Gold opens higher on “overcooked enthusiasm”

In the Lead: “Manufactured Gains”

Such euphoria managed to drown out cautionary signals from the Fed’s own policymakers and other global financial and economic metrics that remain anything but euphoria-inducing. The Philly Fed’s President noted that his policymaking committee might have to hike rates this year and warned that “many market participants don't understand that the 2014 date from the FOMC was not a firm commitment.” Six Fed officials believe that rate increases ought to commence in 2012 or 2013. Also drowned out (but only for a few hours) was the extremely disappointing US consumer confidence figure which temporarily halted the buying sprees in equities and commodities.

As for the debt crisis raging across the ocean, USA Today remarks that “Europe's debt woes remain the main worry in the markets. A growing fear is that Portugal may also need to get private creditors to reduce their debts, even though Europe's leaders say Greece's debt-reduction deal is a one-off. Portugal's borrowing costs have been rising consistently to record highs over recent days as the economy shows few signs of improving.” All eyes now shift to Portugal and its potential debt woes as well as to the Eurozone’s unemployment level – at its highest since 1998. All is not well in the Old World just yet.

All is well in China you say? Sure, if you interpret the bump in its PMI from 50.3 to 50.5 in December. But how about the readings that stories such as “Chinese home prices fell for a fifth month in January” (the longest losing streak since such data has been tracked) imply? Or the one about Hong Kong home prices facing a 25% drop in 2012? Ignored. For now.

However, even the fuse that lit the commodity market buying spree deserves a bit of a dissection as it appears to be..."manufactured" in some regards. Standard Bank’s economic analyst Steven Barrow took a scalpel to the data from Beijing and has concluded that: “The [PMI] gain occurred despite most factories shutting-down in the final week of the month for the Chinese Lunar New Year, which, on balance, manifests in a moderation of the PMI. However, whilst superficially perplexing, a closer look at the components suggest caution: it is telling that the slight rise in the headline figure was driven by increases in import prices (+2.9) and raw material inventories (+1.4) whilst output (+0.2) and new orders (+0.6) were broadly flat and new export orders fell sharply (-1.7).

“Furthermore,” Mr. Barrow adds, “less than half (9 out of 20) the industries posted readings of more than 50. It is also notable that the HSBC PMI remained below 50 at 48.8. Therefore, we remain tied to an expectation for economic activity to slip below 7.5% y/y in Q1:12– the first sub 8% print since mid-2009 - and expect policy to engineer growth of 8.5% for 2012.”

Such “nuances” behind the speculation-inducing headlines prompted Marketwatch’s Paul B. Farrell to quote hedge fund manager Jim Chanos’ (as opposed to Jim Rogers’) take on matters Chinese: “Jim [Chanos] has been reading the [Chinese] tea leaves for a long time and sees too heavy a government footprint in their economy: crony capitalism, state-owned companies favorites, massive municipal debt, overbuilding of luxury condos, stadiums, poor construction, environmental pollution, lax regulations, subsidized prices, bad accounting, currency manipulation, and more. Chanos has been warning investors to ignore the hype. He tells BusinessWeek investors to “Short China,” this bubble is collapsing.” Those of you in attendance at the recent Cambridge House Resource Investment Conference in Vancouver who did not miss the Gordon Chang’s presentation and debate already know what this is all about…

Speaking of China, it appears that perhaps so-called ‘rare earths’ are possibly set to become less ‘rare’ (they really are anything but) now that the World Trade Organization has issued a ruling against China's restrictions on raw material exports. Such an official ‘slap’ could force changes to some of its rare earth export policies. The WTO said on Monday that China had “violated global trading rules by curbing exports of raw materials like bauxite, coke, magnesium, manganese and zinc, which inflated prices and gave domestic Chinese firms an unfair competitive advantage.”

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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