Gold demand remains muted despite uncertainties

In the Lead: “Moving Violations”

Back at the end of the year, Tim Riddell, head of ANZ Global Markets Research, Asia, said in a report that "A negative crossover in moving averages can be seen as a selling signal. But in gold's profile, it is probably a confirmation signal that gold has made a cyclical high in the third quarter, and will likely see a more protracted consolidation phase than the market would initially wish to see." For a thorough discussion of moving averages and the aforementioned convergences and divergences, do take the time to read this excellent explanation (complete with why gold and silver are facing significant resistance headwinds above current levels) by Forbes contributor Nigam Arora (whose good work we mentioned last week in these columns).

One of the possible factors to keep gold prices in check this year could be the Fed and its hitherto notable largesse in monetary policy. Current US economic conditions appear to have improved sufficiently to put the question of additional Fed easing (QE)…into question. No question, apparently, at least as far as one Fed member is concerned. James Bullard (he of the St. Louis Fed) said that the US central bank will probably not begin a new campaign of asset purchases on account of recently improved labor and manufacturing statistics. Albeit Mr. Bullard does not vote on matters of monetary policy in 2012, his voice is important to listen to, because he was actually the first Fed official to call for QE2 back in 2010. Thus, categorical predictions/assurances of a Fed QE3.0 still coming from various alarmist newsletter quarters should best be taken with a large grain of salty skepticism.

Something else to be viewed with a good dose of distrust are the various pronouncements about how China might make a quick exit from the rut it currently finds itself in, economically speaking. The “unusually uncertain” label formerly being used in conjunction with the US economy can now safely be transferred and applied to China, according to more than one market expert. The head of the World Bank, Robert Zoellick, has said that “there is widespread recognition that the Chinese growth model, that has been so successful past 30 years, will not work in decades ahead.” The “father” of the euro, Robert Mundell observes that “it is not clear [that] China’s system is favorable to shift to domestic demand,” and economist Lawrence Summers asserts that trying to divine the road ahead for that country is “the great unanswerable question.”

For the time being, we can only keep a closer eye on the facts and figures emanating from China and leave the speculation about its economic future to those (above) in a qualified position to provide such. The latest batch of economic metrics from Beijing indicates that both lending and money supply have grown at rates in excess of economists’ expectations. December loans surpassed $101 billion whilst M2 grew at 13.6%.

In addition, China is still trying to figure out how to cope with the potential demand shock arising out of the European debt debacle (40% of the country’s exports are funneled into the Old World). Coming up on the 10th of the month will be the official December import/export and trade balance data for the country. Following that, on the 12th we will learn about the official December inflation figures as well as about the country’s economic growth levels in Q4 and 2011 overall. Stay tuned. We could see a market-moving day (or two)…ahead.

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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