Gold and Silver Demand Outlook
Gold Prices ended lower after small directionless swings amid market uncertainty & on some chart consolidation and a corrective pullback from solid gains scored on Monday. Gold and Silver may behave similar to other risk assets, taking their cues from Equities and the US Dollar until a fresh direction catalyst emerges. Gold and Silver need to break out of their tight trading ranges to encourage more trader participation. Technically, Comex Gold Prices for Dec contracts face a stiff resistance in the range of $1740 to $1750. Further upsides in Gold Futures can be expected only on a breakthrough beyond this range. The RSI – Relative Strength Index is still neutral, despite the recent rally, suggesting the market can move higher before reaching technically overbought levels. Gold Prices seems to be trying to form a base after the recent sell-off, for a target range of $1810 to $1855. Crude Oil prices declined after Israel and Hamas had agreed to an Egyptian-brokered ceasefire that will go into effect soon. This news also had some spillover effect on Gold and Silver price movements. Gold and Silver coin sales are showing signs of recovery, while interest in physically backed Gold ETF (Exchange-traded funds) remains strong. Investors worried about future inflation and US Dollar devaluation over the long term have beefed up their Gold Holdings lately. Gold ETF holdings recently hit a record high above 2,600 metric tons while Silver ETF holdings hit a record of 18,854 tons in mid-November. Trading activity & volumes in Gold Market may remain thin as compared to other days on position squaring up by traders who do not want to hold positions over the U.S. Thanksgiving long weekend.
Citigroup’s Global Head of Commodities Research, Edward L. Morse, spoke to reporters yesterday and said that gold can continue to rise 8-15% per year based on central bank purchases and despite the end of the commodity “super cycle”. “It is now clear that the commodity super cycle is over,” Morse was reported as saying by Bloomberg. “No longer will a pure long-only strategy bring the returns expected in 2002 to 2008. Nor will conditions approximating those of the last decade return any time soon.” The “super cycle” of commodity price gains has finished as China’s economy moves to slower growth and supplies increase. Prices won’t climb “sharply” higher even though quantitative easing from global central banks lift growth and Gold Bullion demand rebounds by the end of 2013. Returns will be more “differentiated” among raw materials depending on supply- demand balances wrote analysts at Citigroup Inc. Economists say the most visible sign of uncertainty over the fiscal cliff is in the lack of capital-spending growth since the summer. In his speech yesterday, Bernanke said worries about the Fiscal Cliff and debt ceiling in the U.S. may already be affecting spending decisions and thus the economy. He urged the members of Congress not to kick the can down the road. Putting off policy choices would only “prolong and intensify these uncertainties,” he said. Without action by the White House and Congress on the fiscal cliff, about $500 billion in spending cuts and tax increases are set to begin in 2013.
The Outlook for Silver Industrial Demand
The Silver Institute yesterday released a report, The Outlook for Silver Industrial Demand that examines the current and future outlook for global industrial Silver Demand. The 14-page report features an economic outlook, as well as current and future silver industrial demand projections in all the main categories of silver industrial demand through 2014.
Looking ahead, the report projects an estimated 6 percent rise in silver industrial demand to a new record high in 2014, which will account for an estimated 57 percent of total silver fabrication that year. A steadily improving economic outlook, strong growth in the automobile sector, and a recovery in the housing and construction industry are primary reasons for the forecasted up-tick in demand, according to Thomson Reuters GFMS, which produced the report for the Silver Institute.
At present, against a backdrop of a continuing sluggish global economy, a downturn in Silver industrial demand is forecast for 2012, although a recovery in 2013 will see these losses entirely recouped. The report states that during 2012-14, some silver industrial market segments will outperform, including the use of silver in ethylene oxide (EO) plants, which is already experiencing a strong performance this year. Silver oxide is employed as a catalyst to produce EO, which is then used as a key ingredient in a range of products such as polyester. The authors project photovoltaic off take to broadly stabilize in 2013, following a forecasted downturn in 2012, and anticipate robust demand in the use of silver in photovoltaics in 2014.
Regionally, over the past 10 years, the most notable change has occurred in emerging markets demand, principally China. Of note, China accounted for just 8 percent of global silver industrial demand in 2000, compared to a strong 18 percent contribution last year, and is expected to grow further. The report notes that United States industrial silver demand will remain particularly elevated, enhancing its position as a leading manufacturer of high-end silver materials.
In looking at the essential role silver plays in various applications, the report addresses the use of silver in specific consumer and industrial product lines and provides demand projections for the products discussed, especially in automobiles, photovoltaics, televisions, and personal computers.
To download a free copy of the report, please visit this link: http://www.silverinstitute.org/site/wp-content/uploads/2012/11/OutlookSilverDemand.pdf
3 Events worth WatchingVia - Frank Holmes: U.S. Global Investors
Indian Gold Demand Picks Up
The love for Gold has been reignited in India, according to the World Gold Council (WGC) in its Gold Demand Trends for the third quarter of 2012. India regained its title as the strongest performing market, overtaking the greater China area, as the country experienced a bounce back in demand due to improved sentiment during the festival season.
