Gold Prices, Eurozone Bond Sales (commodities weaker on strong US dollar, market selloff but long term fundamentals remain strong, Italy bond rates double in just one month)

Interesting Fact: 12% of the world's gold is produced at mines dug by individuals without advanced digging equipment. A lot of those mines are in countries like Mali and Somalia.
So far in 2011 silver's popularity has gone up while gold's has decreased slightly, at least according to sales reports by the US Mint. Between January and end of November 2011 the US Mint sold 37,859,500 ounces of silver (up 15.11% from 32,890,500 oz in 2010) and 934,500 ounces of gold (down 19.5% from 1,160,500 oz in 2010). In fact on October 1st it was rumoured that upwards of 737 thousand of silver ounces were purchased from the US mint, a one day record. If true that would amount to 42% of all silver purchased during the month of December 2010 and 24% of the three million ounces sold in October. Since the US moved towards a weak dollar policy in 2002 silver has tacked on about 500% of its present value which is still about 20% under its 200 day average. 2012 update France's credit rating was lowered to AA from AAA by Standard and Poor's. That's a bad position for the country to be in considering it recorded zero gdp growth during the year and given previous statements by Sarkozy as recently as October when he said he would do everything he could to keep France from being downgraded.

Negative Forces affecting the metals
     Over the last little while, particularly the last two weeks gold, silver and other iso traded precious metals showed vulnerability even though their long term outlook remains strong. The weaker prices are due in part to a stronger US dollar (equity markets weak driven lower by the strong dollar which negatively affects foreign investment, EU sovereign debt uncertainty causes US dollar to gain). The ECB's reluctance to purchase the soveriegn debt of Italy and Spain has also been a negative factor (ECB has been under pressure from Germany to refrain from handing out blank cheques to debt laden countries citing the repercussions and how greater ECB exposure to Italy would mean more exposure for Germany, France has a different opinion and is lobbying the ECB for more support). France thinks that more ECB buying is the only way to encourage other investors to buy sovereign debt; On Friday, 10-year Italian bond yields surpassed 7% after the country's debt auctions that day showed lackluster results (Italy did sell €8B worth of 1/2 yr bonds (@ 6.5%) & another €2B in 2 year bonds (@7.8%) however the rates commanded by buyers nearly doubled from only a month ago (was 4.63% and 3.54% respectively). 7% yields in Italy puts it in the same class Greece, Ireland and Portugal were once in (though rates did get much higher for those countries before their financial collapse, the 7% rate was seen as a point of no return), this is extremely dangerous because Italy is home to the world's 3rd largest bond market after the USA and Japan (worldwide exposure to Itay is 3 times what it was to Greece) with Barclays calling Italy's situation "mathematically beyond the point of no return".
Even more disconcerting: Germany, considered the strongest of the EU economies (more manageable debt/high gdp growth) is having problems raising money in the bond market; On Wednesday Nov. 23rd Germany sold only 60% of the 10-year bonds made available. Update: With Italy's debt crisis worsening and the ECB not stepping up with more support, the IMF is reportedly preparing to loan the country $794 billion (€400-€500 billion) at an interest rate of between 4% and 5%. The loan would allow the country 1-1.5 years to reform its system and hopefully regain its solvency. It must be noted however that the IMF may be relying on a new credit facility worth just over €420 billion that was offered it in 2009 by 39 countries, to put together the money for Italy given that only two months ago the IMF only had less than €300 billion available to be loaned. (wsj:IMF Can't Rescue Europe Alone) The news pushed European Equities higher (main equities index up 3.75% on Monday). (news broke in Italy's La Stampa)

There's also bad news coming out of China - Many companies are laying off workers in the manufacturing sector and that's leading to strikes in cities like Dongguan and Shenzhen. Less import demand by Europe is causing a decline in export growth (down to 16% in October). Many of the plants use commodities like gold (1,000 people left their positions in protest recently at apple/ibm plants in Shenzhen) and silver (Foxconn makes electronic components, automotive plants - cars require catalytic converters which are the largest source of demand for platinum group metals).

