monetary policy will continue to debase the value, integrity and confidence in the faith-backed dollar,” he said.

There really hasn't been a good reason for the greenback to rally in recent days, with little substantial economic information to support its upward trend, said David Beahm, a vice president at precious metals retailer Blanchard & Co. And with the dollar not quite the safe haven it once was, “the safe-haven aspects of gold are likely to re-exert themselves,” said Peter Grant, a senior metals analyst at USAGOLD-Centennial Precious Metals.

“Gold is at a bargain right now and investors should take advantage of the low prices,” said Beahm. He sees short-term volatility in the market but said gold will find its bottom, bounce off of it and ultimately reach new highs.

In the meantime, demand is another key factor for gold to pay attention to, and even though it's been a concern, things may start to improve. The World Gold Council reported Wednesday that, in tonnage terms, jewelry and investment demand fell, contributing to a fall of 19% to 735.6 tonnes in gold demand for the second quarter vs. a year ago.

In value terms, gold demand rose to a new all-time quarterly record, up 9% at $21.2 billion for the second quarter. Painting an even brighter picture, seasonal demand for gold is just around the corner. “We sit just ahead of the opening of the high season for gold, in the final quarter of the year and the first quarter of next year,” said Julian Phillips, an analyst at GoldForecaster.com.

Much of the second-quarter decline in jewelry demand came from India, where demand fell 47% to 118 tonnes, according to the World Gold Council. But the first festival of the Indian buying season, the Raksha Bandhan festival, begins Saturday.

“India cannot save the day on its own, if investment demand in the West turns to disinvestment,” said Nadler. Still, gold bugs are finding a “best friend” in India, hoping for a great monsoon and harvest season that will boost physical demand for gold, he said. It could be too little, too late.

“If anything, festival-related buying might prevent a faster meltdown towards $700, but if the trends in commodities continue along their current path, it will not be able to turn the gold market … around and back into bull mode,” said Nadler.

While the storm in commodities is far from over (they have now fallen 21% since Independence Day), today's focus will be trying to find depth gauges long enough to probe what kind of waters these markets are currently navigating in. Book-squaring may be painful as the week closes – we have had but one day in the plus column all month. To say that some bounce should be expected is to state the obvious. Problem is, nothing -of late- has been obvious. Except, of course, the farewell to commodities by speculators who never believed in them to begin with and wanted to make the proverbial fast buck.

By Jon Nadler

Source : Commodity Online

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