Tuesday, February 8, 2011

Inflation Roars To Life

A funny thing happened this morning as the CRIMEX opened for Precious Metals trading this morning. After drifting lower off their overnight highs in Asia during the London trading period, the Precious Metals exploded in price at the 8:20AM est open this morning in New York. There was no pertinent US economic date released this morning. However...

China hikes interest rates again to damp inflation
By Tini Tran
BEIJING (AP) -- China's central bank raised interest rates for the second time in just over a month in a bid to dampen high inflation and guide blistering economic growth to a sustainable level.

The People's Bank of China announced Tuesday on its website that the benchmark 1-year deposit rate would rise by a quarter percentage point to 3 percent and the 1-year lending rate would increase by the same amount to 6.06 percent. The increases are effective Wednesday.

Its last rate hike came on Christmas Day, when the bank raised both benchmark rates by a quarter point. China's leaders have sought to cool surging inflation that could pose a threat to political stability.

Gold prices broke lower on the news of the Chinese rate hike around 5:30AM est., and drifted lower through the early morning until the CRIMEX opened in New York. Nothing unusual in that. Raising interest rates in China "should" result in a drop in Precious Metals prices...at first.
The explosive response to this news in New York this morning is a bit confounding on the one hand, but given the global inflationary expectations implied by the Chinese rate hike, probably justified on the other. However...

Shorter-Dated Treasurys Ease as Debt Sale Looms
NEW YORK—Treasurys maturing in 10 years or less fell as the market braced for $72 billion of new government debt supply over the week.

Shorter-dated notes led the selling ahead of the first leg of the auctions, a sale of $32 billion in three-year notes at 1 p.m. EST. The Treasury Department will sell $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds Thursday.

The bond market has been hit hard over the past week as optimism on the U.S. economic growth fueled worries about inflation, which eats into bonds' fixed returns over time. But investors shrugged off the move by China, the world's second-largest economy, to raise key interest rates by 0.25 percentage point Tuesday in its own efforts to quell inflation. It was a third hike since October, and many market participants expect further tightening measures in coming months.

"Supply is the immediate theme," said John Briggs, U.S. interest-rate strategist at RBS Securities in Stamford, Conn. "Treasurys looked to see if risk assets would sell off [on the rate hike in China], then for the most part shrugged and moved on."

With a sale of $32 billion in three-year notes at 1 p.m. today, $24 billion in 10-year notes on Wednesday, and $16 billion in 30-year bonds Thursday, one might have expected a bit of a tighter leash on the Precious Metals this morning at the CRIMEX open. The run up in prices was quickly halted as Gold neared key resistance at $1365. You might say Precious Metals prices hit the wall as Gold reached the 50% retracement of the recent sell-off that began right after the first of the year.

At 10AM est as I write this, all the Precious Metals and the currencies look bottled up ahead of today's $24 BILLION three-year note auction. The Chinese interest rate hike should help push the Chinese Yuan higher, and the US Dollar lower moving forward, but with $72 BILLION of debt to sell, the Treasury and the Fed cannot allow the threat of inflation and a lower Dollar to impinge on this massive debt offering...even though we know who the buyer of this pile of horse dookie is for the most part going to be the Fed itself. Hey, even liars and thieves have to keep up appearances. It should be noted, however...

40-Year JGBs See Least Demand Ever Amid Yield Uptrend
By Megumi Fujikawa
TOKYO (Dow Jones)--Demand for new 40-year Japanese government bonds was as weak as it has ever been at an auction Tuesday as investors steered clear of buying superlong bonds on the back of the recent spike in yields.

Japan's Ministry of Finance sold Y299.6 billion worth of 40-year JGBs at an issue price of 98.96 yielding 2.24%. The 40-year notes were sold in a Dutch-style auction in which all successful bidders pay the lowest accepted bid.

The auction received Y616.5 billion in total bids for a bid-to-cover ratio of 2.06, sharply deteriorating from 4.15 at the last 40-year sale in November.