Grmike's view The commodities market is entering a consolidation and deflationary period as a result of the current US debt ceiling being capped until 2013, US dollar rally, and gold and silver's post 2008 rally. The gold to silver ratio is getting very close to 60 which represents a doubling in eight months (33 in April 2011). Central banks continue not surprising since silver and gold remain fundamentally strong investments. View the lower prices as an opportunity to buy more. Poor debt sale showings in Italy, Germany and Spain mean debt may literally be insurmountable. The effect that will have on currencies will be disastrous and that will cause central banks to hoard even more gold and silver making the commodities invaluable.

What about emerging market debt? The debt crisis is making the buying of debt associated with developed nations increasingly unpopular particularly amongst international investors. So where are they going? Well, a viable alternative for the long term that's attracting interest are emerging market bonds that is, emerging market debt denominated in their local currency (debt sales in the developing world traditionally happen this way). Even a year ago when the debt crisis wasn't as widespread, US pension funds forecast their participation at over $100 billion before 2015. The only limiting factor is that in many countries including the big players China, Brazil and India the system is designed to limit foreign capital investment so not all foreign investment is allowed and when it is some countries like Brazil impose a special tax. Though still in its early stages, restrictions on them are gradually being removed and that's leading to more investment.

Last Monday's 2.5% dip in gold put the spot price below its $1,700/oz 100 day moving average, possibly an important breach considering that level had been supported for over a month (December futures contract on Comex down to $1,685.7/oz). In the week of Nov 21-26 gold fell 2.3% after falling 3.5% the prevous week. So far for November, silver declined in price by nearly 10% meaning that on the year silver hasn't gained anything. Out of all the metals with an iso trading code palladium lost the most on the week, dropping 5.9% to close at $572/oz.

Positive forces on the metals:
Gold ETF's continue hoarding, with the total weight of all gold held by ETF's recently reaching a new high of 69.978 million ounces led by the world's largest, SPDR Gold Trust.

IMF recently reported that Russia (20 tonnes), Mexico, Belarus and Colombia purchased a total of 26 tonnes of gold in October proving that gold is still the top safe haven investment choice for central banks.
Gold's long term fundamentals remain strong especially when factoring in the long term outlook for the world's most popular safe haven currency; the US dollar may be at risk of weakening if sovereign debt there becomes harder to sell (the US dollar is used in 85% of all foreign exchange transactions, 60% of foreign reserves are held in US dollars, 40% of US spending comes from debt sales making the country's ability to borrow extremely important). For now though, a strong black Friday weekend ($52B in sales) is providing a temporary boost to US sentiment.

On November 21, 2011 Silvercorp subsidiary Henan Found Mining Company, paid $22.75 million for SX Gold, a small Chinese government-owned gold mining company. The mine acquired contains silver, gold, lead and zinc, is nicnamed XHP and is a 3 hour drive from Luoyang City. There's also a small exploration project 51% controlled by SX Gold. Silvercorp already owns another mine in the area, the XBG mine which was acquired in August 2011.

Other: It was reported that Canada will officially withdraw from the Kyoto Protocol next month (December 2011). Japan and Russia are other countries that openly state they will not accept new commitments required by the new protocol, notable since Japan is where the treaty was first signed in 1997. Oil sands production is expected to more than double to over 3 million bpd by 2020-2025.

Update: In the third quarter of 2011 Canadian gdp grew by 0.9% (3.5% when extrapolated over 12 months) up from 0.1% in the second (energy up by 2.6%, up from 0.4% in the second quarter), while exports rebounded posting a gain of 3.4%. Canadian real estate has also been stronger which is surprising given that Canada's record high home prices (average at over $360,000 up about 5%) have sparked concerns over a possible real estate bubble.