Gold heads lower as risk-on trade threatened

In the Lead: “The Higher They Climb...”

Some of the bullishness so pervasively on display in gold in the first two-thirds of 2011 has also been tempered by the increased volatility and several plunges in price that the yellow metal has experienced since touching levels above $1,900 last fall. While not too many expect net annual declines in gold’s value this year, there is one school of thought that foresees some bumps ahead for bullion as fresh bullish price drivers have been rather difficult to come by lately. Long-term insurance-oriented allocators may not have a lot to fret about but Xenon Group CIO Jay Feuerstein warns that he does not “think (gold) will be the slam dunk that it has been,” and that “short-term gold speculators are likely to have a tougher time with the metal this year.”

Also, do take note of the potentially lessened need for gold by Chinese individual investors now that inflation pressure in that country is also showing signs of easing (see our article yesterday). While inflation is falling, some have jumped way ahead of themselves and have declared that monetary easing courtesy of the PBOC is next on the menu. Apparently, that is not the case just yet, judging by today’s decline in local stock indices (the SGE fell 1.3%) which reflected the realization that tight liquidity measures will not be abandoned any time soon by the government.

China appears to also be losing some amount of capital, the latest metrics would suggest. A first-in-a-decade shrinking of that country’s foreign reserves are partially attributable to a sizeable capital outflow (some $34 billion) as folks fret about a possible hard landing and anticipate a decline in the yuan versus the US dollar. Standard Bank analysts also correlate China’s falling foreign reserves to gold’s action this morning, as follows: “This morning release of Chinese foreign-exchange reserves might also be contributing to gold’s downward movement. This can be explained in terms of the negative effect that a slowing down in Chinese foreign-exchange reserve accumulation would have on global liquidity and the ability of governments, especially those of developed nations, to borrow.”

The above is all the more reason to pay attention to reports such as the one issued by Barclays Capital this week, in which the correlation between the number of skyscrapers being built and the odds of a financial crash for a country is being made. Guess who tops the list of skyscraper projects in progress globally? China and India. Some of you may have heard of the billion-dollar residence of Mukesh Ambani. You know; the one that requires a bit more staff (600+) to maintain than Donald Trump’s crib does…

Barclays warns that “Investors should be most concerned about China, which is currently building half of all the tall buildings in the world, the bank said. A lending boom following the global financial crisis in 2008 pushed prices higher in the world's second largest economy. In a separate report, the BBC reported that JPMorgan Chase said that the Chinese property market could drop by as much as 20% in value in the country's major cities within the next 12 to 18 months.”

Have a pleasant weekend,

Jon Nadler is a Senior Metals Analyst at 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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