Tuesday, January 18, 2011

The China Factor, Supply, And Demand

Gold reached resistance at $1375 this morning as the US Dollar sank to a two-month low. The US Dollar this morning is teetering on support near 78.80 on the US Dollar Index. I, and many others, remain puzzled by last Thursday's coincident drop in the Dollar, Gold Silver, and Oil.

On Friday, China told banks to set aside more deposits as reserves for the fourth time in two months, stepping up efforts to rein in liquidity after foreign-exchange holdings rose by a record and lending exceeded targets. This, of course, led to an across the board sell-off in commodities on the fear that a liquidity crunch in China would stifle demand for commodities globally.

Yesterday, Chinese President Hu Jintao emphasized the need for cooperation with the U.S. in areas from new energy to space ahead of his visit to Washington this week, but he called the present U.S. dollar-dominated currency system a "product of the past" and highlighted moves to turn the yuan into a global currency.

This morning, we learn that China, the biggest buyer of U.S. Treasury securities, reduced its holdings in November after four months of gains. According to the US Treasury, China's holdings of Treasury debt dropped 1.2 percent to $895.6 billion.

In addition, we learned this morning that China's central bank has reportedly cut its 2011 lending target for banks by 10 percent from last year in a bid to slow down free-wheeling lending and tame inflation.

One wonders if the unusual volatility in the currency and commodity markets the past few days were to prepare for this weeks visit to Washington by Chinese leader Hu Jintao, or simply a play set up by the banks to take advantage of all of the moves by China to fight inflation there.

Of course, there is always the belief that the Precious Metals markets were again experiencing "bear raids" by the bullion banks that operate outside of commodity law at the CRIMEX in New York. This is a pertinent belief because the recent vote on position limits by the CFTC last week does little, if nothing, to thwart the abuse of commodity law by the likes of JP Morgan.

Analysis: CFTC "position points" lack bite of hard limits
By Roberta Rampton and Christopher Doering
(Reuters) - The largest speculators in U.S. commodity markets have little to fear from a new plan by their regulator for heightened surveillance -- a precursor to position limits that won't likely force anyone to exit trades.

Traders such as Goldman Sachs, JPMorgan and Morgan Stanley will likely get extra questions about their over-the-counter swaps from the Commodity Futures Trading Commission when they exceed certain complex thresholds in 28 energy, metals and agricultural futures markets.

The added surveillance, known as the recently proposed "position points", is an attempt to appease Bart Chilton, a CFTC commissioner who says the agency should act faster to make sure speculators cannot help drive up prices at a time when food and copper have hit records and oil nears $100 a barrel.

It is an interim measure until the CFTC has the data needed to put in place speculative curbs required by a new Wall Street reform law.

But barring an extreme price spike or market emergency, lawyers and analysts say the CFTC probably will not force speculators exceeding the "position point" thresholds to liquidate positions.

Emergency powers are reserved for times when markets are threatened by manipulation or during major disturbances, said Jill Sommers, a Republican commissioner.

"It's my opinion that our emergency authority does not extend to us being able to tell a market participant to get down just because a position is large. There are other people who feel differently," Sommers told Reuters.


Why does the Congress even pass laws to protect consumers and investors if the bank lobby is allowed to dictate how the law should be written?

JP Morgan Wins: CFTC Position Limits Do Not Apply (To Them)[MUST READ]
By Chris Martensen
Speaking of changing the rules...

Gold and silver are now down hard over the past two days, and the reason may have something to do with the fact that the CFTC utterly caved to JPM in their long-awaited decision on position limits in a 4-1 vote.

While position limits will eventually be set, maybe, someday, the course of action taken by the CFTC grandfathers in JPM's (and HSBC, et al.) current outlandish positions.

Here's the background:

On the flip side, the fall in the paper price of Gold appears to be creating a scarcity of Precious Metals for physical buyers. The contention has long been that when actual physical supply shortages become real, the paper manipulation of Precious Metals price would be revealed as the true fraud that it is, and this derivative market will come crashing down like the mortgage derivatives markets in 2008. Could we be fast approaching a "tipping point" where shortages of Precious metals make it impossible for the CRIMEX shorts to meet delivery demands?

Gold prices buoyed by China demand
By Jack Farchy in London
A spike in gold buying by Asian investors has created a scarcity of investment-grade gold bars in the region, supporting prices even as western investors trim their holdings.

Traders said that gold sales to China had jumped 30-50 per cent since Christmas, driving the cost of kilo bars in Hong Kong more than $3 per ounce above the market price of gold, the highest level since 2008 and an indication of the tightness in the physical market.

“Physical demand has rocketed in China at the start of the year,” said Walter de Wet, head of commodities research at Standard Bank.

The metal’s price has dropped 4.6 per cent from its December record price of $1,430.95, trading at $1,364.10 on Friday, as optimism about prospects for US growth has led western investors to turn their attention away from gold to other commodities and equities. “We have a balanced situation where one part of the world is buying and the other part is selling,” said a senior trader in Hong Kong. Chinese and Indian investors are increasingly turning to gold to protect savings against sharply rising food prices.

Investor buying of gold bars jumped 80 per cent to a record 144 tonnes last year in India, according to GFMS, the precious metals consultancy, while across east Asia bar hoarding was up 125 per cent at a 15-year high.

