In The Lead – The China Syndrome… of Another Kind


Bullion BarsGold prices touched lows not seen in over six weeks overnight and they were heading towards finishing this week with their worst performance since the commodity meltdown of early May.

Spot quotes received during the wee hours showed the yellow metal trading near the $1,486.00 mark per ounce despite a slightly lower US dollar but certainly being "assisted" by a larger-than-$1 slippage in black gold.

For the time being, the news that China’s manufacturing activity expanded at its slowest pace in nearly two-and-a-half years also put a fairly heavy damper on all things commodity-flavored this morning. That country’s factory index dipped to the lowest mark since early 2009 and such a development was probably going to actually be welcome by its leaders in their quest to quell inflation. We mentioned in yesterday’s article why some analysts opine that China might actually be headed for a bit of a… harder landing than the desired one.

The aforementioned potentially jarring touchdown by the Chinese economy has the power to possibly put a fatal hole into the global commodity price "balloon." Author and economist Gary Shilling sounds a rather chilling note of caution when it comes to commodities in the wake of a possible Chinese hard-landing scenario materializing. Mr. Shilling reminds us that:

"Industrial metals such as copper were on a tear. So were precious metals, such as silver. But much of the leap in commodity prices was due to investors and other speculators. Exchange-traded funds had already tied up much of the physical supplies of gold and other precious metals."

Mr. Shilling also adds that:

"Futures contracts held by speculators were up 12 percent in 2010 through October, with sharp increases in bullish bets on crude oil, copper and silver. Volatility forced futures exchanges to raise margin requirements on a number of commodities."

Most importantly, Mr. Shilling confirms that:

"The confidence that China would continue to buy huge quantities of almost all commodities has been the bedrock belief of speculators. For example, there were rumors that China was again building its emergency petroleum reserve in the first half of this year. I’ve studied many bubbles over the years, and concentrated on predicting their demises. Commodities show every sign of being in one."

Similarly weakening industrial activity readings were the order of the day over in Europe this morning. The EU’s manufacturing activity gauge fell to an 18-month nadir while a similar indicator for Germany flashed a low not seen in 17 months. All of this unfolded against the background of a receding threat of a Greek default and thus the quest for various safe-havens ebbed considerably ahead of the long US holiday weekend.

In some ways, the sell-off in gold and other precious metals was ironic as it took place despite the realization that the aforementioned global slowdown signs might just prompt various central banks not to pull the interest rate trigger just yet. It might turn out to be the case that Mr. Bernanke was possibly right in his take that the commodities’ spike of this spring was "transitory."

However, it might also turn out to be the case that the current global slowdown (in part, a natural mid-cycle occurrence, and, in part, a legacy of spiking food and energy prices) might jeopardize that which the previous accommodative policies had hoped to bring about. At such a juncture, hiking rates might not figure at the top of the "to-do" list for various official institutions; not yet, anyway.

Of more possible "urgency" for some, might be the issue of the potential departure of Tim Geithner from his Treasury Secretary post. Media reports indicate that Mr. Geithner might be contemplating the move for personal reasons albeit some critics of the Secretary have cited his "rocky" tenure as perhaps having played a hand in the development. As of this morning, Mr. Geithner has been downplaying such rumors of departing by stating that he is likely to remain on the job "for the foreseeable future."

Spot gold dealings opened the first session of July with a loss of $7.30 per ounce and bullion was quoted at $1,492.50 on the bid-side in New York at 08:20 this morning. Book-squaring ahead of the weekend was expected to remain a principal feature of today’s action but readings of the US’ consumer sentiment, ISM manufacturing, and construction spending gauges were also due later in the morning and were also expected to play a role in the subsequent trading action patterns on the day.

Analysts at Resource Capital Research anticipate that gold prices might peak in the second half of the current year and then experience a decline in 2012. An average price of $1,550 is envisioned by RCR analysts for the remainder of 2011. However, the RCR team offered this note of sobering caution as regards the outlook for bullion in the coming year and beyond:

"We are concerned about the recent outflows of gold onto the market from exchange traded funds. We do not expect the US dollar to collapse, and we consider inflation fears are overstated. Eventually, gold’s unique safe-haven appeal could start to dissipate. Our guess is in the first half of 2012, particularly if we see signs of recovery in equity and property markets, and positive real interest rates in the US."

Readers of these articles may note a… familiar tone in these observations; one often offered up as food for current and future thought, right here.

Silver lost over 70 cents in early trading; it was quoted at the $34.00 mark per ounce on the bid-side. The white metal is now some $4 under significant resistance levels and appears headed towards the $30 or just under area according to some chartists. Platinum and palladium were not spared of the selling spree manifest on this Friday either; the former shed $16.00 to ease to the $1,706.00 level and the latter dipped $3 to touch the $750.00 per ounce mark. Rhodium continued unchanged at the $1,925.00 per troy ounce bid-side quote.

The markets for noble metals expected the release of US auto sales figures this morning, and they are projected to remain on the flat-to-slightly-higher side for the month of June. The seasonally-adjusted annualized sales rate of vehicles is likely to come in at around the 12 million-unit level and it could reveal a very slight upward bump from May. However, that month was still showing the after-effects of the supply chain disruptions brought about by the Japanese quake in March.

As promised on Thursday, we now bring you the pertinent highlights of the CPM Group’s findings on the palladium market for 2010. Our analyst friends at that fine research house in New York noted that palladium’s total global supply climbed by 6.5% last year, to reach 8.4 million ounces. The principal driver of the increase in palladium supplies to the market was a hefty rise in recycling activity.

CPM expects palladium’s global supply to increase a bit more in the current year (another 6.9%) and perhaps reach a total tally of 9 million ounces. As regards mine output for palladium, 2010 witnessed a fairly small rise of 3% in such production (6.8 million ounces) however CPM projects a gain of twice as much in percentage terms to occur in mine output this year.

On the demand side of the noble metal, the CPM team recorded a quite decent, seven percent gain in fabrication off-take. Over 7.5 million ounces of palladium were absorbed by fabrication activities. Naturally, auto-catalyst demand remained in the… driver’s seat in the market. CPM expects 2011 to turn out to be a record year in palladium demand (reaching almost 8 million ounces).

Investment demand for the noble metal has played a critical role in bringing prices to current levels and is still anticipated to figure prominently in the price equation for palladium in the current as well as the coming year. Last year, over one million ounces of palladium were scooped up by global investors. ETFs and other investment vehicles continue to play a significant role in this niche.

Until Tuesday, do have yourself a most wonderful Canada Day and Fourth of July! That’s an order.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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