Neither A Borrower Nor A Lender Be? Nah! – Thursday Kitcommentary

by Jon Nadler, Kitco Metals Inc. on January 20, 2011 · 0 comments

Bullion Bars

If there is one place left on the planet where banks are doling out loan money by the wheelbarrow-full, well, that place has to be China. Just show up at your local friendly bank. Then, you too, may contribute your share to helping the country’s economy record a more-or-less 10% rate of growth (make that, 10.3% to be precise); as it turned out to be the case for 2010. More than double the money that was lent prior to the start of the global financial crisis has been pumped out by China’s banks last year, while the country’s money supply is up 50% from just 2008’s levels. So much for Shakespeare.

Such news would normally be quite welcome and even half of that pace of economic growth would be quite a hefty one to report were it to come from the US, or Japan, or the EU. However, in this case, the statistical number set prompted a sharp sell-off in Asian and emerging market stocks, many commodities overnight.

The reality is that, these days, as China goes, so does much of the rest of the global "tune." Today’s name of the tune is most likely: "Tight" by Hank Crawford. In fact, the malaise surrounding China’s potential tightening appears to have quickly relegated President Obama’s "sales pitch" made last night (said he to Premier Hu: "We want to sell you all kinds of stuff. We want to sell you planes, we want to sell you cars, we want to sell you software." to "also-ran" status this morning. We alluded to this song becoming the one to hum in 2011 when we listed the market-moving factors to consider as pivotal in the New Year.

The "worry factor" remains the same: China is growing too fast, China is stoking inflation with such growth rates, China is not going to tolerate the problems that undesirable levels of inflation (now thought to be near 6%) sometimes bring along. Fourth quarter Chinese GDP was noted at 9.8% and it may have cemented China’s ascent to the number two global economic spot, while pushing Japan to third place.

In so many words, China is now faced with having to tighten some more, and perhaps do so quite soon, and maybe even quite aggressively. Not that others are not taking out the interest rate weapon and firing at the inflation bogey. Take Brazil, for example. Today. Such prospects are the stuff of which…certain market "events" are woven out of.

The price of gold bullion fell hard in the wake of the Chinese news, and after the yellow metal was unable to stage an assault to successfully overcome resistance barriers at higher levels over recent sessions. Gold is evidently reflecting the shifting market sentiment that has been manifest since near the end of last year.

Net outflows from gold-oriented ETFs continue to take place, with the latest reported outflow being a near 10-tonne decline that took place yesterday. Forty lost tonnes of gold may appear not be that much, but the leakage has been only one month in the making. Silver ETF holdings have declined 1.6% within the same timeframe. More than 315 tonnes of the white metal has been lost in silver ETP redemptions this month. The importance of what ETFs do (or undo) cannot be overstated. This writer’s presentation at the upcoming Vancouver Resource Investment Conference will be focusing on "Tales From The Enchanted ETF Forest."

Thursday’s New York session opened with losses across the precious metals’ complex. Spot gold suffered a $25.00+ per ounce loss (1.65%) and fell to $1,343.40 (just under the number(s) at which it is thought to "have had to" hold, lest it should decline significantly lower). Stop-losses were triggered, and they fired off with the precision of the upcoming Chinese New Year’s pyrotechnics displays. Silver lost a full dollar, plus 22 cents and fell 4% per ounce, to touch the $27.55 mark (it too, was seen easily breaching the "pivotal" figure — in this case, $28 — to have had to maintain).

Platinum and palladium did not manage to avoid the sell-off either, this morning. The former dropped $35 to reach the $1,800.00 per ounce level, while the latter declined $17 to the $795.00 mark. Rhodium continued unchanged at the $2,380.00 per ounce price marker. Perhaps some support might emerge at these round figures for the noble (as well as the precious) metals, but that remains to be seen at this juncture.

Today, it was "never mind the slightly lower dollar," (well, okay, it did turn higher after the jobless claims numbers) or yesterday’s risk appetite flare-up for that matter, either. Today was a day to obsess about China tightening, and about improving global economic conditions. Today was a day to note the US jobless claims’ decline of 37,000 filings and "act" based upon that trend.

The healing of the US labor market (the pivotal remaining domino to which the Fed looks when deciding on the triggering of its exit strategy) is being confirmed by the fact that jobless claims appear to have broken towards palpably lower levels over the past two-and-a-half months, even if the period is buffeted by the ebb and flow of holiday-related jobs creation patterns. One Thursday’s figures will certainly not be the ones to prompt the Fed to act, but the trend could be the (US economy’s and the Fed’s) new BFF.

Absent a fresh crisis, where on the price scale should the metal be trading? Evidently not quite at $1,500 or higher, as was promised around the holidays. About the same scenario might hold true for silver, which, in the opinion of James Investment Research, is possibly poised to decline as much as 20% (to about $22) as the trade has turned "crowded."

Look no further — according to some — than the fact that the US Mint sold 4.5 million Silver Eagle coins. Such a sales figure would be a record for the Mint. It also means that someone out there is holding millions of little coins for which they might have paid as much as $35 each. Some will explain this shiny silver coin sales statistic as the beginning of something "big" but others see it as a (sure) sign; namely, that the arrival of the small retail investor on the scene means it is time to pull money off the table.

One must also pose the small, but necessary to ask question as to whether the entity that let go of 4.5 million ounces of ETF silver (the same amount that John Q. Public bought from the Mint) the other day, did so because it expected much higher silver values any time soon? Or, did the HSBC fund mentioned in yesterday’s post scale back its gold holdings by 50% because it expects a repeat (24.8% or 29% return in 2009 and 2010) performance from the metal this year? Even if it remains confident about the long-term?

The only capsule statement needed to explain such new investment patterns is the one offered by the Reuters Metals Insider update received this morning.

It opines that "the decline in holdings in physically backed exchange-traded funds signalled a shift in investor interest from gold and silver to riskier assets such as stocks amid a brighter economic outlook."

None of that, of course, will stop you from receiving "explanations" of another "kind" about this possible sentiment shift in your e-mailbox. They will be full of words such as "raids" or "sinister forces" or "Crimex." Caveat lector.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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