Gold prices drifted even lower overnight and this morning as year-end sellers once again cashed still-profitable chips in and opted to park proceeds in cash at least until the first week of 2012 draws to a close. Portfolio reallocations will then come into play and the market might get a better sense of direction but as things stand right now, the yellow metal did not appear to have too much support at the psychological $1,600 mark, nor did it appear to have too much of the same as it broke under the $1,570 area around the 10 o'clock hour in New York this morning.
Given the thin participation over the next three sessions, we could expect an occasional out-sized move in prices but perhaps we ought not to read too much into such developments unless certain chart points are convincingly breached on the lower end of the scale. If and when the $1,550-$1,565 zone comes into play, there might be some reassessing to be done. The bigger picture remains the same; gold's recent plunge and heightened volatility are keeping new buyers at bay and existing holders pondering to what extent they ought to lighten up on positions.
Some of that crowd was keeping an eye on the "Nosferatu" US dollar this morning; it vaulted nearly 0.75% higher to trade above 80.40 on the index and the euro breached the $1.30 mark once again despite an easing in borrowing costs for Italy. As well, some were tracking crude oil as it gave up earlier gains and it eased by nearly 1% closer to the $100.50 level. Straits of Hormuz-related market supply angst and the best US consumer confidence readings in nine months had managed to pull black gold to above the $101 per barrel mark previously.
Physical bullion demand remains subdued, as India remains on "hold" and as China clamps down on illegal gold activities. ETFs continue to leak tonnage and albeit they are not doing so at a hefty clip, the bigger worry factor is the lack of fresh inflows (see yesterday's article on the drying up of buying in this all-important niche) of gold into them. Although gold is still showing gains in the double-digits as we head into the final days of 2011, its former $530 advance for the year has now shrunk to less than $190 an ounce. The yellow metal is showing a 6.33% loss over the past 30 days and it has fallen $345 from its September top.
Spot dealings in New York this morning took gold to the $1,568 level on the bid-side (a decline of 1.3%) but silver, as usual, tripped and fell even harder, losing nearly 4.5% or more than $1.25 per ounce, to trade well below the $28 (@27.35) mark on the bid. As mentioned numerous times previously, the white metal continues to frustrate the fast-fading remaining bulls and is apparently aiming not only for a replay/retest of the $26 level but perhaps the $22 one as well. Platinum dropped by a substantial $35 per ounce to trade at $1,392 and the discount vis a vis gold is approaching $200 per ounce. Palladium declined $17 to reach the $642 mark but is holding up a tad better as it managed to remain in the $620-$660 channel for the better part of recent trading sessions.
Part of gold's two-day tumble during this shortened week is attributable to the apprehensions surrounding bullion demand from China and India. Our friends at the commodities desk over at Standard Bank (SA) note that players are concerned about the "sustainability of demand out of China and India (the world's largest consumers of gold). The Shanghai Gold Exchange and Shanghai Futures Exchange both restricted trading on gold spot and futures contracts in a bid to curb illegal activity in commodities. The Bombay Bullion Association forecasts a fall in gold imports for December (as much as 50% month-on-month) because of the weaker rupee."
No such worries on the supply side of the equation from China - at least as regards so-called "rare" earths (which are anything but rare, by the way). Reuters reports that "China will keep rare earth export quotas for 2012 at this year's levels, it said on Tuesday, a move that will ease overseas worries about the supply of 17 crucial elements used in high-tech manufacturing. China accounts for more than 95% of the global output of rare earths, which are used in the electronics, defense and renewable energy industries."
Still on the subject of China, we must also note that the country's government was advised to be prepared for a possible 25% "adjustment" (guess which way?) in housing prices. This is now a question of "when" and not "if." One of China's four largest banks, the Agricultural Bank of China, in its latest report on the state of the real estate space in the country, notes that prices need to drop by from 10% to 25% in the most developed "first-tier" cities in order to become "reasonable." So much for the ill-informed arguments that there is no real estate bubble in China and that its denizens will feel flush with housing-based profits and thus gobble up vast gold tonnage with their mountains of cash.
Worse yet, China is potentially facing some civil discontent. As Bloomberg's William Pesek observes, there are two worry items to keep track of as we head into 2012. The Mayan calendar is not one of them. However, as Mr. Pesek sees it, "China's consumers will become more dissatisfied with the toxic mix of inflation and widening income inequality. Leaders aren't doing enough to make sure the benefits of growth are shared equitably. As the 'Gini' coefficient - a statistical measure of wealth inequality - rises across Asia, increasing tensions will play out in unpredictable ways in markets and politics."
And then, there's "Occupy Wukan." Mr. Pesek reports that "it's getting harder for China to keep its 1.3 billion people from hearing about events in a coastal village in Guangdong province. There, thousands of people fed up with land seizures took to the streets and forced out Communist Party officials. This Occupy Wall Street dynamic is a startling contrast to the usual success China has in quashing any hint of public discord. As the New York Times points out, there are at least 625,000 potential Wukans in China. The 12 months ahead will be busy for China's thought police."
Finally, Mr. Pesek notes, "It's a make-or-break year for China's efforts to defy the economic laws of gravity. A bad-debt hangover from the huge stimulus of recent years is a distinct possibility. Markedly slower growth would be a nightmare for a Communist Party obsessed with social stability." All of the above add up to but one cautionary bit of advice: ignore the starry-eyed commodities newsletter vendors' perpetual state of denial and drunken uber-optimism when it comes to the Chinese paradigm. Reality might just come to bite them hard in the year of the Armageddon. And, as you've already been informed by our good friend Liam Pleven (WSJ), the take-away lesson for investors is that as goes China, so go commodities. Let's just hope it goes more like this, than...this.
Until tomorrow, stay safe.
Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.