Strong Indications of Gold & Silver Shortages [MUST READ]
By: Adrian Douglas
Since reaching new highs at the end of 2010 gold and silver have been sold off, and the selling has been particularly intense in the last few days. The news on the economy is almost exclusively bullish for the precious metals. From the price action one might be falsely led to believe that investment demand for the precious metals is waning. On the contrary the data analysis I will show in this article reveals strong indications of growing shortages and furthermore that the gold and silver markets are approaching “tipping points” that will lead to an acceleration of price appreciation.

The clear trend in the data clusters that has developed over the last ten years indicates that the gold open interest will soon be declining with a rising price as is the case for silver. Taken together the data shows that in both gold and silver there is a growing reluctance of the traditional short sellers to meet rising demand even at elevated prices. This is strongly indicative of looming physical shortages. This conclusion is corroborated by many other market observations and anecdotal evidence. We are likely very close to the “tipping point” where shortages become exposed and a stampede of investors into precious metals to benefit from the accelerating prices will give rise to a feeding frenzy that will exacerbate the shortages.

Perversely the more the market becomes close to the tipping point the more we can expect the cartel of bullion banks to make bear raids as we have seen this last week because they desperately need to cover their short positions. However, in the case of silver and soon to be the case with gold a negatively correlated open interest to price relationship means that lower prices lead to higher open interest; in other words there is no way to cover at lower prices; the only way to cover is at higher prices. As this becomes increasingly obvious to the cartel the severity of the bear raids will decrease, particularly when the premiums in the physical market are showing that the bear raids are stimulating massive physical offtake making the predicament of the cartel ever more precarious.

This makes the brouhaha about the CFTC imposing position limits on the Comex a complete joke because, as always, the regulators are going to be too late.

Just like all the other nefarious financial engineering schemes that are falling like houses of cards, the scam of selling precious metals that do not exist is fast approaching a rendezvous with its day of reckoning.


Premiums Play a Role in Indicating Silver Manipulation
By: Dr. Jeffrey Lewis
Silver investors should remember to always pay attention to the per ounce premium they pay to receive physical metals. While premiums are important as a barometer of the actual silver you're obtaining per dollar, premiums also play a very important role in gauging current market manipulation.

There are a number of headlines and stories that today focus on the rising premiums being paid for physical Precious metals:

Jewellers book gold at high premium on supply squeeze

Demand for Physical Bullion Sees Silver Eagle Sales Soar and Premiums Rise

Right now, the demand for physical gold in China is surging. The premiums for gold bars for spot delivery jumped to their highest levels in two years there.

Bank dealers said premiums may rise to $1.65-1.75 an ounce from the current $1.40/1.45. "Supply is still a problem, and it looks unlikely to be solved until February. If this demand trend continues, we might see further rise in premiums," said the state-run bank dealer.

Gold Shorts Beware China's Million-Strong Gold Savers

Bullion Demand Surges in Middle East & Asia

Of course supply shortages and rising premiums for physical metals leads one to wonder about default scenaios over at the CRIMEX.

Precious Metals Default Scenarios
By Jeff Nielson
For obvious reasons, there has been a great deal of discussion about actual, formal “defaults” in the gold and silver markets. Among those “obvious reasons” is that informal defaults are apparently already taking place in both markets.

Beginning in the London gold market over a year ago, and now rumored to be occurring in New York's “Comex” silver futures market, buyers who have legally contracted to take “physical delivery” of the metals they have purchased are said to be accepting large, paper bribes to accept a “cash settlement” instead.

There are many reasons for investors to take such “rumors” seriously. Empirically, we see the premiums being charged for physical bullion (even from large, established dealers) rising to levels never before seen (around the world). This strongly suggests a very tight market for bullion. This is confirmed through the anecdotal reports of both industrial users and large institutional investors (such as Sprott Asset Management) that they are having a great deal of difficulty locating any large quantities of bullion available for sale.

In theoretical terms, we are merely seeing the culmination of arrogant bankers attempting to defy the elementary laws of supply and demand for over a quarter of a century. Even those with no training in economics know the basic rule (since it is merely an expression of common sense): when prices rise, demand falls; when prices fall, demand rises.

There are many derivative principles which flow from this one basic law. Among the most salient (and the one apparently beyond the comprehension of bankers) is that if you under-price any good it will be over-consumed. I have demonstrated the unequivocal truth of this principle previously, and so will not do so again. Suffice it to say that in deliberately under-pricing gold and silver for well over a quarter of a century (through their relentless manipulation of these markets), the bankers have caused more than 25 years of excessive demand – where previous surpluses in these markets have been transformed into huge supply-deficits.


China or the CRIMEX? Who knows why the Precious Metals are being toyed with here. Suffice it to say, the fundamental case for a continued rise in the prices of Gold and Silver only gets stronger by the day. Gold is far from being in a bubble, and the US Dollar is far from being a pillar of economic strength. China may hold a lot of the global economic economic cards right now, but the growing supply shortages and rising premiums put the pillars of wealth protection in the holders of physical Gold and Silver.

Be right and sit tight as the world's fiat money system spirals to towards it's demise.

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