Gold, Silver, Metal Prices: Commentary – 1/11/2010


Bullion update ... In The China Shop…

Good Day,

Gold prices lifted off at warp speed in the first moments of overnight trading on Sunday, following news that China went on a commodities shopping spree in December.

The US dollar lost more than 0.50 on the trade-weighted index as follow-through selling from Friday, and the Chinese news reignited risk appetite and extended the carry-trade plays into the Monday session. Such bets were pretty obvious in the larger than $1.1 gain in crude oil, the nearly 2.5% rise in copper and aluminium, and similar surges in zinc, lead, and nickel.

"Gold had closed on Friday just below the heavy resistance zone above the $1,140 an ounce mark," said’s founder, Matthias Detremmerie. "This must have attracted strategically placed, opportunistic market on opening buy orders late on Sunday", he added. He relayed the start of trading last night as follows: "Globex opening on Sunday saw Friday’s daily high (GCG10 – $1,140.0 an ounce) taken out in 5 seconds of trading, where a buy-stop frenzy started a snowball effect in very tight market conditions. Another round of buy-stops was seen at $1,143.50, where the market equally arrived after 5 seconds after market opening."

GoldEsssential analysts also added that: "Given that the spike in gold has come in extraordinary market conditions makes us a bit cautious, for now, it seems to be holding up just fine. If it can hold to gains above $1,148-$1,148.40 an ounce into the early COMEX dealings later today, there’s a good chance that the move will eventually attract fresh fund inflows that may take this rally towards $1,170 an ounce."

Resistance at around the $1170 level could engender a pitched battle, and, for now, support will be assumed to emerge at the $1140 area from which the current rally emerged. The latest round of gains in gold is however, (once again) unfolding against a background picture which show that investor interest is still lagging gold prices, based on the statistics which reveal that gold-oriented ETF vehicles actually lost 4.52 tonnes via redemption just last Friday. Such outflows have thus far amounted to just over 15 tonnes during the month. On the other hand, over in the futures market, the party rolls on, as reflected by the nearly 780 tonnes of net speculative long positions (which is still quite a mountain, despite a recent 4 point drop in percentage terms as a portion of the overall open interest), and some 507,000 contracts’ worth of open interest.

New York spot bullion trading opened with solid gains across the precious metals board, as the participating crowd observed a continuation of dollar softness (last seen at 76.94 on the index, and at 1.453 against the euro), and commodities on the rise. Gold spot rose $21.40 per ounce, to reach $1159.10 on the bid side, while silver gained 36 cents to start at $18.84 per troy ounce. Good gains were seen in platinum (which added another $15 to $1589 an ounce) and palladium (rising $2 to $428). Rhodium was steady at $2600 per ounce.

News that China’s car market overtook the USA’s in 2009 boosted speculative plays in the noble metals complex. Nearly 14 million vehicles were snapped up in China in the past year, while the US auto market suffered a nuclear winter which saw the only bright spot in sales only on the heels of cash-for-clunker-style gimmicks. This is not to say that the Chinese car sales took place without any government-sponsored stimuli, either. But, the figures speak for themselves. The first waves of platinum and palladium ETF buyers must be a happy group, thus far.

Thus, the operative word for this Monday is (once again): China. A huge emphasis is being placed by speculative market players on practically everything that the country does economically at any given moment, or on what its various officials say now and then. To a certain extent, this is as it ought to be; China is, after all, aiming for lofty placement in the hierarchy of the global economy during a period when the US and Europe are wobbly-looking, at best. However, not everyone is on board with the starry-eyed projections of never-ending growth and consumption coming from Zhongguo.

In fact, according to, there is at least one school of thought that sees a fully-formed Chinese bubble and aims to profit from the eventual end-of-life event that such phenomena are normally accompanied by. One of the leaders of this not-so-bullish school is: "James C Chanos, (who started the Kynikos Associates investment firm), and he is of the opinion that China is building a number of assets bubbles and will collapse. He is therefore bearish on China’s stocks as compared to investors of the likes of Warren Buffett and Wilbur Ross Jr. who are very optimistic about China’s growth in 2010 and are adopting a bullish strategy.

