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Welcome Aboard the China Clipper

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jan 20 2010 5:15PM

www.kitco.com

Good Evening,

While gold and the US dollar managed to climb higher together on Tuesday, the Wednesday market action in the USA was completely different. Gold fell by the most in one month. During the morning hours, a surge in the US currency and a steep fall in the euro (the common currency hit 1.410, which was a five-month low) pressured gold bullion heavily, and the metal was unable to overcome the dollar’s gains with some of the physical buying such as we saw the day before.

The US dollar climbed significantly higher, gaining 0.86 on the trade-weighted index, and reaching 78.36 as of the last price check. Most of the advance in the dollar was a mixture of investor fears about the tightening in Chinese bank lending curbs fears and speculative optimism due to the election of a Republican candidate to a Massachusetts seat which had long been occupied by a Democrat. Speculators believe that the US Republican party has what it takes to tackle US deficits and cut spending, as well as restore the status of the badly damaged US dollar.
As a result of the Chinese news reports that some local banks have already been told by the Chinese government to stop lending or suffer penalties, most commodities and some emerging market equities declined on Wednesday. According to the Financial Times, “Chinese regulators have told some banks to temporarily halt lending amid growing fears of asset bubbles and inflation. The renewed efforts to rein in credit growth follow a burst of frantic lending activity by Chinese banks that have raised concerns about overheating in the Chinese economy.

At least two banks – Bank of China and Agricultural Bank of China – have issued orders to lower level branches to stop issuing loans to corporate customers without explicit approval from their headquarters, employees at those banks told the FT. A state-run newspaper on Wednesday cited unnamed banking sources as saying some banks had been told to stop all lending for the rest of January and that Bank of China, which has been the most aggressive lender among the large state banks, had switched off its internal electronic loan approval system.?

Banking news of another kind was visible in the US markets on Wednesday. Citigroup lost about $7 billion and Band of America lost over $5 billion in Q4 of 2009 – however, these bad figures need to be placed in the context that these banks used $20 billion [Citi] and $4 billion [BoA] in repayments of TARP stimulus assistance funds to the US government. This is a process which is actually seen as part of the exit from the crisis of 2008/2009. Nonetheless, the US Dow Jones Industrial stocks average lost more than 200 points before recovering to a loss of only 122 points at the close, because of the news from China and the effect of such news on commodities-related stocks.

New York spot metals trading finished with major losses across the board. Spot gold finished with a $27.00 or 2.36% decline, and after reaching an intra-day low of $1105, it was quoted at $1110.70 per ounce at last check. A London-based senior metals analyst told Futures and Options Intelligence.com this morning that he was concerned about countries with formerly loose monetary policies now talking about tightening interest rate and lending policies. He believes that gold’s bullish run could be hit by a round of fiscal tightening and changing investor perceptions. Paper gold positions over at the derivative and foreign exchange online trading firm called Finotec were only 34% long, implying that most clients were sellers of gold at the moment.

Silver ended the Wednesday session with a huge 89 cent decline, quoted at $18.87 per ounce, while platinum erased some $21 of its Tuesday gains, following large-scale profit-taking which brought it down to the $1623 per ounce spot bid level. The noble metal has racked up some $250 per ounce in gains over the past month. Call it ETF euphoria, we will.

Palladium still managed a $2 gain on the day, as it was quoted at $466 an ounce. That metal added some $110 to values during the same 30-day period, on account of the same market-moving factor called the ETF. As with gold, one has to wonder what a 50 or 100 thousand ounce sales redemption in the future might do to market prices. Everything needs to be viewed in the context of being a two-way street. Against this metals market finish, the US dollar was last seen at 78.38 (up 0.88) while crude oil fell $1.40 to $77.15 per barrel.

As Gold Essential.com analysis sees it, “for gold, the market’s speculative focus is on the key $1,102.50-$1,100 an ounce price support area, where a longer term uptrend support line is residing. “If prices can hold above here, there may be decent follow-up buying, but below here could see prices quickly re-testing $1,086.60 and $1,075.20 an ounce.

“There are few reasons why gold couldn’t go and test the key support area near $1,100 an ounce. Investor demand in gold ETF’s is not supportive, and apart from increased risk for a bit of quick retracement in the EURO/US DOLLAR currency pair – which could limit gold’s fall initially, things do not look rosy, at all?, Evelyne Winters, a senior analyst at GoldEssential.com said last night.

Indeed, the lack of ETF buying coupled with deteriorating fundamentals could put more than a dent into the gold price equation during coming months. Last week, analysts at Credit Suisse calculated that there will be an excess of 420 tons of gold hitting the market in 2010 if buying by exchange traded funds (ETFs) goes back to levels prior to the credit crises last year. They estimate that gold prices would have to drop to $722 an ounce -- a fall of about 36% from current levels north of $1100 -- before supply and demand were in balance once again.
 

 PS – Haiti has just been hit with another 6.0+ magnitude quake, at a time when it struggles to recover.
KITCO URGES YOU TO PLEASE GIVE TO THE VICTIMS OF THE TRAGIC QUAKE IN HAITI. PLEASE VISIT THE LINK ON THE KITCO HOMEPAGE: http://www.kitco.com/reports/Kitco_Cares.html
GIVE ANYTHING. GIVE A DOLLAR, GIVE FIVE, OR GIVE MORE, IF YOU CAN. EVERY SINGLE DONATION HELPS. SOMETIMES, GIVING MONEY IS FAR MORE CRITICAL THAN TRYING TO MAKE MORE OF IT. THIS IS ONE OF THOSE TIMES.

 

Jon Nadler
Senior Analyst
Kitco Metals Inc.
North America

 

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