Factoring in China's Factories

The first session of the new quarter commenced on an upbeat note for all of the precious metals, save gold, this morning. The yellow metal opened on the weak side, showing a bid-side quote at $1,665 as against a marginally higher US dollar (79.01 on the index) and a fall of 50 cents in black gold. Attempts to lift gold beyond resistance at $1,680 or $1,700 could still be in the cards this week, with a potential target of $1,730 or so. On the support-side, the $1,650 and $1,620 levels are being cited as key numbers that need to hold. Overall, the speculative trade is still concerned about the potential slackening of physical gold demand from key consuming nations such as India and Turkey and about waning investment demand.

Despite certain optimistic reports to the contrary, we cannot confirm that the two-week-old strike by Indian jewelers has concluded yet. Estimates are that India only took in perhaps as little as 20 or 25 tonnes of gold in March. While some observers feel that India could all but lick its current account deficit figure by virtually halting gold imports, others opine that punitive moves (tariffs, etc.) on gold are “too little, too late.”

The Business Standard’s Devangshu Datta notes that “the enhanced customs duty on gold is designed to dissuade imports. Indian households have a default tendency to hoard gold. The Finance Minister has a delicate task in setting customs rates. If the rate is too high, there would be an incentive to smuggle. It’s easy enough to buy gold cheap in the Gulf and land large quantities on West Coast beaches. This happened daily in the old days of the Gold Control Act. That legislation created the legendary dons of what was then Bombay.” To be continued…

The tally of speculative positioning in the markets showed a bit of an improvement in the net speculative length in gold, which, according to this morning’s analysis by the team over at Standard Bank (SA) is still relatively weak and is running some 158 tonnes below the average of 2012. SB analysts are thus hesitant to call the futures market in gold as “bullish” just yet. The bulls continue to pray hard that the US economy show signs of faltering, which, in turn, would motivate the Fed to swiftly unleash some type of "unsterilized" QE3 and that such a move would, then, make for the attainment of a $2,000+ per ounce gold price target.

Their prayers have not been answered thus far, and the market’s recent “gyrations” unfortunately underscore just how over-dependent on the Fed the situation has become in gold. The perma-bulls appear to be ignoring (for the time being) other facts and figures that have quietly crept onto the scene. Take for instance the best Q1 gain by the S&P 500 since 1998 – a development that propelled US equities above gold for the first time in over a decade. Connecticut-based Birinyi Associates believes that “the problem with gold now is that people are starting to accept the economy [sic] recovery.”

Barclays Capital Commodity Research noted that “gold is also lacking sufficient investment enthusiasm to be able to sideline the physical market as it did earlier in the year.” Recall that last week Swiss bank UBS cut its gold price forecast by 18% for this year. This morning, a more modest but still meaningful 5.4% trimming of same was done by BofA Merrill Lynch. The bank reduced its gold projections to $1,750 per ounce while at the same time it raised its forecasts for silver, platinum, and palladium.

Market players in New York pushed silver higher by 14 cents to the $32.42 mark, platinum to $1,640 per ounce, and palladium to the $658 level. Speculative net length in silver fell dramatically in the latest CFTC reporting period; by nearly 530 tonnes. Albeit silver-based ETFs added 22.6 tonnes to their holdings, the futures market remains unconvinced about silver’s near-term price prospects. A similar lack of confidence appears to be on display in the platinum market, judging by the sharp decline in the metal’s net speculative length in the week ending last Thursday.

Copper advanced by 0.20% but other base metals recorded modest declines despite a better reading this morning in China’s manufacturing activity for March. CFTC market metrics show that hedge funds and money managers cut their net long positions in commodities by nearly 2% last week based on Chinese-related demand concerns. Goldman Sachs, last Wednesday, cut its short-term recommendations on raw materials. Market observers opined that they do “not buy today’s move [in bellwether copper] as the beginning of a bullish phase because the Chinese economy is still slowing and at the same time the central bank is not yet willing to cut interest rates.” Thus, the improved reading coming from China went over largely ignored by the markets (Hong Kong equities fell once again).

The improved reading in Chinese manufacturing showed that the country’s exporters are still struggling and that a hard landing in the economy will likely be unavoidable lest the PBoC loosens policy and tilts towards stimulus of one type or another. Consider for a moment one internal “sign” that not all is well in China; the nations’ Mercedes dealers are offering hitherto unprecedented discounts on their swanky automobiles. Any takers? Prices of Chinese new apartments fell in 45 out of 70 cities being tracked by the government in February. Any takers?

Some analysts have characterized the PMI data as being a “seasonal” aberration and they point to Europe as constituting about 40% of China’s final exports’ destination. There is a sufficient amount of conflicting data in the Chinese economic metrics (those offered by the government versus those compiled by HSBC) of late to give headaches to market observers however. Meanwhile, similar metrics from Europe were showing that region’s manufacturing activity having shrunk for the eighth consecutive month.

Not only that, but European unemployment surged to the highest level in 14 years (10.8%) and the figure is raising serious doubts about the region’s ability to consume "stuff" going forward. Market participants then awaited US ISM data and hoped that at least that set of numbers might confirm on-going stabilization and/or growth in the American economic environment. They did, inasmuch as the ISM reading came in at 53.4% (as against a forecasted 53.5%) and the dollar remained buoyant in the wake of the news release.

Thus, the US, for the time being, appears to offer pretty much the sole bright spot for economic conditions. Recent regional reports have shown the Empire State area’s factories surging ahead at the best clip since mid-2010, the Philly region’s expansion coming in at the best rate since a year ago, and important gauges such as job creation, consumer confidence and, more importantly, consumer spending (on autos for example) exhibiting some impressive rebounds. Tomorrow’s auto sales data is anticipated to possibly tally an annualized sales rate approaching 15 million units.

Based on the above conditions it might not be a stretch to perceive the dollar as being poised not only not to crumble and disappear, but to actually attract a fair amount of bullish interest after having suffered a 1.5% setback in Q1. Certain market trends in play since last October in the Aussie, Canadian, and US dollar(s) appear to be at pivotal chart points at this juncture. The greenback seems to be in a position to break higher against the two commodity currencies as both of them are largely at the mercy of Chinese demand for materials. Crude oil also appears to be in the process of breaking (see below) both its long-term and short-term bullish trends after having closed out Q1 with a better than 4% gain. 

Until Wednesday,

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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