Gold opens second half of the year under $1,500

In the Lead: “The China syndrome...of another kind”

Gold prices touched lows not seen in over six weeks overnight and they were heading towards finishing this week with their worst performance since the commodity meltdown of early May. Spot quotes received during the wee hours showed the yellow metal trading near the $1,486.00 mark per ounce despite a slightly lower US dollar but certainly being “assisted” by a larger-than-$1 slippage in black gold.

For the time being, the news that China’s manufacturing activity expanded at its slowest pace in nearly two-and-a-half years also put a fairly heavy damper on all things commodity-flavored this morning. That country’s factory index dipped to the lowest mark since early 2009 and such a development was probably going to actually be welcome by its leaders in their quest to quell inflation. We mentioned in yesterday’s article why some analysts opine that China might actually be headed for a bit of a …harder landing than the desired one.

The aforementioned potentially jarring touchdown by the Chinese economy has the power to possibly put a fatal hole into the global commodity price “balloon.” Author and economist Gary Shilling sounds a rather chilling note of caution when it comes to commodities in the wake of a possible Chinese hard-landing scenario materializing. Mr. Shilling reminds us that: “Industrial metals such as copper were on a tear. So were precious metals, such as silver. But much of the leap in commodity prices was due to investors and other speculators. Exchange-traded funds had already tied up much of the physical supplies of gold and other precious metals.”

Mr. Shilling also adds that: “Futures contracts held by speculators were up 12 percent in 2010 through October, with sharp increases in bullish bets on crude oil, copper and silver. Volatility forced futures exchanges to raise margin requirements on a number of commodities.”

Most importantly, Mr. Shilling confirms that: “The confidence that China would continue to buy huge quantities of almost all commodities has been the bedrock belief of speculators. For example, there were rumors that China was again building its emergency petroleum reserve in the first half of this year. I’ve studied many bubbles over the years, and concentrated on predicting their demises. Commodities show every sign of being in one. “

Similarly weakening industrial activity readings were the order of the day over in Europe this morning. The EU’s manufacturing activity gauge fell to an 18-month nadir while a similar indicator for Germany flashed a low not seen in 17 months. All of this unfolded against the background of a receding threat of a Greek default and thus the quest for various safe-havens ebbed considerably ahead of the long US holiday weekend.

In some ways, the sell-off in gold and other precious metals was ironic as it took place despite the realization that the aforementioned global slowdown signs might just prompt various central banks not to pull the interest rate trigger just yet. It might turn out to be the case that Mr. Bernanke was possibly right in his take that the commodities’ spike of this spring was “transitory.”

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