Gold, silver hit as lower growth forecast in China

In the Lead: “Fantasy Island Revisited”

Proving for the nth time that what happens in China is a pivotal impact factor to the commodities’ space, the most recent developments in that country sent base and precious metals prices, along with most global equity markets, lower overnight. The first forecast for lower economic growth in eight years for that country derailed many an asset as the new trading week commenced. Gold and silver were clearly not immune to the negative news.

Gold prices dipped well under the key $1,700 level in the process once again this morning, while silver fell one dime under $34 per ounce following a feeble attempt to stage a recovery after the opening bell in New York. Despite the wedding season’s unfolding in India, locals opted to remain sidelined when it came to buying into rising prices in gold on the back of a weakening rupee. Speaking of weakening, the loonie took one on the beak this morning and sank to $0.9928 against the greenback as so-called ‘commodity currencies’ followed the Chinese news with dismay. The BoC is widely expected to keep interest rates at 1% when it makes an announcement on Thursday.

Opening bids for New York spot gold prices came in at $1,703.70 per ounce and at $34.44 in silver. Platinum dropped $27 to $1,668.00 while palladium declined $4 to the 706.00 per ounce mark. On the supply side for gold, it was reported this morning that Australian output for the yellow metal remained relatively flat in 2011, but still resulted in that country’s second-place ranking on a global basis (just behind China). More than 264 tonnes of gold (only 2 tonnes less than in 2010) were dug up Down Under.

In the background, crude oil managed to hang on to very slim gains (up $0.40 per barrel to $106.96) as US-Israeli talks on the sticky subject of Iran’s nuclear ambitions were slated to get underway today. The US dollar was trading at 79.33 on the trade weighted index and the euro drifted towards $1.32 against it. The common currency hit a two-week low as concerns about Greece’s ability to pull off a debt restructuring deal remained manifest and as China’s expected lower growth turned off the appetite for risk.

Gold-oriented ETFs added 8.5 tonnes to holding in the latest reporting period on market positioning by the CFTC. The “unremarkable” increase in tonnage, according to analysts at Standard Bank (SA) indicates some level of wariness on gold by the buyers of such vehicles. We must note that the report does not cover the meltdown in prices and related likely reshuffling of the speculative deck of cards that took place on the last day of February following Congressional testimony by Fed Chairman Bernanke.

The same analysis by Standard Bank issued this morning opines that albeit there appears to be a higher degree of speculative confidence in silver than in gold, there “is a clear indication [as seen in the percentage net speculative length to total open interest] of a market that is becoming overstretched and consequently vulnerable to correction. Despite the apparent investor enthusiasm, we believe that silver’s downside remains exposed (mainly due to Chinese inventories), to below $33/oz. We don’t believe that rallies beyond $35/oz. are sustainable yet,” concludes the report.

The speculative positioning in platinum remains quite robust, and ETF buying continued to be manifest with the addition of 21,300 ounces to platinum holdings (it was second-largest gain in balances this year). Similar optimism and buying in palladium underscores the fact that the investment crowd remains convinced about palladium’s future price prospects. About 37,000 ounces were added to palladium ETF holdings.

This rising level of confidence in performance comes at a time when Thomson Reuters GFMS anticipates that palladium is likely to outperform platinum over the next several years. Talk of $1K palladium (while platinum might stall out near $1,700) was on tap by GMFS analysts at the PDAC gathering in Toronto. It is however worth noting that there is one potential factor that might hamper very swift progress in these metals towards much higher price ground.

We are speaking here of the worst start to Chinese automobile sales in seven years. The first two months of 2012 saw a 3% decline in vehicle deliveries in that country and when coupled with the expectations of lower economic growth we covered here today, the caution flags are worth raising at this juncture. One more ‘China syndrome’ to add to the growing list. Still, for the time being, the labor-based difficulties in South African platinum output are likely to be felt in the physical supply pipeline for that noble metal as we roll towards April.

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