In The Lead – A Little (More) Trouble in Big China


Precious Metals CommentaryA raft of unfriendly macroeconomic news from China and from the EU sent gold prices to prices not seen since mid-January on Thursday as the metal’s bears gained the upper hand once again in the market with a push to the oft-watched 61.8% Fibonacci retracement level (in this case at the $1,627 mark per ounce).

The principal catalyst for the fresh decline in precious metals that we witnessed yesterday was the quite poor showing in China’s HSBC flash manufacturing index. However, commodities as a group also headed lower as reflected by the 1.6% slide in the S&P GSCI Index of 24 raw materials. Meanwhile, as could be expected, the main beneficiary of the shift in sentiment was (once again) the US dollar.

The final trading session of this week opened with mild gains in the precious metals’ complex, as crude oil and copper recovered a tad and as the dollar retreated a bit on the trade weighted index. Spot gold traded near the $1,650 level while spot silver climbed to above the $31.50 mark. Bellwether metal copper showed signs of rising bearishness amid tallies that Shanghai warehouses are now sitting on double the amount of the orange metal that they had held in the final quarter of 2012. That kind of development cannot be very supportive for silver (largely a by-product of copper mining).

On Thursday, the markets witnessed the largest decline in gold-based ETF holdings thus far this year.

UBS analyst Edel Tully remarked that "Annual [gold ETF] inflows peaked in 2009 at 21.77 million ounces, but fell to just over a quarter of that amount in 2011, the weakest annual increase in global ETF holdings on record," and that in order for gold prices to try to push significantly higher, such holdings must return to the growth levels they had exhibited in the 2005 to 2009 period.

UBS’ Ms. Tully wonders whether or not the recent shift might usher in a more significant exit by perhaps even long-term holders from these investment vehicles.

By-the-way, another UBS analysis indicates that the Federal Reserve will aim to "normalize monetary policy sooner than many investors predict."

We have now had near-zero rates courtesy of the Fed since December of 2008- a time when gold was trading at $850. You get the picture…

Platinum and palladium remained in check and show only very modest gains. The former was unchanged at $1,619 while the latter climbed $3 to $655 the ounce. Palladium experienced its largest drop of 2012 on Thursday and technicians argue that there is possible scope for it to fall another 7 or 8 percent.

Analysts at Standard Bank (SA) feel that while the noble metals are joining the momentum to lower values that gold initiated since the post-Bernanke-is-not-willing-to-say-he-will-ease-some-more period started in sympathy, the recent demand picture is also contributing to the profit-taking in what has been the best-performing duo in the precious metals’ space.

Swiss export data appears to corroborate the fact that demand from China for Pt and for Pd remains weak and that domestic car sales have not gotten off to a very good start this year in that country. Zurich-originated palladium exports to China totaled only 311 ounces in February. That said, the Standard Bank team believes that production-cost issues could be supportive for palladium on an approach towards the $600 level even if the current upside for the metal appears limited at around the $700+ area.

Much of what we have recently seen in terms of gains in the US dollar has not been due only to tangible metrics that show progress on the US economic front. There is another component to the greenback’s ascent on the price scales; one that is perception and sentiment-based. A survey by Bloomberg News shows that 34% of US respondents to a monthly consumer expectations questionnaire feel that their country’s economy is on the mend. That level of optimism is now at an eight-year high. The mood in the US has been boosted by job growth (best half-year trend since 2006), home sales data, the largest rise in the leading economic indicators in 11 months, and by similar economic metrics.

On the other hand, it also appears that inflation has not morphed into the dire scenario that was depicted by alarmist publications for so many years. In fact, the Dallas Fed’s President opines that rising prices are not a threat to the US economy, despite a temporary spike in oil prices courtesy of speculators.

Mr. Fisher went on to say that his FOMC team will "not support any further quantitative easing under these circumstances."

In addition, he also noted that the money that the Fed has pumped out is largely sitting around unused (we mentioned the shrinking velocity of money the other day and why inflation fear-mongers are plain wrong on ringing their incessant alarm bells). All of this has played into the American currency’s multi-month strengthening.

Yes, the "fiat currency" that was supposed to die a thousand deaths by… paper cuts by now, refuses to play into the hands of the many doomsayers who have been promising its demise for several [many] years. In fact, the greenback’s Nosferatu-like ability to survive the incessant stream of "obituaries" that have been written about it- mainly by newsletter vendors whose main job is to keep you petrified about the future- has prompted even some very respectable sources to finally admit that it is time to shift camps.

To wit, PIMCO — yes, that PIMCO, the huge money manager and long-standing bear on the greenback — has now finally discarded its negative view on the US currency and is projecting that it will likely continue to rise for at least the remainder of this year, and possibly a lot longer. PMICO envisions a dollar-euro rate at or near $1.15 and an Aussie dollar at 90 cents US (can the Canadian loonie be far behind?) before the end of this year.

Regular readers of these articles may recall that we advised not short-changing the American currency (or shorting it for that matter) for the better part of the past year. While we are not classic "dollar devotees" we do have a duty to bring trend changes to your attention, whether or not they are pleasant to consider. Sometimes (make that: many times) it is all in the timing…

The highly anticipated HSBC figure on China’s economic temperature came in at 48.1 and it was the lowest since last November as well as the fifth decline in as many months. Readings under the 50 pivot-point indicate economic contraction underway.

In fact, HSBC’s chief Hong Kong-based economist believes that China’s "growth momentum could slow down further amid a combination of sluggish export new orders and a softening of domestic demand."

Coupled with the lowest level of hiring in that country in two years, the conditions prompted 24/7 Wall Street’s Douglas McIntyre to opine that the "recession in China has begun."

A very similar and equally worrisome metric was noted in Europe, where the Markit Eurozone PMI Composite Output Index revealed that the region slid back into recession this month and that output there fell for a second consecutive quarter (the ‘classic’ requirement for calling a recession). When we consider that China is slowing considerably and that it also generally exports 40% of its manufactured goods to the Eurozone, it would appear that the commodities-related jitters we witnessed over the past several weeks are quite justifiable.

In a nutshell, aside from the USA, there are large economies out there showing signs of fatigue. That paradigm is not investment-friendly. As a result, European equities lost more than one percent yesterday and the gloom eventually spilled over to the Dow, which slipped 78 points on the day. However, we have to add (at least in the case of gold and silver) one more ‘player’ to the anxiety-producing equation that has rattled the markets lately. That would be India, in this case. We have reported already that nearly 300,000 Indian jewellers are crossing their arms and refusing to conduct business as they protest their government’s proposal to hike import tariffs on bullion.

However, there is more to the China and India stories than meets the eye. While we may all be focused on the latest HSBC metric or the import duty-related walkout, it is worth considering that these two countries have in fact become the string-pullers in many commodities.

Marketwatch’s Myra Saefong relays the fact that "Growth rates [or the lack thereof] in both China and India are experiencing large fluctuations, and with generally stable supply, these large fluctuations in aggregate demand lead to high price volatility" — volatility which is troubling the commodities markets.

Ms. Saefong also notes that, according to Mr. Jeffrey Sica, President and Chief Investment Officer of Sica Wealth Management:

"commodity markets should be more worried about China and India than ever since their economic growth, and economic stimulus creating liquidity in China, has had an astronomical effect on commodities prices."

Now consider the overnight headline by Commodity Online that cautions that "India, China gold jewelry demand is expected to decline in 2012, 2013" for a moment.

We wish you a pleasant weekend,

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. and

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