Precious metals look for support

After the strong summer bull market, most precious metals have been losing ground as a result of profit-taking by speculators. The question is, after testing the downtrend line, will these metals eventually confirm their reversals and resume an upward direction?

Market watchers are not in agreement, particularly with regard to gold. Although the recent surge was the result of widespread speculation, market fundamentals had to be in place to allow it to happen. There is good industrial consumption of the main precious metals. Significant quantities of precious metals are byproducts of base metal mines and these are slowing their output. Any surge in demand from whatever source will propel prices upward at a fast clip.

Lately, government finances appear to be the root cause for much uneasiness. Most countries are experiencing similar bouts of financial indigestion caused by overspending, recession and enormous deficits. In reaction, governments are seeking new and innovative ways to extract more funds from unwilling payers. Among the latest innovations are confiscatory service charges on travelers and sellers of houses and cars.

As a result, sharply rising taxes, taxpayer avoidance efforts, poor commercial and industrial sector sales and declining investment are adding to the revenue shortfalls and accelerating the decline. Rising levels of unemployment and general voter unhappiness are pressuring many countries to try to reactivate their economies; and they are doing this by dropping interest rates, which may cause massive money movements and runs on a currency.

The only strong growth in many countries is in the unofficial grey markets for goods and services where cash (and maybe the odd bit of precious metal) still constitutes good payment.

Reacting to profit-taking and quiet currency news, average-to-date September gold prices continue to settle back — reaching US$362.19 per oz. (compared with US$379.80 in August) — and prices look set to test the US$325-per-oz. level shortly.

In sympathy with gold, silver also weakened, reaching US$4.52 (US$4.84) per oz.

In markets for platinum group metals (pgm), profit-taking has been partially offset by two factors: improvements in autocatalyst demand and rumors of production problems at the Russian nickel complexes where pgm are important byproducts. Platinum declined to US$369.74 (US$393.38) per oz. and palladium to US$120.62 (US$137.17) per oz. Rhodium, meanwhile, is ahead at US$950 (US$915) per oz.

Base metal markets are looking increasingly anemic. While producers are reported to be selling all their output (especially in North America, where consumption is strong), most are showing financial losses. The Japanese economy is on the mend and metal demand is increasing. Metal inventories in Europe are still building slowly.

At current rates, worldwide production for most metals slightly exceeds consumption and the rising inventories are slowly pushing down prices. More shutdowns, voluntary or not, are likely. Moreover, they are necessary if the price direction is to change.

News of further Russian nickel arrivals in Rotterdam has pushed down average nickel prices on the London Metal Exchange (LME) to US$2.045 (US$2.143) per lb. Meanwhile, LME inventories jumped to 108,828 tonnes, compared with 106,260 tonnes in August.

Lower availability of both Zairian and Russian brands is firming cobalt. Spot September prices are steady at US$12-13 per lb. Western brands are at US$13 (US$12), Russian at US$11 (unchanged from August) and African producers officially at US$18 (also unchanged) and discounting.

LME zinc stocks increased, again reaching 770,850 (762,500) tonnes. And prices, most recently at US39.6 cents (US40.1 cents) per lb., look set to ease further.

— Jack Dupuis is a minerals marketing consultant based in Thornhill, Ont.