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Broadgate Commodity Briefing

16 December 2011

SINGAPORE, Dec 13 (Reuters) – Spot gold slid to a seven-week low on Tuesday, extending a 2.6-percent decline in the previous session, as worries about the euro zone debt crisis continued to grip investors after the euphoria over the European Union summit agreement faded.  Equities headed for a second day of losses and the euro languished near a two-month low as investors took fright at the prospect of mass euro zone sovereign ratings downgrades after the outcome of a “last chance” European Union summit failed to convince markets.

“It’s all about anxiety and worry,” said Nick Trevethan, Senior Commodities Strategist at ANZ in Singapore. “Gold is just getting lumped in with other markets as risky assets, not necessarily for the right reason.”

Wild swings in gold prices since August have tarnished its reputation as a safe haven, and bullion has moved in tandem with riskier assets in the past few months.

Spot gold lost 0.7 percent to $1,653.50 an ounce by 0726 GMT, after posting its biggest one-day drop in nearly three months in the previous session. It touched $1,650.89 earlier, its lowest since Oct. 25.

U.S. gold declined 0.6 percent to $1,657.70.

The $1,650 level should provide strong support for gold, analysts said.

SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, reported that its holdings dropped 0.605 tonnes to 1,294.796 tonnes by Dec. 12, the lowest in three weeks.

Physical buying picked up in Asia after the sharp decline in prices, but many were hesitant to buy in bulk ahead of the year-end, especially as market sentiment remains fragile on concerns about Europe’s troubles, dealers said.

“Demand started to come in last night, but the amount has not been massive,” said a Singapore-based dealer, adding that jewellers and bullion dealers from Indonesia and Thailand have been active buyers.

Investors will closely watch for any move by Standard & Poor’s, which last week warned of a possible downgrade of 15 euro zone nations. In addition, the Italian and Spanish bond sales later this week will be a barometer of market sentiment.

Spot platinum edged up 0.1 percent to $1,481.49 an ounce, off a seven-week low of $1,476.23 hit in the previous session.

The gold-platinum spread stood at just above $173 an ounce, its narrowest level in two weeks, after the sharp price decline in bullion.

You Can’t Print More Gold

What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks?

An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade.

Negative real interest rates occur when the inflationary rate, or CPI, is greater than the current interest rate. A quick account of the G-7 and E-7 countries shows that the majority have negative real interest rates.

Across the developed G-7 countries, British citizens are the worst off with real interest rates in the U.K. sitting at negative 4.5 percent. U.S investors aren’t doing much better with rates at negative 3.25 percent and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero.

Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping’s grandest economic powerhouses, China and India, have negative real interest rates sitting around negative 2 percent.

Simply put, investors in those countries who have parked their savings in cash and low-yielding investments, such as Treasury bills and money market accounts in the U.S., are actually losing money due to inflation.

That can be tough for any investor, but when you’re the central bank of a country with millions of dollars in reserves, it can be catastrophic. This is why central banks around the globe have sought protection by diversifying their foreign-exchange reserves into gold bullion this year.

VTB Capital’s Andrey Kryuchenkov told The Wall Street Journal this week that, “Central banks are diversifying, and it has intensified to a rate that nobody had expected.” Latest estimates predict global central banks will purchase between 475-500 tons of gold in 2011.

This amount of capital flowing into gold has the potential to push prices up a level in 2012. John Mendelson from ISI Group sees gold prices reaching $2,200 an ounce during the first six months of 2012.

While real interest rates look to remain in the red for the foreseeable future, many of these same countries are printing record amounts of “green” with accommodative monetary policies.

U.S. Global’s director of research John Derrick says central banks around the world have focused their attention on stimulating growth. Beginning with Brazil’s interest rate cut in late August through the European Central Banks (ECB) cut this week, there have been 40 easing moves by global central banks, according to ISI Group.

John says this also means we will likely see more quantitative easing in 2012. The Bank of England has already started its quantitative easing, and many experts believe the ECB and the Federal Reserve will follow in its footsteps.

Bloomberg reports that global money supply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money supply has been gradually moving higher and higher since mid-2010.

The reason global central banks have shifted the printing presses into overdrive is simple: they need the money. My long-time friend Frank Giustra reminded us of this new reality in an op-ed piece for the Vancouver Sun last week. Frank writes:

“The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.”

