Gold hits two-month low on China tightening fear

NEW YORK Thu Jan 20, 2011 3:58pm EST

Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo September 17, 2010. REUTERS/Yuriko Nakao

Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo September 17, 2010.

Credit: Reuters/Yuriko Nakao

NEW YORK (Reuters) - Gold fell nearly 2 percent to two-month lows on Thursday due to technical selling and as worries over further monetary tightening in China triggered a commodities rout.

Silver, which sharply outperformed gold last year, dropped almost 4 percent for its biggest one-day decline in 1-1/2 months, sending the closely watched gold-to-silver ratio to its highest in nearly two months.

Gold, which rose 30 percent last year, has fallen 5 percent this month as investors took profits and put more cash into assets such as equities and industrial commodities.

"In the short term, some of the flood into the gold from the European crisis has subsided somewhat. We are poised for a decent-size correction here in all risk markets, and gold is getting caught up in that," said James Dailey, portfolio manager of the Team Asset Strategy Fund TEAMX.O.

The Reuters-Jefferies CRB index .CRB, a commodities benchmark, looked set for its largest one-day loss in over two weeks, led by 2 percent drops in oil and copper on fears that strong growth in China could prompt more monetary tightening.

Spot gold fell as low as $1,342.65 an ounce, its weakest since November 19. It slipped 1.4 percent to $1,350.90 by 2:15 p.m. EST. U.S. gold futures for February delivery settled down $23.70 at $1,346.50.

Turnover in the U.S. futures market was stronger than usual. COMEX gold totaled 260,000 lots, up two-thirds from the 30-day average, and volume in COMEX silver was about 50 percent higher, preliminary Reuters data showed.

Worries that Chinese tightening could derail global economic recovery sparked losses in stock markets too, with equities falling on both sides of the Atlantic.

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Analysts also cited weaker demand at gold-backed exchange traded funds as a factor behind the metal's weakness.

Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, continued to decline, falling to 1,251.433 tonnes on January 19 -- its lowest since May 2010. Its holdings are down more than 29 tonnes so far this year.

Gold came under further pressure after the dollar rose as better-than-expected housing and employment data pointed to an improving U.S. economy, though hopes for an easing in Europe's debt crisis limited euro selling.

On technical charts, a new downward trend could be forming for the U.S. February gold contract after prices broke below their 100-day average to hit a two-month low on Thursday.

"For the past few weeks, we are seeing a series of lower highs and lower lows forming on the charts. Technically, this suggests a new downward trend is forming," said Adam Sarhan, chief executive of New York-based Sarhan Capital.

SILVER SLIDES 4 PERCENT

Silver, which rose more than 80 percent in price last year due largely to continuous investment, came under pressure following another outflow of metal from top silver ETF iShares Silver Trust.

Silver dropped 3.9 percent to $27.66 an ounce and has fallen around 11 percent so far this month, putting it on track for its largest monthly decline since June 2009.

The prospect of tighter monetary policy in China, the top consumer of many industrial commodities, also hit the metal, which has a far greater industrial demand base than gold.

The gold-to-silver ratio -- the number of ounces of silver needed to buy an ounce of gold -- rose to a near two-month high at just below 49, showing that silver is underperforming gold in a falling market.

Platinum fell after two consecutive days of gains that took the price to its highest since July 2008. It lost 0.9 percent to $1,815 an ounce, while palladium inched up 0.2 percent to $813.22.

(Additional reporting by Jan Harvey and Amanda Cooper in London; Editing by Dale Hudson)

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Comments (3)
Duffminster wrote:
The employment figure isn’t really supportive of the dollar. We already had a substantial Philly Fed index revision from about 24 to 20 and then Chicago PMI came in revised lower. Top that off with today’s news that “Philly Fed Misses Expectations, Comes At 19.3, Admits Broad Price Increases”, and couple that with President Hui’s visit and you can be sure that the Fed now sees a wall of inflation coming amidst stagnant ecomic growth.

So it is the Fed and the primary dealers who are trying to mask this buy selling off commodities and silver is always an object of their first attack.