Compared to the third quarter of last year, Indian Gold Jewelry demand grew by 7 percent while gold bar and coin demand rose 12 percent. Total consumer demand was 223 tons, compared to 205 tons this time last year. The second largest market was Greater China, which consumed 185 tons in the third quarter of 2012. This was less than the 201 tons consumed in the third quarter of last year.
Together these markets in the east made up 55% of the world’s jewelry and investment demand, according to the WGC.
Although India experienced a setback earlier this year when gold shops boycotted a proposed tax on the yellow metal, imports recovered by July “as inventory levels were bolstered (aided by a well-timed dip in the local price) and the market adjusted to the customs duty,” says the WGC.
The third quarter has historically been a strong seasonal time for the Love Trade to come alive in the east. Monsoon rains and the festival season in the fall are generally associated with the buying and giving of gold. Still, for the year, don’t expect the Love Trade in India to be as strong as it was in 2011, as gold demand remains subdued with the ongoing weakness of the rupee.
FHA in Need of Taxpayer Bailout Keeping Fear Trade Alive
The Federal Housing Administration reported that it has exhausted its reserves, possibly requiring a bailout from U.S. taxpayers for the first time ever in its nearly 80-year history.
The agency prides itself on being “the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.” Meanwhile, delinquent loans have been steadily climbing for the last few years. According to data from the FHA, the Wall Street Journal reported that the number of single-family loans insured by the FHA that are 90 days or more past due climbed to roughly 739,000 in September. “That represents about 9.6 percent of its $1.08 trillion in mortgages guaranteed,” says the WSJ.
Now its capital reserves have dropped to a negative $16.3 billion. This is considerably below the required 2 percent capital cushion. Based on its $1.1 trillion portfolio, it should be reserving about $22 billion.
To keep the FHA solvent and meet its requirement, approximately $38 billion of cash would need to be injected.
The FHA has played an important role in keeping the housing market healthy, as it provides insurance on mortgage loans for single- and multi-family homes. Many of the loans backed by the FHA are held by borrowers who make a small down payment, which can be as little as 3.5 percent of the purchase price. Without the government’s guarantee, most private lenders wouldn’t have originated these loans.
It appears that another government bailout is on the horizon. The housing market is key to the U.S. recovery, which incentivizes the government to print more money and debase the currency, just as the Federal Reserve is driven to seek maximum employment. These continuing actions should stoke gold’s Fear Trade all through the winter.
Gold is a “must have” investment today, according to Investment Strategist Keith Fitz-Gerald of Money Map Press. During our latest web cast, Keith explained how gold helps hedge value. The yellow metal has been “proven to have a roughly 10-to-1 relationship with interest rates. And that means it’s an indirect correlation or a corollary to bond portfolios,” he says.
“If interest rates start rising, that’s where your gold is really going to pay off,” Keith says.
Keep in mind that although there are many powerful reasons to accumulate gold, make sure you invest prudently. We recommend having a 5 to 10 percent weighting of gold and gold stocks in your portfolio. How should you invest the other portion?
Keith suggests structuring portfolios using the 50-40-10 pyramid model shown here. At the bottom of the pyramid are the “Base Builders,” where 50 percent of the portfolio is invested in defensive positions that tend to hold their value in nearly all market conditions.
One base builder that Keith recommends is US Global’s Near-Term Tax Free Fund (NEARX), which invests in municipal bonds that have a relatively short maturity.
Above the Base Builders are the “Glocal Income & Growth” investments, which should make up 40 percent of a portfolio. These are globally recognized brands with strong balance sheets, experienced management, high levels of cash flow and above-average dividends.
The remaining 10 percent is invested in what Keith calls “Rocket Riders,” which are riskier assets. Special situations, IPOs and options fall into this category, allowing the investor to “swing for the fences.”
China’s Pyramid of Power
The global economic picture came into focus a little more with the announcement of China’s new leadership. We now know the seven men who will lead the world’s most populous country and second largest economy over the next several years.
But don’t expect sweeping changes, as the new pyramid of power will likely follow the path of its predecessors. Yet the leaders will likely feel pressure to “continue making significant reforms to China’s economic structure and expanding the personal freedom of its people,” says China Macro Strategist Andy Rothman of CLSA. Likely pushed to the top of the agenda is the rule of law, as it is a key evolutionary step for China and can benefit both the rich and the poor. CLSA believes it is fundamental to the country’s economic growth as well as its social stability.
We will need to wait until after the Party’s economic work committee meeting in December to hear about China’s economic strategy for 2013, however, more details will be revealed after the new government formally takes office in March. Regardless, it would be helpful to eager investors to communicate stronger reform messages sooner rather than later.
“We’re In for a Barbeque Economy”
Despite the clarity that we have following the outcome of the U.S. elections and the selection of China’s new leaders, we’ll likely continue facing uncertainty during this long, slow recovery, says Keith. It helps to think of the economic recovery like a good barbeque. It doesn’t come from being cooked fast; rather, it requires patience and time. So even if progress is slow in this “barbeque economy,” growth will continue, he says.
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