As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities.

Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.

However, this image doesn’t tell the whole story. While the price of gold has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Precious Metal Mining Team.

In fact, if the global money supply were backed by gold, gold prices would be much higher, according to Bloomberg. The yellow line below shows how gold would be greater than $5,000 per troy ounce if just half of global money supply were backed by gold. If all of the money supply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000.

It’s unlikely, of course, that this will happen, but it serves as a useful illustration for the disappearing value of the world’s fiat currencies.

Frank reminded readers that we have been down this path before. Frank says, “When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.”

The beneficiary of this type of event has historically been gold.

Grains

Soybeans were modestly higher overnight following continued worries over dry conditions in South America.

There are some rumors floating around making reference to the 2008 growing season and a drought which resulted in soybean losses of nearly 17 MMT.

The truth of the matter is that we are still a long way away from 2008 in terms of weather.

Corn futures rebounded modestly overnight following the same South American talk.   A problem in South America could send more demand to the US.   The only problem has been that we have seen little demand.  Like I’ve been saying for some time now, the ethanol blenders credit expires in a few weeks.  This should cause some disruption in the demand for corn as we transition to a blenders credit-free environment.

Wheat futures were higher overnight on the US Dollar weakness.

The winter wheat belt has seen some beneficial rains over the past few weeks.

The outside markets are supportive with a risk-on type trade this morning.

But much like we’ve seen in the past few weeks, I expect this to be short lived

12th Dec – Gold prices fell more than 1% on technical selling

(Reuters) – Gold prices fell more than 1 percent on Monday on technical selling and concerns that the European Union summit had stopped short of producing a convincing plan to solve the euro zone debt crisis.

The approaching year-end and funding difficulties caused by financial market turmoil have reduced liquidity in the gold market, leaving prices prone to volatility. Spot gold prices fell more than $10 in just two minutes.

Investors remained nervous even after Europe secured a historic agreement on Friday to draft a new treaty for deeper economic integration in the euro zone.

“People are still worried about the economy and euro zone debt crisis and gold remains under pressure,” said Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

A stronger greenback also weighed on dollar-priced gold. The euro slipped in Asia on Monday, and was expected to struggle going into the year-end.<USD/>

Spot gold lost as much as 1.7 percent to a two-week low of $1,681.39 an ounce, and regained some lost ground to $1,690.65 by 0735 GMT.

The most-active U.S. gold futures contract lost 1.7 percent to $1,688, before recovering to $1,694.70.

Traders said the price move below $1,700 triggered stop-loss selling.

“On the technicals, we are heading for a triangular formation. If we move lower, we’ll break to the downside and that is a bad signal,” said Dominic Schnider, head of commodity research at UBS Wealth Management in Singapore.

Gold from Hong Kong to mainland China jumped 51 percent on the month to a record high of 85.7 tons in October, as buyers took advantage of lower prices.

Silver slid along with industrial metals, losing more than 2 percent under the pressure of technical selling and an uncertain euro zone economic outlook.

Spot silver fell to a 1-1/2-week low of $31.37 an ounce, before trimming some losses to $31.51.

U.S. silver dropped 2.5 percent to $31.46, and recovered to $31.59.

On this week’s agenda, bond sales by Italy and Spain will attract much attention from investors. Yields are likely to rise again after the European Central Bank last week dashed hopes for further bond purchases.

Prices of platinum group metals also weakened. Spot palladium fell 1.5 percent to $673, and spot platinum lost 0.8 percent to $1,499.75.

Demand for industrial metals will largely hinge on the growth in China, the world’s second-largest economy and top consumer for many raw materials. Slower growth in China’s exports and imports in November showed fresh evidence of faltering demand abroad and at home.

GOLD – ANOTHER BUYING OPPORTUNITY

Gold

The following daily charts show gold in US$ terms and euro terms. The patterns are similar, in that gold bullion has recently made sequences of lower highs and higher lows in terms of both the US$ and the euro. Furthermore, in terms of both currencies it has worked itself into a position where a breakout — in one direction or the other — will soon have to occur.

For investors, as opposed to short-term traders, the best buying opportunity would stem from a downside breakout. Specifically, if gold broke out to the downside from its contracting range and if this breakout were followed by declines to the mid-1500s in US$ terms and/or the mid-1100s in euro terms then the downside risk would be reduced to almost nothing.