That also marks the lowest level since 40-year government bonds started being sold in November 2007. A higher bid-to-cover ratio is usually considered an indication of stronger demand.

Amid recent yield rises in the global bond markets, "it's not a condition in which players want to buy government bonds aggressively,", said Nobuto Yamazaki, executive fund manager at DLIBJ Asset Management.

The auction results show that top-heaviness in JGBs has spread to the superlong sector, which had resisted recent selling pressure compared with other zones, Yamazaki said.

Closely tracking movements in Treasurys yields, Japan's benchmark 10-year yield hit as high as 1.3% on Monday for the first time since May.

It will most interesting to see the results of this weeks US Treasury auctions considering this bond market slap in the face to this Japanese Government Bond offering. Recall also that Japanese Government debt was recently downgraded, and the same fate may await US Government debt soon.

Bottom line folks: The Inflation Genie is out of the bottle. The cork has been lost and would be useless even if found. The continued rise in Chinese interest rates confirms that the World is now staring down a global battle against Inflation that will not be won quickly or easily.

The rise in interest rates here in the US have been at the behest of the bond market, and not the Fed. This signals a growing fear of inflation here in the USA, and not a sudden belief that the economy is recovering rapidly as many in the western financial press would have you believe. ANY and ALL "signs of an economic recovery" here in the USA is because of a flood of monopoly money into the financial system to prop up the still failing banks. This flood of money has resulted in accelerating price increases which the Fed denies at every opportunity. These rising prices are then deemed to be a "sign of growth" as sales receipts have increased due to the rise in prices, and not an actual increase in the amount of goods sold.

The consideration of Precious Metals as a hedge against inflation has hardly been evident during this ten-year bull market in prices. Most of the run up in the prices of Precious Metals can be laid at the feet of the banking crisis, and a general uncertainty regarding the health of the global economy. Factoring inflation into the bullish fundamental equation for owning Precious Metals, and demand could soon be about to soar to levels only talked about previously. We may be looking back on today's Chinese interest rate hike as a watershed moment in this Precious Metals bull market. This could be seen as the last "phase transition" as the Precious Metals bull moves from the "smart money" phase into the "mania" phase as the general public seeks refuge in the Precious Metals to protect what wealth they have left from the ravages of global Inflation.

Gold Prices Pop Despite China Rate Hike
ByAlix Steel
Gold prices were unfazed by China's decision to raise key interest rates by 25 basis points, the third move since October 2010. China has been trying to take baby steps to fight rising inflation, which is currently 4.6%.

Typically an interest rate hike would drag on gold. As paper money gains more value, gold becomes a less appealing place to put money. Gold also does well in a negative interest rate environment, which is the interest rate minus the inflation rate. Using the one year deposit rate, even with the hike, China still has a negative rate of 1.6%.

China's New Year holiday ends today so it will be interesting to note if physical gold buyers in China will be deterred by higher rates or if rampant gold buying will continue. If today is any indication, Chinese buyers will jump into the market. Just by the mere fact that China is forced to raise rates because of inflation brings the buzz word into the foreground which is supporting prices.

The inflation validation "brought more funds to gold back after the $1,360 area was surpassed," says George Gero, senior vice president at RBC capital Markets.

Prices "aren't completely falling out which means there is some support in the market," says Phil Streible, senior market strategist at Lind-Waldock. "The 150 day moving average is holding strong ... I think the health of the gold investor has gotten a lot better over the last week."

Silver prices have broken higher here following the London Fix at 10AM est. I would have some reluctance chasing price here however. The 10 day moving average had a bullish cross of the 20 day moving average this morning. I would like to see a test of the 10 day moving average, and possibly a dip to the 20 day before jumping in. A test of either of these averages would go a long ways towards strengthening the next move higher in Silver. It is however significant that Silver has broken through resistance [$29.38] at it's 61% retracement of the January sell-off, and cleared it's January swing high of 29.78. This is indeed a very powerful move by Silver, buy the dips.


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