Gold, Silver, Metal Prices Commentary for Dec. 10, 2010


Bullion Bars

China and its anti-inflation/anti-bubble combat took centre stage in the market news flows once again during the overnight hours, as its People’s Bank announced a half percent hike in reserve requirements (to 18%) for the country’s banks.

The move represents the sixth such tightening this year and it comes just one day ahead of the release of November inflation and other economic metrics for the world’s second largest economy. Polled analysts believe that inflation may have risen further, possibly to as high a level as 4.6%, and that the PBOC might raise interest rates even as soon as Sunday if it feels that the inflation dragon is growing yet another unwelcome head and getting ready for a menacing flight.

The news from Beijing dented most of the Asian regional equity markets overnight, especially as China’s trade activity gauges (imports and exports) rose to records last month thereby offering yet another reason to believe that the PBOC might do something –and soon- in order to prevent some runaway scenarios that might prove difficult to deal with at a later date.

Commodities markets, on the other hand, treated the Chinese trade statistics with speculative "joy" and continued to rise for a third day, with specs probably figuring that they can deal with Chinese tightening if and when it comes, but not just yet. ‘Tis the season to keep pushing for a big fat profit bag under the tree. Has been, most of the year.

After having recovered somewhat during Thursday’s session, gold prices opened with an eighty-cent loss on Friday, quoted at the $1,386.20 per ounce spot bid level. Scattered selling was still being observed at opening time; however a slippage to just under 80 on the trade-weighted index by the US dollar helped minimize bullion’s initial loss early this morning.

Silver also fell — by fifteen cents — to open at the $28.61 per ounce mark. Wednesday night’s EW analysis found that Tuesday’s 7% high-to-low intraday reversal (daily continuation contract) after recording a new 52-week high "was the third largest intraday reversal after a new 52-week price high since August 1971 (nearly 40 years)." In a somewhat similar move, silver made a slightly higher high in May of 2006 (after the April 2006 high), but then declined a whopping 37% in just five weeks.

Platinum advanced $2 on the open and was quoted at $1,677.00 per ounce, while palladium gained $1 to start the final session of the week at the $739.00 per ounce level. Rhodium showed no change at $2,260.00 the troy ounce. A mix of hot-cold news from the automotive sector might give the noble metals specs something to ponder over the weekend.

Carmaker VW announced that its November sales gained a robust 16% and that it will remain on track to sell more than 7 million sets of wheels in 2010. The (long-awaited) global upturn in automobile sales represents a larger-than-proportional blessing for the German carmaker. China, once again, takes the ‘cake’ — for VW. And, what a sweet mooncake that, is.

VW’s November Chinese car market deliveries popped by 29%. In fact, overall Chinese car deliveries rose by 29.3% last month to a new record of 1.34 million units. That said, automotive analysts expect precisely the Chinese automobile market to be the one that might show a mild contraction in the coming year.

A shrinking to the 11% growth level is anticipated for Chinese vehicle sales in 2011, according to Deutsche Bank analysts who point to the dissipation of stimulus effects and to the lower likelihood of sustainability for such astounding year-on-year gains as that market has recently been witnessing. Hopefully, any such "slowdown" will be mitigated by a revival in US and European auto sales next year. Russia, India, and Brazil auto markets are still expected to perform robustly in 2011.

Something else that is also expected to do well in the coming year is the hitherto "laggard" area of certain commodities such as cocoa, hogs, oil, and natural gas. This, according to a fresh Commodities Corner article by Marketwatch’s Myra P. Saefong. Natural gas, for example, has not only been a shrinking violet this year; it was the worst performer in an otherwise buoyant niche.

However, be very alert. As Reuters cautions this morning, "commodity investors now fear a slowing Chinese economy more than U.S. financial regulations and many worry of a bubble if markets keep rallying with little heed to fundamentals, a survey by Barclays Capital found. Absolute returns, or profits, remained the main reason for investing in commodities for a second straight year — compared with the traditional objective of portfolio diversification."

This type of "quest" (by hungry, hungry hedge hogs) is precisely what worries your scribe as well. Early in 2010, they set their sights on commodities. Behold the year-end results. What happens when they find new ‘darlings?’ Answer: xxxx.

A shrinkage of another kind was on tap this morning as well; the one noted in the US trade gap, which fell to its lowest level since January. The 13.2% narrowing of the disparity between exports and imports vis a vis September’s figure of $44.6 billion was good enough to make for a fresh advance (to as high as 80.29) in the US dollar on the index as well as a corresponding decline in the precious metals complex. Further aiding the US currency this morning, was the release of US consumer confidence data, which showed a gain up to the 74.2 level for the early part of this month.

Spot bullion traded as low as $1,372.00 in the wake of the US trade gap figure, while silver touched lows near $28.00 per ounce. Gold ETP holdings fell by about 2.7 tonnes up and through Thursday, while silver, platinum, and palladium holdings in such vehicles remained at or near record high levels. Nothing like a little "off-exchange hoarding" of physical metals to excite the markets, eh?

A gap of another variety — that of the federal budget — remains very much on the minds of Americans. Most of them now believe that the US deficit is "dangerously out of control" and that it needs to be brought down. When it comes to solutions however, the US public is far less inclined to give up anything that has to do with entitlement programs and defense, and would prefer that the rich (and Wall Street, as opposed to Main Street) get "soaked" in the process instead.

Never mind that defense is still more than 50% of the ‘problem’ in the deficit numbers’ game. A Bloomberg National Poll reveals that Americans do not want to sacrifice, plain and simple, even if their own President’s debt panel found that "must-have" reductions in Medicare, Social Security, and defense spending are some of the key factors that might begin to address the problem.

Then again, the US public as also at odds with its own central bank. Many see the Fed as the uber-evil villain which has set out to destroy the greenback. More than half of Americans actually want to rein the US central bank in under tighter political control, or euthanize it outright. Yesterday’s "Taking Stock" with Bloomberg’s Pimm Fox and economist Joe Brusuelas revealed just how little the American public really understands about the Fed and its policies, but how eager that same public is to blame it for everything that ails their country at the moment.

Many in America are now looking to the author of "End the Fed" — representative Ron Paul (R -TX) to literally do so, following his taking the chairmanship of a subcommittee to oversee the Fed. Good luck with that. You can download the podcast entitled "Bloomberg’s Brusuelas Comments on Abolishing the Fed: Audio" at this link (about halfway down the page): and learn for yourself why, even if the new scrutiny that the Fed might come under could be intense, the chances of it simply going away and letting banks set monetary policy are…zilch, zip, nada.

The podcast will give you a good idea of the…alternatives (including an Austrian-flavored scenario) that would have materialized by now, had the Fed not been navigating the treacherous waters of the economic cycle. The same odds, by the way, of the oft-floated urban myth that there is no more gold present in the US Treasury’s vaults.

Have a great weekend. Listen to China.

Until Monday,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and
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