Buying in reaction to an upside breakout would be riskier, because the breakout could turn out to be false and because gold bullion is expensive relative to most things right now. We expect that it will eventually become much more expensive due to increasingly-widespread concern about the stability of the financial system, but it’s always better to buy low than to buy high.

Gold Stocks

The following daily chart shows that the XAU rocketed upward on 30th November to just below resistance and then spent the ensuing 7 trading days partially retracing its 30th November gain. Consolidations within short-term upward trends typically last 5-8 trading days, so the short-term upward trend has probably either just resumed or will do so during the first half of this week. That’s assuming the current pullback is a counter-trend consolidation rather than the start of a new downward leg. There is no guarantee that this assumption is correct, but based on sentiment and the price action it is reasonable.

The resumption of the short-term upward trend would be confirmed by a daily close above 210, whereas a daily close below 190 would indicate that the above-stated assumption is wrong.

The bottom section of the following chart shows that the XAU/gold ratio has moved sideways since early August. It should move to a new 2-month high (above 0.12) if/when the XAU breaks above 210.

Grains

Soybeans were lower overnight continuing weakness from last week.

The weather is negative as Brazil has seen rain which is favorable to crops.

We could see more commodity liquidation ahead of the New Year.

Outside markets are likely to pressure commodities this week.

Corn futures were lower overnight continuing the sell off from Friday.

Farmer remain long on old crop and with prices falling any rally will likely be sold.

The ethanol blenders credit expires at the end of the month leaving a great deal of uncertainty over demand into the New Year.

The final production report will be out in January but any production cut could easily be offset by a cut in exports.

Wheat futures were also lower overnight.

The wheat belt saw more beneficial rains over the weekend adding pressure to prices this morning.

Australian wheat areas continue to see too much rain which will likely leave us with more feed wheat.

10th Dec – Weekly Grains Summary

CORN

March corn futures were down only 1 cent in what seemed to be a negative week.  Export sales this week were above expectations at 695,500 MT.  China bought 238,100 MT last week.  Friday morning the USDA numbers were neutral with the carryout rising a modest 5 million bushels to 848 million.  Chinese corn production was raised by 7.3 MMT from November.  The USDA world corn carry out estimate was raised 5.6 MMT to 127.2 MMT.

Corn should see pressure as farmers look to sell their 2011 crop in a market with softening demand.

SOYBEANS

March soybean futures fell 29 3/4 cents this week with the bulk of the loss on Friday.  Export sales this week were above expectations at 770,400 MT.  China was the best buyer at 551,100 MT.  Friday morning the USDA numbers were was negative for beans.  The USDA raised the carryout 35 million bushels to 230 million.  The USDA cut exports by 25 million bushels and cut the crush by 5 million bushels.  The world numbers were slightly negative as the ending stocks were raised by 900,000 MT.  The weather in South America seems mostly benign.  A decent crop in South America could cut US demand further.

Beans may quickly see a price in single digits if South American weather is favorable over the next few months.

WHEAT

Chicago wheat futures were off by 29 1/2 cents this week basis the March contracts. Export sales this week were 427,200 MT without a single buyer in six figures.  Friday morning the USDA numbers were negative for wheat as they cut exports by 50 million and raised the ending stocks by the same to 878 million bushels.  The world wheat carryout was raised 5.9 MMT to 208.5 MMT.

Growing world wheat stocks along with the prospect of additional CRP acres flowing into wheat should keep prices under pressure.

A large portion of the 10 million CRP acres expiring over the next two years should move into wheat.

9th Dec – Precious Metals

Gold

The price of Gold was up slightly today in line with a jump in the Euro caused by speculation China may offer some investment funding to the beleaguered Euro Zone.  Investors though remain doubtful over the outcome of the European Summit meeting on solving the financial crisis.

“I wouldn’t get carried away. (The EU leaders) need to convince the market that the crisis can be contained. Gold is trading completely against the dollar, moving in the opposite direction … and the physical side of the market is very quietly waiting on the sidelines for a pullback to start buying,” VTB Capital analyst Andrey Kryuchenkov said.

“Gold could have a knee-jerk reaction, especially if there is disappointment with the meeting today,” he said, adding that $1,680.00 was a key level of support and one at which consumers would likely look to buy.

Silver

Silver was up over 2% today.

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Broadgate can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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