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China: What Inflation?

By Jon Nadler       Printer Friendly Version
Mar 10 2009 9:31AM

Good Morning,

Further price erosion in gold took place during the overnight hours, although the US dollar eased back to the 88.50 area on the index. Advances in equities made for a tough going in the yen and the greenback, and to some extent, for gold as well. Safe haven quests abated somewhat, following a rebound in financials over in Asia, and following a Citi memo from Mr. Pandit which indicates that the bank has been posting a profit (!) for the first two months of this year. Miracle on Park Avenue.  C is trading at $1.05 if you have the guts. That is what is still required, given the simultaneous news that the US is evaluating ways in which it might help the banking giant should 'things' get worse. Three Uncle Sam-given capital injections later, one would think that 'things' have been addressed...somewhat.

Disinflation trending towards deflation is alive and well, in...China (!). Consumer prices fell 1.6% last month, and -more importantly- producer prices have fallen 4.5% year-on-year. This represents the first drop in consumer prices in almost seven years. Urban home prices fell by 1.2% last month, also recording their third monthly drop. All of this sounds eerily familiar, and someone will have to pedal really hard to get things back on track. Never mind the track things were on previously, which resembled the Maglev track in Shanghai more than anything.

New York spot gold bullion prices gave back another 1.5% at today's open. The yellow metal was quoted at $906.50 per ounce (off $13 on the day) and appeared poised to retest the $895-$900 support zone - one that held last time around. Recovery in equities was cited as the principal driver of today's continued selling. That would appear to be the case, as the dollar slipped lower and oil edged higher at the same time.

Uncertainty surrounding future sales of gold by Europe's central banks may be put to bed as early as this month, according to UBS analyst John Reade. Expectations are that the self-imposed 500 tonne limit will survive to see another day (or year). Not so sure about what the IMF will/will not do as it continues to be deluged with more requests for hand-outs than a tourist strolling through Vancouver.

Silver dropped 24 cents, to open at $12.70 per ounce this morning., Platinum continued lower as well, shedding $8 to $1051 per ounce, and palladium market time at $195 per ounce, showing no change thus far. All is quiet on the automotive front, although one cannot recall a time when direct, personalized e-mails from local car dealers clogged the inbox to such an extent as today. Offers of 2 (cars) for 1 (price), and free everything after a purchase sound enticing? Not if you are convinced that a framed GM warranty will be an art collector's item sometime soon.

We bring you gold-bullish news today. Before you drop that cup of java, it is bullish news if your compass is trading-oriented and you value contrarian analysis and trade newsletter sentiment. Marketwatch's Mark Hulbert (someone whose periodic evaluation of same has been frequently featured in this space) brings us the latest temperature reading from newsletter-land. He finds the soil warm to the touch:

"It would certainly appear as though gold has gone nowhere over the past six weeks.

That's because bullion closed Monday less than 1% higher than where it stood in late January.

But, from another perspective, one that focuses on changes in the consensus mood among gold traders, a lot has happened over the past six weeks. And, on balance, these developments on the sentiment front are bullish for gold, according to contrarian analysis.

Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Monday night, the HGNSI stood at 36.8%.

At the point in late January when gold was fetching more or less the same price as today, in contrast, the HGNSI stood at 60.9%. So the net effect of gold's gyrations over the past six weeks has been to convert some previously bullish gold timers into bears. On the contrarian theory that a bull market likes to climb a wall of worry, this is a bullish development.

A similar conclusion is reached by comparing the HGNSI's current level to where it stood early last December, when an ounce of gold was priced below $770 -- more than $140 less than where it closed Monday. The HGNSI stood then at 52.1%, or more than 15 percentage points higher than where this sentiment index is today.

So even though gold bullion is a lot higher today than then, the HGNSI is markedly lower. That's a bullish divergence. The reason that contrarians consider this to be an encouraging development: It means that there is an abnormally large amount of cash on the sidelines among gold traders that will be lured back into the market as it rallies -- thereby propelling it even further upwards."

Further upwards. A target price would help. It would appear that the newsletter sentiment takes hold in the reader base with a delay factor of several weeks to a couple of months. If there were a sentiment index among individual investors, it would relate to the front cover of practically every money-oriented (and some not) publication on the average newsstand. They sport shiny gold bars and coins and vie for attention with the February cover of Sports Illustrated - often with the caption last seen when the photo was that of a McMansion: "How to Make a Fortune In...[insert asset of choice]." At the same time, 70% of small investors are extremely bearish on stocks. Now that the Dow is half of what it was a year ago. Perfect.

Happy Trading.

Parting words and major food for thought for the day: "Big banks will not be allowed to fail" - B. Bernanke 3/10/09

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.