Gold prices take cue from crude oil

China’s leadership drew one step closer to achieving its overheating-prevention objectives as the country’s manufacturing sector reported its first shrinkage since March one year ago. The CMPMI index, released this morning, showed a reading of 49.4 (with 50 being the ‘neutral’ zone of growth-no-growth). While the slowdown is indeed just that (not a meltdown), it does reveal that official efforts to curb gambling in the property sector and overall overheating are starting to gain traction.

The CMPMI reading is one of two key metrics being used to define the state of China’s manufacturing activities. Of course, these days, with China having stepped up to the number two global economic spot, the applicability of "as China goes, so goes…X” (insert your favorite part of the industrialized world here) is hardly in question. The other thing hardly in question is the fact that the yuan may not manage to climb much higher following today’s set of numbers. Interest rate hikes appear right out of the question as we head for the home stretch of 2010.

Such worries were nearly absent from at least one mining industry jamboree over the weekend; the Diggers and Dealers Conference taking place in Kalgoorlie, Down Under. Nevertheless, powerhouse firms such a BHP Billiton and Rio Tinto have each cautioned that slowing Chinese demand cannot but affect sentiment and volatility in the commodities’ markets, let alone net visible physical demand for assorted base and/or metals. The mining sector is heavily dependent on what it has thus far seen as virtually ‘insatiable’ demand from China (kind of like the gold market is much too heavily dependent on one, historically less-than-dependable –in terms of duration- sector of demand; investment flows).

It is hardly a secret that investment demand has grown to constitute nearly one-third of overall gold demand over the past two years. Lest anyone conveniently forget, that same period also happens to have coincided with some near-misses of ‘total core meltdowns’ (be they in the financial sector, or in the currencies) in the U.S. and Europe. Now, such Chernobyl-like, End-of-Days scenarios have been heavily discounted –if not yet totally dismissed- by global investors. Ergo, lower price bands for the yellow metal.

Commodity brokers Natixis, over in London, have therefore come to the conclusion that whilst gold prices might remain at relatively elevated price points for a bit longer, the combination of quite poor underlying fundamentals (rising mine supplies trending towards record output levels by 2012, for example) and the possible re-start of producer hedging could take the metal towards levels just above $1,050 as we head into Q4 of the current year. As for the coming year, Natixis envisions possible sub-$1K gold (say, around $950) as being the new price paradigm for parts of the year, possible forays to highs near $1150 notwithstanding. Once again, no zeros were omitted in this writing either.

Bullion prices opened mixed once again, on this, the first New York trading session of August. Gold headed lower by $3.80 per ounce, starting the day off at $1177.60 as against a small (0.21) slippage in the U.S. dollar on the index (to 81.38) and as against a still-resilient euro (last quoted at $1.307).

Bullion could still aim towards $1200 and/or $1220 this week, as spec funds try to repair portions of July’s damage, and as short-covering emerges on occasion, but the yellow metal still lack external drivers of the panicky variety that drove it to headline-making levels back in June. Risk-takers continue to chant “Bon Appetit!’ and that is one slogan that bullion bulls truly do not care for. The risk-seeking species remained on the scene this morning, despite the Chinese news and is possibly ushering in a week that feels quite different from the last two; a period during which global contraction was the featured fear of the week.

As was the case this morning, for example, gold took its main cues from crude oil’s hefty $2 rise, rather than any manifest, scary developments on the global scene. Maybe it is the summer doldrums, but most likely not. The scent of "fall" remains in the air on given days.

Gold lost nearly 5% in the month of July, raising questions about whether the highs for the year have indeed been seen back in June. Investor preference for other, more "rewarding" speculative assets has dented demand for bullion, as has the lessened need to hedge against a crisis such as the one that never fully materialized in either the U.S. last year, or in Europe earlier this year.

Jon Nadler is a senior analyst for Kitco Metals Inc. and

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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