Gold, Silver, Metal Prices Commentary for Dec. 3, 2010


Bullion Bars

If there was any lingering doubt that China has serious intentions about combating inflation and runaway growth, well, such doubts can now be safely shelved and marked as "expired." Beijing announced this morning that next year’s monetary policy aims to shift from "relatively loose" to "prudent" and "proactive." The hitherto euphoric "China will never stop" species of speculators can take that bit of news and chew on it until it is completely digested; tightening is now part of official Chinese policy, and not some kind of market supposition.

What the precise fallout from the Chinese monetary policy announcement will be, remains to yet be learned. However, a couple of things can probably be counted upon; namely, that a cooling trend for the country’s economy is now receiving the full blessing of the leadership. Officials have hereby acknowledged that bigger risks lie in the continuation of runaway growth and advent of various bubbles than in the curtailing of hand-over-fist lending and the weak yuan policy they have been seen as pursuing.

At this juncture, market analysts envision a rate-hike campaign being undertaken by Chinese monetary authorities, and lasting throughout next year. Lending policies, margin requirements, and benchmark lending rates have already undergone ‘adjustments’ in recent weeks/months. Inflation rates above 4% may have been the proverbial straw for the government to announce that it will now act in a formal manner.

On the other hand, there is also little doubt that the more than half a trillion dollars’ worth of residential real estate that was sold in 2009 (an 80% increase above 2008 levels!) and the $1.6 trillion worth of loans that Chinese state banks have lent to locally government-owned firms throughout the country, have been an equally blatant warning signal that, perhaps, just maybe, things were getting out of hand. Whether or not policy makers heeded Nouriel Roubini-esque warnings at this juncture, is less important than the fact that they are acting upon such caveats.

Similar ‘adjustments’ are coming to other parts of the Chinese markets as well. For example, in a move reminiscent of that which we have already begun to see in Europe and in the US (courtesy of the CFTC and the exchanges), the Shanghai Futures Exchange has hiked margin requirements on various futures contracts. This week, the SGE contract margins on fuel oil, aluminium, copper, and gold rose to 10%, along with a widening of daily price limits on the above, to 6%. Such regulatory action, along with the aforementioned tightening policies, should give some pause to heavy-duty commodities’ speculation and reckless risk appetite. Emphasis on ‘should’ is appropriate, as the rule makers are up against…human nature.

And now, back to the other side of the Pacific. An unwelcome (and largely unexpected) rise to the 9.8% level in the overall US unemployment figure sent gold market on a fast sled-ride beyond the $1,400.00 level and the US dollar on an equally swift but declining path this morning. While gold spot prices reached $1,403.50, the greenback broke to under the 80-mark on the trade-weighted index (last seen at 79.65) and these moves came on the heels of data indicating that 39.000 jobs were added to nonfarm payrolls in November (the month that the Fed launched QE 1.5) as opposed to the previously anticipated 155.000 positions.

The dollar/gold/equity markets placed the heavier emphasis on the 0.2% bump in overall unemployment however. Well, at least the Fed can now stop sending people out on the Sunday morning talk shows in order to defend that which they launched in early November, when they saw a tight spot (jobs) in the US economic picture looming. Many experts had relied (perhaps prematurely) on the stellar October report which eventually (after an upward revision) tallied 172.000 jobs as having been added to the US payroll books. Surprise. The cold bucket of statistical water being thrown at the markets immediately dented European stocks, US stock futures, crude oil prices, and the aforementioned US dollar.

Spot gold prices had opened with modest gains near $1,385.00 the ounce, but quickly added value following the jobs report. Silver spot prices rose to $28.95 the ounce (up 39 cents) in the wake of the US Labor Department release. Speculators continued to fan the flames in platinum (still up $8 to $1,719.00) and to a lesser extent in palladium (unchanged at $760.00 but up $5 earlier) despite the fact that the sagging jobs picture does cast some doubt on just who will buy more cars in December if in fact joblessness (at these elevated levels) stays with us.

Continuing our journey around the globe, let’s look over into Europe for a moment. ECB President Jean-Claude Trichet — hands still full with ‘periphery’ problems — asserted that the euro is ‘credible’ (now that kind of pat on the back for the common currency is what should actually really worry some) and that the impending plethora of austerity programs in various nations does not raise the threat of a recession ("we’ll believe that when we see it" say speculators). More importantly, Mr. T also said (while tightly clinging to the idea that rescues are imperative) that any stabilization fund to be set up to deal with the mushrooming debt situation in the eurozone’s periphery ‘must be large enough’ to effectively tackle it. In translation: larger than the 750 billion euro fund already cobbled together.

Meanwhile, over in Italy, while PM Silvio Berlusconi parties hardy but prefers to label his romps as "elegant soirees" the country’s banks are apparently paying the price for the second-highest national debt in the union. Mr. "Bunga Bunga Berlusconi" who calls himself "the dream of all Italians" faces a vote of confidence on December 14. Confidence from the fashion-model industry, yeah. Not much else, however.

The Italian banking industry, on the other hand, while relatively sound, are facing certain profitability squeezes as they have to now pay through the nose in order to insure their debt. The country’s economic outlook is not exactly up to the pattern being observed in the rest of the bloc and might only grow 1% this year and next (compare that, to Germany‘s 3.6% growth rate in the current year — the fastest since its reunification).

Such prospects and the aforementioned debt level are a heavy drag on Italy’s banks. Let’s see how ‘confident’ their votes turn out to be on Mr. B. next week. We maintain that the risk of an eventual disposal of some gold tonnage by the Italian central bank remains quite plausible, given the rock and the hard place between which the country appears to be tightly squeezed at the moment.

Rounding out today’s round-up, a couple of links of interest for you, the soon-to-be-weekend-reader-of-lengthier-articles-than-a-Friday-might-allow-for. The first one comes from our good friend Myra P. Saefong, over at Marketwatch. Myra reports — and confirms in the process — that while gold may be stealing certain headlines, there are a number of other metals that ought not to be overlooked by those who seek returns on capital.

As we have always said: "Gold is investment insurance, while other metals are investments." And, yes, palladium (a metal which this writer has favored for good reason) makes the year-to-date performance "list" in a big way.

The second item of interest is for you to plan a visit to sometime soon, and feast your eyes on new images of the Johnson Matthey Ten Ounce gold investment bars produced for the North American market, the new PAMP "Bloom" gold bars (quite swanky), and the Perth Mint’s new Kangaroo Minted Gold bars (a new product range for the global gold market). GBWW is a case (and a website) where pictures are, indeed, worth 1,000 words. Or 1,400 words, as the case may be, at least today. Have a great weekend.

Until Monday,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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