Gold gains as Chinese GDP prompts speculation

In The Lead: “100% European News-Free Content”

This morning the markets proved that Europe can still take a back seat (at least for a brief time) in shaping them, while news from China overshadows and takes the lead. So, despite a good harvest of negative Europe-centric news (downgrades, default fears, etc.) we will not mention the Old World in today’s article. Surely, we will not be able to do so, come tomorrow…

Anyway, China’s slowest pace of growth in over two years (ironically) prompted a rally in commodities as speculators turned bullish on the idea that the country’s central bank will now take easing steps in order to get growth back above the fourth quarter’s 8.9% level. The Shanghai equity market jumped 4.2% this morning recording its biggest gain in 27 months on the perception that the growth figure was better than forecasted and on the speculation that the PBOC will loosen monetary and lending policies.

Some see the slowdown as a sign that the authorities have succeeded in engineering a “soft landing” while others, such as a spokesman for the National Bureau of Statistics, fret that China could face a “gloomy, highly complicated and severe international environment” that would make it difficult to pull off such a feat, especially given the fast-imploding (some say “correcting”) domestic real estate sector. Other still, worry that the worst is yet to come for China’s economy.

JP Morgan, for one, anticipates China to only grow at 7.6% in this first quarter of 2012. Market players this week and later will also be on the lookout for any official response (policy-wise) to the recent contraction in China’s foreign exchange reserves – a phenomenon that has not only not been seen in many years (since 1998) but has also prompted speculation that “hot money” is on its way out of the country.

Whether or not the speculative funds’ wager on assorted “stuff” this morning turns out to be correct or not, remains to be seen. The percentage gains we saw in copper, oil and other commodities could turn out to be either short-lived or based on wrong-way bets that turn sour later. It is not like this has not happened before; various money managers augmented their net-long positions in 18 different commodity contracts in the week that ended on the 10th of January. That was the highest level of bullish exposure since last November in the commodities’ space. What happened subsequently? Commodities underwent their largest three-day decline since about November right after the bets were placed. Oops.

Precious metals joined the commodities’ party this morning with fairly robust gains showing in each of the five metals we track. Gold spot opened with a $21 gain at $1,664 the ounce while silver advanced 37 cents to the $30.51 mark. Platinum tracked $37 higher and palladium gained $20 per ounce. Rhodium was ahead by $50 at $1,300 the troy ounce.

However, not all was well on certain fronts, at least in gold and in silver. India raised its import duties on the two precious metals to 2% and to 6% respectively, from a previously flat-per-weight tariff. These are hefty increases in import duty and the hikes cast a further layer of doubt on just what this all-important country might imports in gold and silver this year, following a not-so-robust showing in 2011 (especially in the latter part of the year).

The [precious and base] metals ignored the still perilous European situation and focused on risk-taking in the wake of the news from China. Naturally, a near half-percent lower US dollar helped the situation as well. The initial gains were later tempered a bit and gold showed a $15 gain, silver a 29 cent one, and platinum and palladium were ahead by only $25 and $12 respectively. This, as the US dollar recouped about half of its earlier losses and rose back to the 81.25 level on the trade-weighted index. The Dow advanced 130 points within the first 15 minutes of trading action. The shortened trading week might bring increased participation and volatility with it.

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