Mr. Chanos says that bubbles are created because of credit excesses and there is a huge amount of credit excess in the Chinese economy as a result of huge stimulus by the Chinese government as well as huge amounts of lending by Chinese banks to pull the economy out of the recession. He however also says that it will be difficult to take positions against Chinese stocks as foreigners are restricted from investing directly in stocks listed in China. Hence, he is thinking of betting on construction and infrastructure related companies."

Mr. Chanos is not alone in his line of thinking. Forbes recently took a close look at China and came away with the following sobering observations: "China’s economy is humming along in high gear, thanks to a fast-growing pile of dicey debt. Such booms tend to end badly. China’s economy is the envy of the world. As developed nations struggle to eke out a bit of growth and to get unemployment rates out of double digits, Chinese output gallops ahead at an 8% annual rate. This $4.7 trillion economy, it seems, is the world’s dynamo and the prototype for the future.

Take a close look, however, and you may come away thinking China resembles nothing so much as Japan shortly before its stock and property markets melted down two decades ago. A speculative frenzy of borrowing and bidding up is at work. If and when prices crash, there will be hell to pay.

The Chinese government’s officially disclosed $840 billion in public debt represents less than 20% of GDP. But the People’s Bank of China and the treasury are also on the hook for potentially $1.5 trillion in off-balance-sheet debt owed by cities and provinces and entities they control. They’re also implicitly obliged to backstop $1 trillion, both in loans that “policy banks” were directed to issue, even when they made no economic sense, and nonperforming loans that the government removed from the books of state-owned commercial banks over the past decade. Add it up, and the national government is responsible for debt equal to over 70% of 2009 GDP. That doesn’t count any loans generated this year that might go sour amid a 30% increase in debt balances nationwide."

And you thought the US had it bad, with a current 50% of GDP debt load…No wonder that Forbes goes on to note: "Signs of the times: government bureaucracies funding themselves by foisting debt on state-owned business enterprises; local governments raising capital by selling land at sky-high prices to corporations they own; and a People’s Bank of China lavishing liquidity on the entire system in a way that makes Federal Reserve Chairman Ben Bernanke look downright stingy."

In so many words: “It’s a Ponzi scheme whose head is the central bank, and it can print money,” says Victor Shih, a China expert at Northwestern University."

Watch for the attempts towards the $1170 level, ($1174 remains a bit of a…grail) as well as for potential emergence of profit-taking around $1162 or higher. The metals markets are making a habit of depending on but a few (and the same) factors. If it worked in 2009, it must work again this year, or so the thinking goes. Bears remain in hibernation, bulls are roaming the market prairie, and a certain Tiger lurks around the calendar’s corner…This one, a Metal Tiger (same as 1950), to boot.

Chinese horoscope says: "Tigers depend on luck. They like to spend money, and also to share it. They can be quite impulsive spenders because they know they can always make more. Somehow, as luck would have it, they discover the end of the rainbow just before complete bankruptcy. They are willing to lose a fortune in their lifetime, if it means they will wind up with two."

Happy Trading,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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Check out other site market resources at Bullion Prices, Silver Coins Values and theUS InflatioCalculator which easily finds how the buying power of the dollar has changed from 1913-2009.

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Duff Minster

Personally I believe that there are other factors at work. I believe that while its true that the Carry Trade was enhanced by the good import/export numbers out of China, that growing realization that the demand side for the dollar is actually decreasing as well as the probability that the US will need to issue a whole lot more debt, even as its real estate market continues to need support of low interest rates as the shadow inventory from government forclosure moratoriums builds, and the massive wave of ALT-A, Options ARMS, Pick a Rate, and other non sub-prime related mortgage… Read more »