Keep in mind their are reports of tightness in the silver market all over the world and this is price suppression using paper. The weak longs without conviction will be flushed as usual and the long term buyers and physical buyers will be stepping up and there will be no gaps to fill.

Ultimately, the physical market is growing bigger and stronger by the day in the area of alternative money and value stores and none more than silver in my opinion.

Duffminster
http://www.duffminster.com

Jan 20, 2011 2:59pm EST  --  Report as abuse
Duffminster wrote:
Silver (exchange-traded product) flows have started the year on a weak note, with outflows yesterday of 17 tonnes taking total net redemptions “for January to 317 tonnes”.

In the meantime the US Mint has recorded record sales. The introduction of the Sprott Physical Silver Trust PSLV may account for a good deal of the silver migration. Sprott has been taking silver off the exchanges to fund its silver requirements.

As I posted before, there is little to indicate support for the dollar from an economic stand point given the two downward revisions in the Philly Fed reports and the recent Chicago PMI report. There is much to support increasing inflation inputs.

Furthermore, there is also much to indicate that beneath the massive artificial price manipulations of the paper derivatives markets for silver and gold, that physical demand is very strong.

As far as silver goes, very little reporting is done on the actual state of inventory and long term demand and supply. I wish more indepth analysis would be done on these points:

1. Above ground Available Silver bullion inventories have declined from about10 billion ounces in 1940 to around 1 billion today.

2. There is now approximately 3.8 billion ounces of above ground gold available.

3. Silver is not only a monetary precious metal but a highly useful and irreplaceable industrial metal used in high technology, medical and other manufacturing applications.

4. Very little of the silver used in industry is recycled.

5. The historic ratio between silver and gold is about 16.

6. The current ratio between silver and gold prices is about 48.

7. Physical demand for physical silver and silver coins is at all time highs and accelerating.

8. New applications of of silver (almost all non-recylable) such as HeiQ Materials, which “manufactures high-performance textile effects for the most demanding functionalities,” in the area of anti microbial and other anti-germ technology using silver compounds are expanding even as silver mining production is just beginning.

So, silver is actually substantially more rare than gold and yet the price ratios do not reflect the physical reality yet. This means that the long term price suppression of silver via the extreme concentrations of short positions by one or two of the largest Bullion banks has created a sling shot of potential upward price energy. If the CTFC investigation into silver price suppression or any of the current law suites, class action or otherwise, fully reveals the degree and level of ongoing suppression, silver may quickly revert to its historical ratios, and given its increasing rarity and industrial and technological usefulness, climb well beyond its less rare cousin, gold.

Duffminster
http://www.duffminster.com

Jan 20, 2011 3:43pm EST  --  Report as abuse
Duffminster wrote:
This isn’t about fear of tightening. It is about an orchestrated take down of commodities. One of the major levers used to bring down prices is to raise margin calls at the COMEX. In this case, gold and silver were targeted along with a small handful of other commodities. Gold and silver margin calls were raised about 6% by COMEX.

There are many indicators that inflation is accelerating and with China visiting and the US desire to see a more expensive yuan, perceptions of inflation needed to be analyzed to help gain concessions on the yuan in my opinion.

How do you do that. You call your pals at COMEX, tell them to bump up the margin requirements on gold and silver and a small number of other commodities and boom, instant sell off. Then you put out press that says its about data supporting a stronger dollar or fear of tightening, and a large percentage of the uninformed buy this, panic sell and the smarter long term investors who can see that both the euro and the US dollar are likely going to be toast as a result of totally un-repayable debt loads and realize that the Fed is locked into eternal QE because any substantial increase in interest rates will increase the US interest payment on sovereign debt rapidly absorb the entire discretionary US federal budget and lead to insolvency, simply use these raids and market MOPE (management of economic perceptions) to take delivery on more physical metals (if you can find them) or on safe proxies.

China is doing fine and they are buying up commodity companies in a way that we could only hope US companies and the government were doing because China sees the writing on the wall for the US dollar and Euro in my opinion.

Dig deeper, and tell the stories that you won’t get for the government PR room.

Duffminster
http://www.duffminster.com

Jan 20, 2011 9:43pm EST  --  Report as abuse
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