Additional losses were noted in gold prices overnight following Thursday’s late afternoon long-liquidation slump in values. Although said sell-off was primarily driven by jockeying for position ahead of this morning’s US labor market statistics and by a salvo of soothing words on the US economy by Mr. Bernanke, this morning’s continued drop toward the $1,360.00 pivotal price support area had another, somewhat familiar, yet quite clear motivating factor: China.
The PBOC announced that it has once again requested the country’s banks to hold higher amounts of deposits in the wake of recent revelations that foreign-exchange holdings and lending activity moved to higher levels. Mr. Hu is keen on slaying the inflation dragon. The 50 basis point move (the fourth in sixty days) underscores the Chinese leadership’s resolve to pull the rug out from under the inflation bogey. However, any such tightening move has become a bogey of its own to hitherto partying-like-there-is-no-tomorrow (there always is) commodities’ players.
And, the country’s ratcheting up of reserve (and probably interest rates as well) requirements is not over, by a long shot. HSBC analysts have opined that China might possibly hike reserve ratio mandates by 200 (!) basis points in 2011. The process is thought to be a carefully orchestrated effort to stem the rise in inflation (even at the cost of social unrest) as ultimately that would bring on…social unrest.
The Chinese economy, rebounding strongly at the moment, is affording the country’s leadership the confidence level necessary to take such “bold” steps. And, folks, we are not talking Zimbabwe-style inflation here. The government of China is fighting a 5.1% inflation level (as of November). For comparison, India is battling an 8.4% inflation level (as of December) and has already raised interest rates on seven occasions over the past year or so. This is what central banks do when they have to deal with the opposite of what they have had to deal with in recent years. Coming to a theatre near you, soon.
Speaking of inflation, one of the possible candidates for the EBC’s future leadership, the Bundesbank’s Mr. Axel Weber, said today that the economic outlook for the eurozone has ameliorated “markedly” but that such a rebound has also raised the risk that prices could rise over the medium-term. Chalk that one up on the same blackboard that Mr. Trichet scribbled the words “interest rate hikes are coming, if needed” just yesterday at his press conference.
While not exactly using the “I” word, or alluding to imminent rate hikes by the Fed, Mr. Bernanke, for his part, also chimed in on related matters yesterday. Some of the language he used contributed to the late afternoon slide in precious metals. The Fed Chief noted that the risks of deflation in the US have “receded considerably” (interesting choice of words) in recent months.
Mr. Bernanke’s Thursday remarks rekindled the possibility that the QE2 program might come to a ‘premature’ end prior to its targeted expiration in June, or that it might be ‘trimmed’ in size. Neither proposition “sits” very well with those players who have inflated gold to its recent levels in anticipation (make that: in the certainty that) of the opposite scenario (and then some). Their bets are highly dependent on the continuation of zero-to-negative real interest rates.
Mr. Bernanke did caution that it might however take some time for US joblessness levels to improve equally as “considerably,” but he also offered a growth scenario that would place the US economy atop a 3.6 to 4 percent expansion level in 2011. Not bad, considering where said economy turned back from: the dark abyss that has had doomsday-oriented newsletters in a lather, since…oh, forever, it seems.
All of this brings us to Friday’s market opening in metals. Gold fell $10.40 right at the start of the final session of the week, and was indicated at $1,363.60 on the bid-side. The breakout that practically everyone hinted at as the week got underway began to look more like a break…down at this juncture. Maintenance of the $1,360.00 level is thought to be essential by market watchers. Ditto, the $28.00 support zone in silver, which opened Friday’s action with a 34-cent loss at the $28.40 mark. Meanwhile, yet another gold ETF saw the light of day on Thursday. Miners must be quite happy with the prospects of another ETF channel via which to sell their rising (yes, rising to a record, at that) level of gold production.
Peak gold? Think again. The National Post’s intrepid reporter, Peter Koven informs us that “Global gold production reached a record high last year, precious metals consultancy GFMS reported Thursday, defying the gold fanatics who claim that output is in terminal and irreversible decline. From 2002 to 2008, gold production declined even as prices soared from less than $300 US an ounce to more than $1,000 US. The poor supply-side response to rising prices led some experts to declare that "peak gold" -- the point that production reaches its historical zenith and begins to decline -- was already upon us.”
Meanwhile, platinum still managed an opening gain of $5 this morning and was quoted at $1,806.00 per ounce as stories of robust Chinese automotive-related demand continued to flow through its market veins. Palladium, on the other hand, did follow the rest of the complex to lower levels, shedding $15 off its spectacular recent gains. It was quoted at $797.00 the ounce at last check. Meanwhile the only notable action in rhodium was a lack thereof.
The noble metal remained at the $2,380.00 level for yet another morning. In the background, the US dollar was up slightly, at the 79.27 level (after dropping a not insignificant amount yesterday as safe-haven bids took a hit following all the economic “pep” talk by the ECB and the Fed). Crude oil however fell pretty hard, losing nearly $1 (at the 90.42 per barrel mark).
The US Commerce Department reported US retail sales as rising by 0.6% in December. While US retails sales showed the sixth consecutive month of gains, the figure fell a tad short of economists’ expectations. Separately, it was also reported that the December US CPI was up by 0.5%, with the core rate rising 0.1%.
The data release dented US stock market futures but also made for additional declines in black gold (down 1.23%) and in gold, which came to breach the $1,360.00 support level (by one dime, up to the time of this writing). Gold has shown not only indecision this past week but has actually diverged from the commodities’ complex which appears excited about the recovering global trends. The interest rate environment (if we listen to the words of Messrs. Hu, Weber, Trichet, and Bernanke) shows some signs of the “zero-to-negative” paradigm coming to an end.
“Signs of technical support at around $130 a share for the ETF and 1320 for gold itself “seem to be a good place for the market to reveal its intentions. That is where the bottom of the ragged trading range meets the rising trend line from the November 2008 low,” Deutsche Bank market analyst Michael Kahn wrote recently. Time will tell, and that figure (as opposed to the $1,650 one that was not achieved today) will tell a lot more.
Have a pleasant, long weekend (US on holiday on Monday).
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America