METALS - News

When Its Time to Get Into Gold
A new venture is making it easier for hedge fund managers who want to invest directly in gold.

Gold Bullion International (GBI) said last week that it was launching a new product that will allow investment managers to own the actual physical precious metal.

Some prominent hedge fund managers, such as John Paulson and George Soros, have turned to gold investments as a hedge against inflation. But usually the investment is in mining companies or in ETFs like SPDR Gold Shares.

"Even though demand for physical gold ownership has exploded, there has not been an efficient or cost-effective method to meet that demand," said GBI Chief Executive Officer Colbert Narcisse.

GBI, however, is bringing investment in the actual raw material as an additional option for managers.

The chief impediments for investors looking to get into the physical market are ease of execution as well as pricing, Narcisse told HedgeFund.net.

"It's a fairly opaque market," he said.

For pricing purposes, GBI has a network of eight precious metal dealers who are all members of the London Bullion Market Association.

GBI Chief Operating Officer Savneet Singh says efficiency is what GBI also can bring to hedge funds and other asset managers who want to invest directly.

If a hedge fund, for example, wants to order $1 million in gold and have it stored in Zurich, GBI bids it out to several dealers in the Swiss city, Singh said.

"Within 20 minutes of the trade, the hedge fund will have a confirmation," he said.

Besides gold, GBI can offer investors silver, platinum and palladium.

The firm's advisory board includes retired General Wesley Clark, former House majority leader Richard Gephardt, Tocqueville Gold Fund Portfolio Manager John Hathaway and former SEC Chairman Arthur Levitt.

Before starting up GBI, Narcisse was with Merrill Lynch for 17 years, most notably as COO for Investment Banking, Americas.

Cofounder Singh was most recently an investment analyst with Chilton Investment Co. where he covered investments in the technology, alternative energy and infrastructure space.

lol AC called a gold top way back in June 2010




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As most people know, gold has been in a raging bull market for more than 10 years rallying from about $250 per ounce to more than$1,250 per ounce. Many people are now wondering if the world's currencies have any value at all and are flocking to gold as the only hard asset that historically has always had value.

Gold coin purchases are at an all time high. There are people walking up and down city streets and in shopping mall, holding signs saying "We Buy Gold." There are even vending machines where people can purchase gold bars. Of course, there are the ubiquitous commercials on TV about gold.

Does a contrarian look at all these factors and take the other side? Possibly, but the problem is most of these factors have been present for more than two years and gold has rallied more than $400. Why would gold be any different now?

I believe the psychology of the gold market is in a dangerous place, but manias can go on longer than people think. This happened in the real estate market in 2005 when everyone rushed in. Real estate TV commercials ran nonstop, many were buying second homes as an investment with no down payment, bankers were giving loans to anyone.

It took about three years for it to finally come apart. The gold and real estate markets are not related, but the mass psychology is eerily similar.

Are we finally at that tipping point? I believe we are.

Until two weeks ago, gold had been in a steady uptrend since February. It was going up because of inflation or deflation; it was going up because Euro weakness or Euro strength or it was going up because of stock market strength or stock market weakness. People on CNBC have even said gold will never go down.

But close inspection of the gold market at this time show many technical difficulties that may bring it down. Below is a candlestick weekly chart of the gold market.


Source: Barcharts.com

Gold set the all time high of $1,264.80 per ounce during the week of 6/21/10, but that week also formed a candle stick called a "hang man". This is when a market breaks off the highs but then runs all the way back up to the previous daily or weekly close. The next bar is critical because it must run back down and close under that previous low. As you can see, this is exactly what happened.

The chart below also shows some import reversal patterns. This is a daily candlestick of gold. On June 21, gold made an all time high but closed below the previous day's low. This previous day was the all time high. This can bea very bearish sign. Also notice it happened againjust five days later.


Source: Barcharts.com

There have also been some major divergences recently. The Gold Bugs Index bug index (HUI), a basket of un-hedged gold stocks, topped out in March 2008 just as gold did. From there, both markets had severe sell-offs. Since then, gold has come back to make new highs in November 2009, and then another rally to an all-time new high again in June.As you can see, HUI has not confirmed this high, not just once but three times. This triple divergence is also very dangerous.

Source: Barcharts.com


Source: Barcharts.com

The last component I analyze closely is the Commitment of Traders Report (COT). The rally in gold this year has gone to new highs but buying from managed futures traders (the purple line) has not had the buying enthusiasm that accompanies these type of rallies. The large spec (the green line) also has been a reluctant buyer. The commercial trader (the red line) set an all-time record on the short side in March. This type of selling from commercials does not pinpoint tops, but it does put you on alert for possible market failures.

Source: Barcharts.com

Calling tops in a raging bull market can be very difficult and painful,but with so many yellow flags, there seems to be a great trade from the short side. If gold closes below $1,170 per ounce I think the gold market is in for a large fall.

Bruce Gwyn
Managing Partner
Level III Trading

(Bloomberg)--Rare-earth prices have jumped as Chinese export quotas crimped worldwide supplies for the elements used in the manufacture of disk drives, wind turbines and smart bombs. Prices have climbed sevenfold in the last six months for cerium oxide, which is used for polishing semiconductors, and other elements have more than doubled, according to Metal-Pages Ltd. in London, which tracks rare-earth prices.

