Gold spurned as traders reach for safe-haven dollars

In the Lead: “The Euro Pit and the Chinese Pendulum”

Mr. Gayed uses the ratio of the IEF (the T-bond ETF) versus the GLD to measure such pendulum swings in the cycle. Right now, and as of mid-August, the ratio of the two ETFs appears to not only have bottomed but it also shows the “early stages of an uptrend.” Mr. Gayed notes that “This would occur under a scenario of long-term deflationary expectations taking hold in the psyche of investors. It looks like we may be entering a period where paper beats rock.” No mention of scissors needed.

Over in Europe disaccord between France and Germany regarding the role that the ECB ought to play in the unfolding debt drama remained front-page news material this morning. The measures that were agreed upon at the late October summit by European leaders have yet to be implemented and the markets continue to await the materialization of austerity programs in Italy and in Greece. Meanwhile, bond yield of various Eurozone countries continue to be rising and the 7% figure keeps coming up as the one beyond which danger/default/rescue paradigms could be lurking. Only Germany and the Netherlands appear currently immune to the effects of the crisis as regards bond yields.

While the Franco-German debate about how to keep the Eurozone afloat rages on, there are signs that certain parties are still willing to help. Having come to what World Bank President Zoellick describes as the “tipping point,” the European Union really needs to get its members to come to an accord and produce a concrete plan to stop the crisis in its tracks. China, Australia, Canada and the USA, are all apparently ready to support the region via the auspices of the IMF if in fact an agreement is arrived at by the union’s policy makers. Obviously, all of the countries on that list have vested interests in Europe and would potentially suffer collateral damage if the situation were to be allowed to disintegrate into a chaotic free-for-all.

For now, the latest proposal (and one that appears to be gaining traction) is to have the ECB lend money to the IMF which in turn would use such funds to bail out one or another de facto insolvent Eurozone nation. It is widely assumed that Germany and the ECB itself might be against such an idea but it is also widely accepted that the EU has run out of ideas, solutions and the amount of road still ahead of it before a do or die decision has to be made. This morning’s market chatter was once again pointing to a modicum of bond-buying by the ECB as having taken place. The “Big Plan.” Will it be this weekend? Will it be next? Only “The Shadow” knows…

No week would be complete if we did not mention that all-important (for commodity players) country: China. There, we just did. The country’s regulators are (once again) warning that funds for certain locally-backed property development projects may soon run out. The CBRC urged lenders last week to clean up their act and step up asset sales and debt restructuring while it urged banks to curtail (make that cut) lending to “high-risk” projects.

The ratchet-tightening by Chinese officials comes amid an unmistakable slump in property prices. Chinese housing prices fell in nearly 50% of government-monitored cities last month. Now there’s a switch from what appeared to be an endless upward spiral. Analyst opine that the “turning point” in Chinese property values is upon us (possibly along with the turning point in the country’s economy). We close today with words of wisdom from neighboring Hong Kong:

“The government should start to be cautious about property prices over correcting on the downside as it will inevitably affect the economy,” Wee Liat Lee, a Hong Kong-based property analyst at Samsung Securities Co., said in an e-mail to Bloomberg News.

When residential property accounts for 6.1% of a country’s GDP and when such a pivot point threatens to potentially wreak havoc on that sector, commodity bulls are well-advised to remain vigilant. Pendulums are made to swing. Heads (and wallets) are at risk when such objects swing above.

Have a pleasant weekend,

Jon Nadler

Senior Metals Analyst – Kitco Metals

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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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