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Precious Metals Weekly Market Wrap

Precious metals showed strength early in the week as the gold price spent most of its time above the important $1,400 an ounce level and silver stayed above the key $22.50 an ounce mark, but that all changed on Friday with the release of the U.S. labor report.

The not-too-hot, not-too-cold take on the jobs market signaled that Federal Reserve "tapering" of its money printing effort would come later, rather than sooner, and this compelled traders to pile back into U.S. stocks, but not before exiting recently acquired positions in precious metals.

As detailed last week in If The Stock Market Tumbles, The Gold Price Should Rise, the inverse correlation between U.S. stocks and precious metals has been nearly perfect in recent months, so, the reaction of the gold and silver price on Friday to the labor market data was not terribly difficult to predict and was correctly foretold in Thursday's How Will Friday's Labor Report Affect Precious Metals Markets.

As of early Friday morning, a weaker trade-weighted dollar had played a key role in pushing the gold price nearly $30 higher from a week earlier. But, as shown below via INO.com, all those gains were given up in a matter of minutes as equity markets surged after the Labor Department release.

(click to enlarge)

More reports of strong demand in Asia were of little comfort for gold investors, as was new bullishness toward precious metals by hedge funds and the latest data on U.S. coin sales that point to a record year.

Friday trading served as a timely reminder that fast moving futures traders control metal prices over the short-term in increasingly volatile markets.

For the week, the gold price fell 0.3%, from $1,388.30 an ounce to $1,384.60, and silver fell 2.6%, from $22.27 an ounce to $21.69. Gold is down 17.3% so far this year, some 28.0% below its 2011 all-time high, and the silver price has fallen 28.5% in 2013, down 56.2% from its record high reached in April of 2011.

Silver saw its first weekly close below $22 an ounce since late-2010, a development that is cause for concern for investors in "the poor man's gold". But this is also a great buying opportunity for those wanting to enter the market at lower prices.

Prior to the Friday sell-off, hedge funds had taken a new liking to precious metals as speculators' net long positions in gold saw their biggest increase in nearly three months, largely as a result of short-covering.

Some hedge funds are surely reconsidering their recent bearish views on gold after strong physical demand recently emerged in Asia and outflows from metal ETFs in the U.S. have slowed. Last week, the SPDR Gold Shares ETF (NYSEARCA:GLD) shed 6 tonnes of the metal, this following a decline of only 3 tonnes the week before. During the prior two months, average weekly declines totaled 26 tonnes, so, recent data is far less bearish. Holdings at the world's most popular gold ETF now stand at 1,007 tonnes and, though it is unlikely, remaining above the 1,000 tonne level would be a very bullish signal to traders.

The iShares Silver Trust ETF (NYSEARCA:SLV) saw 4.5 tonnes exit the trust during the first week of June, this following outflows of 459 tonnes in May. Prior to last month's decline, holdings for the world's most popular silver ETF had moved higher for the year as holdings for gold ETFs plummeted. As of Friday, the SLV trust had 9,998 tonnes of silver, down 96 tonnes for the year.

As noted by the World Gold Council in recent weeks, these ETF flows are being easily absorbed by the world's biggest buyers of physical metal in Asia where premiums are still elevated due to supply shortages. Last week, the Hong Kong Census and Statistics Department reported that China's net gold imports from Hong Kong fell from 136.2 tonnes in March to 80.1 tonnes in April, but the decline was attributed to a large backlog in increasing bank import quotas after record buying during the first three months of the year.

May imports are expected to make up for the April shortfall and then buying should slow over the summer, but, when factoring in domestic production, even the April gold import total is a pace that would put China on course to shatter its previous gold demand record of 780 tonnes in 2011.

In India, gold imports jumped to 162 tonnes in May from 143 tonnes in April and, here too, this is a rate that would easily eclipse previous record highs for annual gold demand if sustained.

That seems unlikely however, particularly after the Indian government raised gold import duties for the second time this year, from 6% to 8%, and took other steps to curb gold demand.

The duties alone are unlikely to slow gold buying since, in local currency terms, gold is still trading at lower levels than a year ago in a country that is home to the world's most cost sensitive buyers.

Other curbs by the Reserve Bank of India included banning imports on a consignment basis (i.e., where the importing bank need not pay for the gold until it resells it) and banning of gold imports using a letter of credit from banks, making overseas purchase of the metal a cash-only transaction.

Though these efforts are aimed at reducing India's trade deficit, the only guaranteed result will be a further increase in gold smuggling, as was the case in the 1990s when similar tactics were employed.

A day after the gold import duty hike, India's finance minister P. Chidambaram urged banks to advise their customers not to invest in gold. Then, on Friday, the central bank advised banks not to sell gold coins to retail customers in a reversal of their previous position on this issue from earlier in the week.

India's gold imports are expected to be as high as 400 tonnes in the second quarter, about double the pace of buying last year, and the government's efforts to curb gold demand are now quickly becoming both desperate and comical. It seems clear that if the Indian people want gold, they'll get it.

Here in the U.S., coin sales slowed in May but remain at levels never seen prior to 2013 according to the head of the U.S. Mint. Richard Peterson, acting director of the U.S. Mint, said in an interview, "Demand right now is unprecedented ... We are buying all the coin (blanks) they can make ... People at the mint had to work overtime and sometimes over the weekends to meet the increase in demand."

The mint sold 70,000 ounces of gold coins in May after 209,500 ounces were sold in April and year-to-date sales are now 572,000 ounces, a level not reached until November last year. After shattering sales records in January, American Eagle silver coin sales fell from 4.09 million ounces in April to 3.46 million ounces in May and are also expected to easily set a new record this year despite the U.S. Mint rationing sales since the January surge.

Ongoing demand for physical gold and silver in both the U.S. and overseas now almost two months after the April sell-off that sent prices sharply lower has undoubtedly given U.S. hedge funds and money managers reason for pause and, at some point, they are sure to return as buyers.

This situation - a surge in "physical" market demand for a product after a vicious sell-off in "paper" markets - is unique to precious metals and is indicative of fading confidence in the global monetary system by the general public, confidence that is not likely to be restored anytime soon.

Lastly, I feel compelled to mention Nouriel Roubini's commentary at Project Syndicate last week - After the Gold Rush - a post-mortem on the gold bull market with an alternate title of "The End of the Gold Bubble" (at least, based on the URL). If getting attention was his goal, he was probably quite successful in that effort, though most of the reasoning is deeply flawed as pointed out in many other commentaries over the last few days. One has only to look at the opening sentence of the first of seven arguments in support of his case to see why:

First, gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy.

The implication here is that those risks are no longer present, a view that, given recent weakness in the global economy and heightened market volatility stemming from central bank actions is the height of Pollyannaish thinking.

This is particularly true today, a time when nearly every investor and trader in the world acknowledges that asset prices are rising primarily due to central bank largess. Risk has returned in a big way as financial markets have suddenly become extremely volatile as the Federal Reserve just begins to talk about minor reductions in its massive $85 billion in monthly bond purchases.

Source: What Next After Another Gold And Silver Sell-Off?

Additional disclosure: I also own gold and silver coins and bars.