Actions by China, which produces more than 90 percent of the world’s rare earths, have drawn criticism from U.S. lawmakers and officials in Japan and Germany. China reduced its second-half export quota for the minerals by 72 percent in July. It is now further restricting exports, according to industry participants. “Materials are still being held up in customs and shipments are delayed,” Jeff Green, president of J.A. Green & Company LLC in Washington, who represents miners and users of the elements, said in a telephone interview yesterday. “Many believe rare-earth quotas for the second half of 2010 are exhausted, leaving materials unavailable for sale.”

President Barack Obama’s spokesman said the National Security Council staff is looking into reports that China is blocking shipments. “They’ve seen the reports,” press secretary Robert Gibbs told reporters traveling with Obama on a West Coast campaign trip. “They’re looking into them but don’t have anything they could confirm about those reports.”

China’s Comments

China said the quota reduction was needed in order to shut polluting mines and still be able to meet domestic demand. It will “continue to supply rare earth to the world” while maintaining restrictions “to protect exhaustible resources and ensure sustainable development,” the Commerce Ministry said in a statement yesterday. Contributing to the rise in prices is an expectation of further restrictions. China will probably tighten export controls on rare earths next year, Shigeo Nakamura, president of Advanced Material Japan Corp., said at a conference in China yesterday.

Rare earths are a group of 17 chemically similar metallic elements, such as lanthanum, cerium, neodymium and europium. The elements are used in radar, high-powered magnets, mini-hard drives in laptop computers, catalytic converters for vehicles, electric-car batteries and wind turbines.

“It’s pretty frightening that there may be a gap where U.S. industry pays an extraordinary price,” U.S. Representative Mike Coffman, a Colorado Republican, said in an interview. He said U.S. rare-earth mining isn’t likely to resume until at least late 2012 at a mine in Mountain Pass, California.

‘Unified Front’

“The administration needs to join with other countries and have a unified front to tell China this is not appropriate,” he said. China’s control of the $1.2 billion market for rare-earth elements gives it “market power” over the U.S., the Government Accountability Office, the investigative arm of Congress, said in a report in April. China restricts exports of the elements through quotas and export taxes, the GAO said.

China has begun to use that market power recently, according to Japanese officials. They said supplies of the elements to Japan were cut after a Chinese fishing trawler collided with two Coast Guard boats in the East China Sea near islands claimed by both countries.

This week, Chinese customs officials began stopping shipments to the rest of the world, according to two people involved in the industry who spoke on the condition of anonymity because of concern about Chinese reaction. Chinese customs officials are delaying shipments by requiring shippers to open containers of the elements for chemical analysis, one of the people said.

Situation Fluid

What’s not clear is whether China has imposed new restrictions or exporters have simply filled the quotas that China imposed in July, the people said. “Right now it’s very difficult to find prices because the situation is so fluid,” Ed Richardson, vice president at Thomas & Skinner Inc. in Indianapolis, a maker of magnets for the military who has sought U.S. funding to use rare earths. “China is not talking, but this does fall in line with the quotas they laid out in July.”

Prices for cerium oxide rose to $36 a kilogram Oct. 19 from about $4.70 a kilogram on April 20, according to Metal-Pages. Neodymium, used in magnets, rose to $92 a kilogram from about $41 in April and $46.50 in July, the company said.

Hybrid Vehicles

About 37 percent of worldwide rare-earth sales in 2008 were for magnets used in products such as hard-disk drives, hybrid- electric vehicles and guided missiles, according to Industrial Minerals Co. of Australia. An additional 31 percent went into phosphors, used in making energy-efficient lights. China set a production cap of 89,200 metric tons this year, while reducing its export quota to 22,300 tons, according to estimates by Guosen Securities Co. It announced that quota in July, and prices have climbed since then.

Companies and government officials have already begun to react to the threat of a shortage of the elements. The U.S. rare-earth mine in Mountain Pass, California, shut down most operations in 2002. Molycorp Inc., which owns the mine, plans to reopen it, and Chief Executive Officer Mark Smith said this week that it may double the planned capacity to 40,000 metric tons.

Glencore International AG, the world’s biggest commodities trader, also said this week that it would try to restart the Pea Ridge rare-earth mine in Missouri.

National-Security Risks

The U.S. Defense Department is studying the national- security risks of dependence on China, and Congress is considering legislation to boost U.S. mining and production. Gamesa Corp. Tecnologica SA, Spain’s biggest wind-turbine maker, said countries such as the U.S., Canada and Australia hold unexploited deposits of rare earths. While most of the minerals are currently obtained from China, “there is no scarcity of rare-earth minerals in the medium to long term,” a Gamesa spokeswoman said by e-mail, declining to be identified in line with company policy.

In Germany, the government yesterday adopted a strategy to secure supply of raw materials including rare earths. Chancellor Angela Merkel said last week that it’s “urgently necessary” to boost European investment in eastern Europe and Central Asia to counter expanding Chinese interest in rare minerals.

Companies Reduced

China has cut the number of rare-earth companies this year, said Li Zhong, deputy general manager of Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. By 2015, the government wants to reduce the number of rare-earth oxide producers to 20 from 90, he said. Traders are now waiting to learn what quotas China may impose on exports for 2011, Green said.

“China might raise the production cap and export quota slightly next year,” said Wang Caifeng, who until last week was deputy director at the Ministry of Industry and Information Technology who oversaw the sector, saying that was her personal opinion. She is now in charge of setting up the ministry- affiliated China Rare Earth Industry Association.

To contact the reporters on this story: Mark Drajem in Washington at mdrajem@bloomberg.net; Gopal Ratnam in Washington at gratnam1@bloomberg.net.