Gold, Silver, Metal Prices: Commentary – 2/12/2010

Neither a Borrower Nor [Mainly] a Lender Be…

Yesterday’s Greek-flavored gold rally turned into today’s Chinese-tinged decline as the Beijing government flat-out demanded that banks freeze more money from being lent. The surprise but unsurprising move to raise reserve ratios by half a percent comes on the heels of a similar move on January 12 and will take effect on the 25th of the month.

 As we warned in our article just two days ago, the fact that Chinese banks may have lent as much money during January as in the entire previous quarter, and did so despite the hike in requirements, pointed to this more aggressive move we saw materializing today. Also as pointed out previously, the Chinese lending-curb move is anything but commodities-friendly. In simple terms, where is the funding going to come from to load up on more speculative positions in copper, gold, and a slew of other ‘stuff?’  Well, obviously, not as much from local banks as previously.

Gold prices turned lower following the Chinese lending-restrictive move and touched lows near $1076 overnight, as the dollar surged ahead and as players lightened up on yesterday’s mainly risk appetite-driven and short-covering-based fresh positions. The New York spot markets started the week’s last session with assorted declines across the precious metals boards. Gold was off by $9.80 per ounce, opening at $1082.80 as participants looked ahead at book-squaring and watched oil lose 2% following the Chinese move.

GoldEssential.com analysts find some reasons to be smiling in gold’s very recent price action, noting that: "developments over the last 24 hours have been encouraging. Correlation studies showed a decoupling between gold and the U.S. dollar on Thursday as gold rallied on technical buy-through and strong equity markets, while the U.S. dollar gained on better than expected data, like in the good old days" They conclude, however, that: "without the cooperation of investors, it’s very uncertain whether gold’s recent recovery will find – sustainable – new legs." Key battles could still lie ahead at $1105 (the path of a major downtrend resistance line, while support ought to hopefully be found near $1070 an ounce.

Silver lost 27 cents to start at $15.34 per ounce this morning, while platinum fell $30 to $1499.00 and palladium dropped $7 to $413 on the open. Rhodium showed no change at $2340.00 per ounce. The economic calendar for the day will be fairly data-laden, with the markets expecting numbers on the retail sales, business inventories, and consumer sentiment fronts. However, the overriding topic du jour remains the Chinese tightening news and the unfolding reaction to the same in the markets.

As noted above, the US dollar resumed its climb with much additional aplomb following Thursday’s EU-Greek deal-induced paring in value. At last check, the US currency was ahead by 0.58 at 80.59 on the trade-weighted index and was trading at 1.357 against the European common currency. The economic recovery (is it over before it has begun?) in the Old World practically lost both engines in a major stall last month, as the German economy’s GDP stagnated and that of Italy actually fell.

The eurozone’s GDP managed only a 0.1% gain after gaining 0.4% in the third quarter of 2008. Thus, the euro fell for a third day, adding to its hitherto 7% (mainly Greek worries-induced) losses recorded over the past sixty days. If that loss were not bad enough, well, tallies show that the euro has actually lost nearly 10% against the US dollar since November.

And, if those stats were not bad enough, well the rumblings of a potential eurozone break-up continue to be present in various pundits’ observations. To wit (reports Bloomberg):

"Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the break-up of the euro bloc," this, according to Societe Generale SA strategist Albert Edwards, who goes on to opine that:

"The problem for countries including Portugal, Spain and Greece "is that years of inappropriately low interest rates resulted in overheating and rapid inflation," London-based Edwards wrote in a report today. "Even if governments "could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable break-up of the euro zone." Mr. Edwards concluded.

Break-up in Europe? What a shock to newsletter writers who assured us that the euro would soon replace the dollar on the international reserve scene. Another potential shock to the same uber-optimistic team of periodicals vendors is the potential crash (not a typo) in China. Yes, the same China that is supposed to take care of any and all demand in commodities for decades to come. Not so fast:

Here is someone who (incredibly, given his credentials and former utterances) is no longer convinced about China’s ability to sustain the hot pace of economic expansion; none other than Swiss guru Marc Faber. He thinks that: "China’s economy will slow down "meaningfully" and may even be at risk of a "crash" because of the nation’s excess capacity and as loan growth slows."

"The [Chinese] economy, for sure, will slow down meaningfully this year," Faber said in an interview with Bloomberg Television in Hong Kong. "It has the potential to crash because of the overcapacities that have developed, and when loan growth slows down, we don’t know how the economy will react."

A possible crash in China’s economy will be "disastrous" for raw materials used in industrial production, Faber said. He instead favors commodities including wheat, corn and soya beans and also said he doesn’t see a "huge downside risk" for gold [although Mr. Faber does allow for the possibility that gold could drop as low as $950 per ounce]."

We close today with a prophetic utterance. Well, in retrospect, anyway. Published on the very day when the London PM Fix in gold came in at $1212.50 (and NY gold gunned to just about $1225 an ounce) was the following article (buried in not-so-benign neglect at the time) by Wilfred J. Hahn, over at IndexUniverse.com, in which, Mr. Hahn (philosophically) observed that:

"Every now and then a viewpoint so convincing and inherently logical captures the crowd, that it becomes near impossible–psychologically, at least–to counter its premise. At such times, a seeming arrogance born of a zombie-like consensus assumes its position to be beyond reproach … in fact, beyond truth itself. When that happens, the analytical brain-cells can be cowed into self-doubt.

What we are talking about here is the fate of the U.S. dollar and gold bullion. The "gold fever" hype is hitting the mainstream … i.e. "Dump the dollar! Buy gold," a headline from Fortune Magazine recently blazes. Would it be foolish to consider countering the consensus on these topics right now? "Fools rush in where angels dare tread."

Gold may indeed get caught in a psychological updraft for no other reason than the hyped and emotional fears of the masses for a time. However, as we have pointed out, it is not a one-way bet as may be popularly presented. Even as gold prices have risen, the very seeds of its future collapse can already be discerned.

Financial trends rarely reward the frenzied opinions of the crowd. Were the basic premise for soaring gold prices correct, then the bond market would soon crash and interest-rate yields would soar. That in turn would undermine a gold rally."

Something to take into account the next time you read the (still) virtually unopposed assertions about the dollar’s imminent and complete demise or about China or India’s ‘insatiable’ appetite for commodities and/or their alleged never-ending disdain for the greenback.

Until Monday,

Be exceedingly nice to your Valentine.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America 

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