Gold caught in consolidation limbo

In the Lead: “Who Needs Crab-Fishing When You can Drive a Lambo?”

In the background, the dollar remained steady and crude oil advanced fifty cents to the $80.16 per barrel level as equity traders prepared for today’s opening. The Dow’s focus might center on the untimely passing of Apple CEO Steve Jobs and on how the firm’s sharers react to it. We tip our hat and then remove it altogether for the innovator that Mr. Jobs was. It is quite safe to say that he has changed the daily life of many of us in one way or another. Initial jobless claims did not pick up on the positive theme that the ADP report offered the other day; the report noted a bump of 6,000 claims for benefits, to the 401,000 mark. Economists had expected a rise in filings of 19,000 on the reporting period, and thus the news was received as largely positive.

President Obama is expected to make a fresh plea (make that a push) to US lawmakers today to pass his jobs plan. US economic growth at better-than-anemic levels is possibly hinging on the passage of the plan, according to economists. The US President is also likely to endorse a "millionaire's surtax" -- a rate increase on those earning $1 million or more. Mr. Obama will speak at 11 a.m. ET.

The jobs-and-tax two-pronged approach recently outlined by Mr. Obama would add to US GDP. The question is: just how much? One economist estimates that the full plan – if enacted – would yield a US GDP growth rate at 3% in lieu of the projected 2% level of expansion in 2012. If only the tax portion of the plan becomes reality, then that would add only about 0.50% to America’s GDP.

Meanwhile, as we noted early this week, the one economy that shows signs about which many should worry a whole lot more, is that of China. Writing for Roubini Global Economics’ EconoMonitor, associate Professor (Tsinghua University School of Economics in Beijing) Patrick Chovanec lays bare the economic landscape in China and has some quite alarming findings to relay. This is a piece well-worth your reading time. It throws a potential cold and very wet blanket on all those “insatiable Chinese commodity demand” “mantras” you have been force-fed incessantly over the past five years in various newsletters and by various commodity celebrities (Rogers, Faber, etc.).

For starters, Prof. Chovanec focuses on – what else? – China’s real estate problem. Of late, a gap is developing between primary and secondary housing values in many a first-tier metropolitan area in China. “In several cities across China, prices in primary housing markets (developers selling to homeowners) have begun falling away from those in secondary markets (homeowners selling to other homeowners)” notes the Professor.

Ever heard the story of the crab-fishing village in China which suddenly turned into a boom-town replete with 800 BMWs, 600 Mercedes, 500 Audis, 50 Porsches, and one each Lamborghini, Ferrari, and Maserati? It’s real. Then, there is the possibly even wilder story of a “Hong Kong-listed baby formula producer that was loading up on loans and relending the money to non-ferrous metals, tungsten, and highway companies.”

Professor Chovanec observes that “When companies neglect their core business and start speculating in “hot” sectors they know nothing about, especially with borrowed money, it’s a sure sign the market is out of whack. Sometimes it’s because companies themselves are caught up in the “irrational exuberance” of a speculative bubble. Other times, it’s because inflation, price controls, credit controls, or other factors are distorting normal incentives. In any case, it’s a big red flag that something is seriously wrong.”

Until tomorrow,

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

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