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Good News Bears
By Jon Nadler

The trading week in bullion drew towards a rather lackluster finish, as gold rose only slightly on the back of not-so-mild declines in the dollar and crude oil values. Safe haven flows into gold have practically come to a standstill (see today's Bloomberg analysis by VTB Capital in London). The gold ETF remains stuck in 'neutral' and has not added balances since June 5. To its credit, it has also not lost from holdings, but the inactivity period is as long as any seen since last November. The same, however, cannot be said for palladium, whose London-based ETF holdings hit a new record: 315,572 ounces. Finally, also according to Bloomberg, "gold may decline as investors leave a “cave of fear” and buy other assets such as property.

Twelve of 22 traders, investors and analysts surveyed by Bloomberg News, or 55 percent, said bullion would drop next week, the second consecutive negative call. Eight people forecast higher prices and two were neutral. Gold futures for delivery in August were down 0.8 percent for the week, at $933.10 an ounce, as of midday in New York yesterday.

U.S. home resales probably advanced in May for a second consecutive month, the first back-to-back monthly gain since 2005, a Bloomberg News survey of economists showed before a National Association of Realtors report on June 23. Gold rose to an 11-month high in February as investors bought the metal to protect against plunging equities and a deepening recession. The weekly gold survey has forecast prices accurately in 156 of 266 weeks, or 59 percent of the time. "

Gold spot was ahead by 90 cents at 1pm NY time, quoted at $933.20 per ounce. Silver was down 4 cents at $14.15 per ounce. Platinum gained $4 to rise to $1205 and palladium rose $3 to $242.00 per ounce. Rhodium fell $37.50 to the even $1300.00 per ounce marker. Book-squaring appeared to take over in the final hours - as is usually the case. Locally tense geopolitics (N. Korea, Iran) kept some longs from letting go in a 'just in case' play. Next week will tell more.

The same apathy was visible in equities, where the Dow barely made headway based on the almost complete lack of background news to bite into. Some markets feel heavy and tired- see oil. Black gold failed to hold above $72 and headed back to $70.50 despite news of rebels bombing pipelines in Nigeria.

The same cannot be said for gold's potential impact factors/news. One bit of news that was finally released (after we had expected it to make market headlines as long as at least a week ago) was the fact that the proposed IMF gold sale (intended to meet the organization's budget shortfall) made it through the US House or Representatives.

Well, that should quiet to noisy comments from quarters that said "over Harry Reid's dead body" at least until such time as when the proposal is placed in front of the Senate - where said Senator is likely to eventually make some noises of his own as regards the matter. And yet, the sales appear set to take place. Just a question of when, how much, and how.

Positive statements were issued by the World Gold Council today - it sees the IMF sales as not impacting the market (if conducted within CBGA parameters) and it goes as far as to 'welcome the news that the US Congress has passed the Military Supplemental Bill thereby finalising the process allowing the IMF to sell 403.3 tonnes of gold in a manner that will have no impact on the smooth running of the international gold market."

Expecting 'zero' impact and expecting 'positive sentiment' to be the result of the announcement among market participants may all be fine, but it does nothing to clarify the issue of the remainder of the IMF's gold, and the dire need to help poor nations - a topic which has still not been addressed. We continue to regard at least some of the remainder of the institution's bullion as potentially 'in play' if global economic conditions push more impoverished souls over the edge and towards a life/death equation.

"The Obama administration has pushed a bill through the U.S. House of Representatives approving $106 billion in supplemental funding, primarily for the Iraq and Afghanistan 'security' efforts, but attached to it was also an expanded credit facility for the International Monetary Fund (IMF) of a massive $108 billion which included an agreement to allow U.S,. members of the IMF Board to agree the proposed $13 billion sale of 400 tons of IMF gold to shore up its finances.

In theory the US. approval of the IMF gold sale, which still has to pass through the U.S. Senate would be the final hurdle in the gold sale actually going ahead. But despite this there was virtually little or no impact on the gold market. In part this may be because of scant publicity being given to this part of the funding approval, but also in that firstly the gold market has largely discounted the IMF gold sale anyway, and secondly in that the IMF has said it will dispose of its gold in an orderly manner through a system such as the Central Bank Gold Agreement which limits sales volumes in a given year.

However the current CBGA runs out in September and there has been no announcement yet of a renewal beyond that date. Given Central Bank gold sales under the CBGA appear to have dropped sharply over the past year it may be felt there is no longer a necessity for a new Agreement. Indeed indications are that some major Central Banks, notably the Russian and Chinese ones, as well as some Middle Eastern banks, are likely to increase gold holdings in part in an attempt to diversify reserve dependence away from the U.S. dollar given the mixed views on the greenback's future path due to the huge amounts of money being pumped into the U.S. Economy to try to stave off recession - or even depression.

In their April Fortis Bank metals monthly, the London based VM Group commented that "There are some good arguments against a CBGA renewal. The original 1999 Agreement arose from a structural weakness in the gold market. Back then, a class of investors (the Central Banks) believed they were massively overweight in gold and wanted to sell; the Central Banks decided to collaborate on a selling programme in order to ensure that they drip-fed gold onto a market that was already very weak. Those conditions are arguably no longer relevant.

