The Bear Facts of the Bullion Market

Peter Major, an analyst at Cadiz Corporate Solutions, a unit of Cadiz Holdings Ltd., said by phone from Cape Town: “Commodity prices were unrealistically high as a direct result of a combination of easy and cheap money from quantitative easing and the threat of inflation. The market is efficient and it looks ahead. Mining houses have been weak for four or five months now; investors definitely saw weaker prices going forward.” Does that sound somewhat familiar? It should, to the regular readers of these columns. 

As well, we cannot yet take comfort in the fact that the latest reports indicate that investors such as fund maven John Paulson have not yet lightened up on their GLD holdings. The first quarter may have initially been kind to such portfolios but the tide has swiftly turned against them and new questions are not swirling around as to the fate of at least a portion of such allocations. Shareholders do not take kindly to more than one “explanatory” message from fund managers. They want results, here and now.

Some market watchers expect Mr. Paulson to join the selling herd and cut some of his holdings in gold before the second quarter draws to a close. "There's absolutely no question in my mind that large institutions have been net sellers in gold over the past two weeks," said Adam Sarhan at New York's Sarhan Capital. "The fact that Paulson has been coming under a lot of pressure on his other holdings may force him to liquidate as well." The additional price pressure coming from such liquidations is as yet not fathomable, but is certainly did show its effects on the way up in the gold market. To be continued…

Something that we are continuing: our coverage of developments in China and how they relate to the commodities’ space. The recent shifts in that country’s economy have clearly been contributors to the decline in the price of “stuff” and that includes gold and silver. At the present time, the overriding perception is that China’s economic deceleration could increase and that its growth might reach a weak point not seen in circa 13 years. Pimco certainly feels that way, and it projects economic expansion in China to only come in at around the 7% mark this year.

Something else that underscores the deepening slowdown in the planet’s second-largest economy is the fact that foreign investment in China fell by 0.7% in April. So-called inbound investment amounted to only $84 billion after the country missed import/export estimates and recorded the slowest level of industrial output since 2009.

China’s currency reserves did however grow in the first quarter and that pattern reversed the first quarterly decline since 1998 that was witnessed earlier. However, once again starkly contradicting those who continue to see the mirage of “stealth” Chinese official sector gold buying, China bought…US Treasuries. In fact, China bought 1.6% more US government securities in Q1 while Japan bought 2.4% more of the same as well.

And now, to close things out, we go back to the US of A for more perspectives. A string of economic statistics has been making its way into the markets since the start of the week, and most of the data appears to reinforce the take that the Fed will not budge and that QE3 remains only a dream in the sleep of the commodity bulls who have become hooked on such generosity. In fact, the week’s most relevant metric – that of inflation falling (largely owing to gas prices caving in) – has not managed to bring about any higher levels of expectations for a new round of QE.

Other than that, we have seen retail sales in April bounce one-tenth of a percent higher in April, US homebuilder sentiment coming in at its best level since the Great Recession, The Empire State manufacturing Index rebounding to 17.1 this month, US industrial production climbing 1.1% and thus beyond expectations in April, housing starts rising by 2.6% in the same month, and capacity utilization – an important metric – increasing to 79.2 percent, i.e., the highest level since April of 2008. That little amalgam of positive economic numbers should be sufficient to silence those who see the “unfolding demise of America” and who only preach fear. Odds are stacked against such a silencing however, as it has become quite fashionable to scare folks into buying that which…one offers to sell; be it God, gold, or guns.

Until Friday,

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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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