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Dangerous Curbs Ahead

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jan 21 2010 9:32AM

Good Morning,

Metals markets made it eminently clear yesterday that they loathe anything to do with the idea of tightening and the curbing of bubbles. 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 declined sharply on Wednesday. The dollar continued to trounce the euro as the “Greek tragedy? plays out over in the Old World and analysts at UniCredit SpA envision a possible 1.39 common currency value against the greenback.

Today’s picture hardly looks any different, as news that China’s economy grew at the fastest pace since 2007 (GDP up 10.7% year on year!) only stoked additional fears that local authorities will grab the tightening noose in earnest and start pulling on it any day now. China is this close to taking the number two spot on the global economic hit parade, but bubbles are something its leaders have made explicitly clear they do not want, albeit in the opinion of many an analyst, they already have them.

The slump continued overnight, after several attempts at stabilization failed to elicit much interest in fresh buying. Market analysts are pointing to record lows in forward gold lease rates – a signal that either there is no metal available for swaps or leasing (hardly the case) or that savvy players are engaged in heavy forward selling (more than likely, given long and short position profiles on COMEX).

Meanwhile, the US currency continued its ascent on the trade-weighted index, receiving a further boost from safe-haven seekers spooked by the prospect of easy money supplies drying up all over the place. This morning’s latest check showed the greenback at 78.62 on the index. Over in the oil pits, crude was hovering just under $78 per barrel, awaiting fresh inventory figures from the US. Commerzbank analysts envision a drop in black gold that could bring it to just under $71 per barrel, following its failed attempt at overcoming resistance at $84 last week.

As a result of the Chinese news and the ensuing surge in the US dollar, gold prices fell to just under $1100 during the overnight hours. The breach of that level could portend a test-target near $1075-$1080 should a close beneath $1112 materialize over the next couple of sessions. Analysts over at remarked that: “it’s a combination of factors that have deteriorated sentiment and have increased the belief that gold is overpriced; the Euro residing at five month lows, inflation data that keeps tame and investment demand that is, well, mostly inexistent?.

He added that: “An over 13,000 lots-large February gold put option at $1,100 is expiring next week, and has gained attention as prices work their way in this direction?. “A break below here could give bears fresh breath, while a key technical trend support is near $1,102.50, and a break here would seriously deteriorate charts and open for a re-test of the December $1,075.20 an ounce lows?.

Such conditions made for a once again lower opening in New York this morning. Gold started off with an $8.30 per ounce loss, quoted at $1103.00 amid fairly hefty liquidation patterns. The question of the day may yet become not whether the metal can close above $1112 but whether it could possibly finish under the $1100 mark – an area not seen since…well, last year’s end. Today’s initial jobless claims numbers could dent the dollar and temporarily halt its recent advance, while providing some modicum of help to gold it its attempts to hold the $1100 mark. Thus, we will go with the ‘it’s too early to tell’ scenario for now.

Silver fell 24 additional cents on the open, starting at $17.63 an ounce, while platinum gave back $22 more this morning, to reach $1601 per troy ounce. Palladium lost $7 to ease back to $459 per ounce. The noble metals ETFs may have siphoned funds away from the star of the show –the SPDR Gold Trust over recent weeks.

Up-to-date analysis provided by Reuters reveals that the famed GLD has suffered from a near 2% loss in balances thus far this year, with nearly 22 tonnes of yellow metal leaving for greener (whiter?) pastures. Ditto for the iShares Silver Trust, which lost 154 tonnes of silver during this very early part of 2010. The gainers in holdings? Why, yes, the newborn platinum and palladium vehicles. Taking risk where rewards are still seen as possible. Reducing risk where prospects appear less than stellar. And the speculative plays roll on…

Speaking of risk, and curbs, and such – the new fashionable trend that 2010 appears to be bringing – here is something to ponder in the latest offering from Marketwatch:

“U.S. President Barack Obama is expected to propose Thursday new limits on the size of banks and the risks they may take, The Wall Street Journal reported late Wednesday. The proposal aims to deter banks from becoming so large that they put the broader economy at risk, and also to prevent them from growing large enough to distort normal competitive forces, the report said, citing congressional sources and administration officials. The president is also expected to endorse some recommendations by former Federal Reserve chairman Paul Volcker, placing restrictions on commercial banks so as to prevent them from using federally insured deposits to finance speculative activity, the report said.?We keep mentioning Mr. Volcker as one ‘advisor’ to the administration who is highly worth watching – on all issues of potential interest.

The markets will continue to be volatile as we close out the week, but the technical damage cannot/should not be ignored. Policies (see China, see the US banking issues above) as well as perceptions among investors (see…the markets) are perceptibly shifting as we roll into what could be a year of change from ingrained trends in the markets.

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco 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 Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.