"If there is no renewal of the CBGA, that would send a tremendously bullish signal to the gold price, at a time today when there are many more actors on the buy-side (such as private investors) and an obviously slowing interest to sell. "This would boost gold's status as a reserve asset, giving holders greater flexibility in how they bought and sold it. It would also encourage other Central Banks with large forex reserves but little gold (such as China) to buy. After all who wants to buy something for which they need an Agreement in order to re-sell?"

But, back to the U.S. Moves. Writing in the Wall Street Journal, economist Judy Shelton comments: "The Obama administration went to great lengths to get the IMF its billions. Last week, congressional leaders received a letter that made a firm connection between global economics and global security. "We know from the 1930s that a protracted global economic slump can foster undesirable and unforeseeable reactions to hardship and adversity," it stated. "Financial hardship and poverty breed desperation, which helps terrorist networks to attract new recruits with messages of hate, violence and intolerance." The letter then urged Republicans and Democrats to support the President's request for IMF funding. "We believe that the current instability poses a significant risk to the long-term prosperity and security of the United States." It was signed by Secretary of State Hillary Clinton, National Security Adviser James Jones, and, most notably, Secretary of Defense Robert Gates."

Shelton's view is that this was an attempt to pressure representatives into voting in favour on the grounds that a well financed IMF might provide a further bulwark against global financial collapse leading to global instability and would thus be a threat to greater U.S. security. She questions this both on economic grounds and on whether the IMF is indeed the right vehicle to handle such a policy. "Officials concerned about global security are right to recognize that financial instability breeds discontent and fosters social resentment that can challenge ruling interests and topple whole regimes." says Shelton. "The question is whether short-term fixes -- in the form of emergency loans to a flailing government, the sort of assistance the IMF is prepared to offer -- provide a solid foundation for economic growth."

Part of the problem, in Shelton's view, is that the IMF is no longer capable of fulfilling its role of overseeing an international monetary system because, since the end of the Bretton Woods era there is effectively no global monetary system and that all the IMF can offer nowadays is "the prospect of lurching from one short-term economic fix to the next." Where does this leave gold? One would think that overall such moves will end up being long term positive for bullion. If and when IMF gold sales do hit the market there may be short term adverse consequences, but if this gold is seen to be quickly absorbed (perhaps by Central Banks looking to build gold reserves) then there could be a quick rebound.

Fundamentals don't necessarily look good for gold at the moment, but the gold market is notable for ignoring fundamentals at least in the short term. It has been retaining its price levels reasonably well in the face of low jewellery demand and a resurgent dollar - both normally very adverse factors. Investment demand seems to be stable. People are still nervous. Gold still offers a degree of wealth protection which most other markets do not at this continuing time of economic turmoil." - Lawrence Williams, Mineweb

Be that as it may, fundamentals poor or not, the contrarian argument normally brought to us by Mark Hulbert, over at Marketwatch, calls for possibly higher prices over the period normally known as the "summer doldrums."

In late May, when I last wrote about gold market sentiment, bullishness among gold timers was at a three-month high. And, as I reported then, this meant that contrarian analysis was forecasting lower gold prices. Today, in contrast, gold timers on average are more bearish than they've been since late April. That, in turn, means contrarian analysis is more upbeat on gold's near-term prospects.

Contrarian analysis, for those of you who find this logic to be counter-intuitive, is based on the historical tendency for there to be too much optimism at tops and too much pessimism at bottoms. It is the basis for the oft-used phrases about bull markets liking to climb a wall of worry, and bear markets preferring to descend a slope of hope.

Objectively measuring market sentiment isn't always easy, however. As readers of this column know, I find it helpful to focus on investment newsletters because, whatever else you might say about newsletter editors, they are incredibly sensitive to which way the winds are blowing. And my econometric studies have shown that their consensus forecast is inversely related (in a statistically significant way) to the gold market's subsequent direction -- just as contrarian analysis would predict.

Consider our Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among the shortest-term gold timing newsletters tracked by the Hulbert Financial Digest. It currently stands at 10.2%. That's a big drop from where it was in late May and early June, when the HGNSI got as high as 56.8%. That big a drop is encouraging, according to contrarian analysts, because it suggests an eagerness among market timers to run for the exits and even jumping onto the bearish bandwagon.

An additional historical comparison reinforces this conclusion: The last time that the HGNSI was as low as it is now, gold bullion was trading below $900 per ounce, well below its current price. In other words, gold timers are as discouraged today by gold in the low $930s as they were a couple of months ago when bullion was some $40 cheaper. This suggests that the gold timers, on balance, are increasingly inclined to see the glass as half-empty. In the process, they are reconstructing the wall of worry that markets like to rise.

Of course, the following caveats should go without saying, but I'll repeat them anyway: Sentiment is not the only factor that makes the markets go 'round. So even though contrarian analysis historically has been more right than wrong in its predictions, it can provide no guarantee.

Furthermore, contrarian analysis is only a short-term market timing tool. In my econometric studies, in fact, its greatest explanatory power is over the short term -- a matter of weeks, not years. So, for example, contrarian analysis tells us nothing about where gold will be trading a year from now.

But, if history is a guide, chances are good that gold will be trading higher over the next month or two."

Leave it to us to differ and continue to still see a roughly $200 risk built into this market's structure. Yes, it is called an IMHO - but it is not the lone such HO. Similar risk/reward concerns were voiced by seasoned trading staff at German firm Heraeus in an interview given during May's fund driven commodity bonanza. For now, projected ranges are seen as between $680 and $980. Summer starts in a couple of days...


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