Gold drops after dollar rockets

In the Lead: “Bubble, Bubble on The Wall…”

Gold and other precious metals prices fell as the new trading week got underway in New York this morning and the principal culprit for the decline was identified as the rising U.S. dollar by polled traders. This is not to say that there were no other factors that came into the equation to help commodities values move to lower ground this morning. Chief among the “extras” was the fact that a survey focusing on the Chinese purchasing managers’ index for the current month – conducted by HSBC – indicates that the official figures from the country may indeed reveal that manufacturing activity in May has slowed to a 10-month low.

Adding to apprehensions related to China’s slowing down were perceptions that despite the indications that momentum is indeed slowing in the Chinese economy, the PBOC will stay the course with its tightening policy for the foreseeable future and that such a stance might further dampen consumption of “stuff.” Such “stuff” as crude oil, for example, lost more than $3.25 this morning in New York as traders sold the…stuffing out of it and drove it to $96.83 per barrel.

Speculators in black gold cited the Chinese manufacturing thermometer’s reading and the fear that Europe might slow down as well as their reasons for lightening up on positions. Of late, of course, as oil has gone (and as the dollar too, in the opposite direction), so too did the yellow metal. This, despite European debt-related angst, which continues to be manifest at present, and has been boosted by the fresh cut in Italy’s credit ratings courtesy of Standard & Poor’s Ratings Services that took place late last week.

As the euro swooned in the wake of such bleak perspectives, the US dollar sailed higher and dented commodities once again. The greenback was last seen trading at 76.35 on the trade-weighted index, rising 0.75% as alternatives still appear to be on the scarce side for safe-haven seekers. The counter-cyclicality of gold and the dollar thus resumed for the time being and the two went their separate ways this morning. Upcoming options expiry and month-end book-squaring ahead of the U.S. long holiday weekend will keep the action on the boil this week, no doubt.

The so-called “5 Minute Wrap-up” over at India’s Equitymaster site questions whether the shake-up in speculative fever might be the catalyst to bring this cycle to an end. The analysis notes that “Commodity prices – be it food or non food – have assumed a disproportionate weighting in government and central bank policy making (especially so, in the past 18 months). During this time they have also emerged as a very lucrative investment. The meteoric rise in prices of precious metals like gold and silver, resources like oil as also some food crops has confirmed this belief. Most analysts and investors recognize the fact that commodities by nature are cyclical. Hence the rise in their prices cannot last forever.”

While Equitymaster points out that speculative activity was an obvious catalyst for the recent gains in gold and especially silver, it also notes that the inverse can certainly be true when it comes to crashes such as the one recently witnessed in silver. The advice to investors by the Equitymaster analysis is that they are “better off not getting carried away with the greed of riding the commodity bubble.” The article also singles out iron ore at this juncture. Here is a commodity about which China’s biggest steelmaker has been quoted on Bloomberg as saying that its prices are “near bubble level.”

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