New Fuel for the Gold Bull

Addison Wiggin – May 12, 2011

  • Still bullish"… New evidence China is propping up gold near $1,500
  • New fuel for the gold bull: A second Hong Kong exchange opens doors to gold traders
  • What next for commodities? Alan Knuckman on a key number to watch
  • When people don't mind looking like a dork: An ultimate sign of commodity demand
  • "Could take paint off a battleship"… Readers write after learning of our experience drinking baijiu

Another day, another leg down in stocks and commodities. And once again, it's driven by news from here in China.

But if you're a precious metals investor, things are happening here beneath the surface that should give you cheer. Let's dive in…

China has raised its reserve requirements for banks yet again. It's the fifth time this year, and the eighth since last October.

When the new rule kicks in next Wednesday, banks will be required to keep a record 21% of customer deposits in the vault or at the central bank.

It's no surprise — not after April consumer prices clocked in yesterday at an annual 5.2%. But it feeds the meme that China's about to slow down at a time industrial production and retail sales here are already starting to run out of steam.

Thus, "it's a risk-off trade" one fund manager tells Bloomberg. Here's the damage report…

  • The Dow and the S&P are adding to yesterday's losses; both indexes are down another three-quarters of a percent
  • Gold has been knocked back to $1,490; silver's back to its lows from last week, at $33.24
  • Oil is down to $96.59
  • Copper, which briefly poked its head above $4.00 a pound on Tuesday, is back to $3.90
  • The dollar index is up 3.4% from its lows at the end of April. At last check, it's 75.5.

"We saw buying when gold dipped below $1,500 from China, India and Indonesia," an anonymous Hong Kong-based dealer tells Reuters, "but not much scrap selling, as people are still bullish on gold."

This corroborates Richard Russell's notion that we shared here on Monday — there's a "Chinese put" under gold. "Whenever gold corrects a bit, China is there loading up on whatever is available."

Sure enough… Gold crossed $1,500 for the first time three weeks ago. Whatever dips have come since then have been shallow, and brief:

That's the short-term picture for precious metals here. Long-term looks equally bullish…

Next Wednesday, the Hong Kong Mercantile Exchange will open a new trading platform for gold futures, featuring 1 kg. contracts denominated in U.S. dollars.

Upon maturity, traders can take delivery at a government-operated depository located at the airport.

"From a business perspective, you want to get into something with a huge demand," says HKMEx spokeswoman Aubrey Ho. The exchange is climbing onto an increasingly crowded bandwagon for the Asian metals trade…

  • Precious metals futures are already traded in Hong Kong via a subsidiary of Hong Kong Exchanges and Clearing
  • China proper, gold is traded in Shanghai, Zhengzhou and Dalian — although for now those exchanges are closed to foreign investors
  • Gold futures are also traded on the commodities markets in Singapore and Tokyo.

But the HKMEx entry could be a game changer: "The move," says MarketWatch, "pits Hong Kong against three centers already well established [in] commodities trading — London, New York and Chicago."

[Ed. Note: Chris Mayer is still keen on two junior gold stocks. One, in northern Canada, sits cheek to jowl with a district known as the "Golden Staircase" that's been making millionaires for a century now. The other he came upon during our visit to Colombia in March. It's literally sitting on a mountain of gold. Either one, before all's said and done, could make you 15 times your money.

You can learn about both of them… and snag half off a membership in Chris' premium advisory, Mayer's Special Situationsbut only through this coming Monday.]

There may be a "Chinese put" under copper too. With copper prices back below $4 a pound for the first time since December, China appears to be buying again.

In recent months, copper has been piling up in Chinese warehouses. High prices and the government's limits on credit forced manufacturers and traders to cut purchases.

But now there's evidence those inventories are headed back out the door. Copper stocks held in warehouses of the Shanghai Futures Exchange are down 30% since March, according to the Financial Times.

They're still high by historical standards, but Nicholas Snowdon at Barclays Capital says the new developments could prove a "pivot point" in which China no longer drags down the copper market.

"The historic action last week leads me to believe we should focus on what didn't happen more than what did," says Resource Trader Alert's Alan Knuckman, surveying the early-May commodity swoon.

"The unwinding of significant gains was fast, efficient and orderly, though painful for some who entered only recently. Traders had continually moved up protective exit orders to lock in profit on the extreme move higher.

"Markets fall a lot faster than they go up, and fortunately, electronic technology helped the unwinding get everyone out on their terms."

So what's next? As always, Alan advises keeping an eye on his favorite broad commodity index, the CRB. As we write this morning, it's down to a key level — 335 — which is 50% above the early 2009 lows.

Don't be alarmed by a short-term dip to this level, Alan says: "Until there is a weekly close below that halfway recovery level from the extreme lows, the solid ground is on the long buyers side."

Alan has played gold just about perfectly this year — parlaying a 7% move in bullion into a 188% gain for his readers. In fact, if you total up all his gains this year and last, you arrive at some staggering figures.

Right now, we're making membership in Resource Trader Alert available at one-third off. But we won't do it for long. Take advantage at this link.

First-time claims for unemployment fell last week. But at 434,000, the number is still woeful. And in what's become almost standard operating procedure for the Bureau of Labor Statistics, the previous week's figure was revised upward to 478,000.

The number of home foreclosures hit its lowest since January 2008. But don't take that as a sign of recovery in the housing market. RealtyTrac, which crunched the numbers, chalks it up to "massive delays" in processing foreclosures.

"Banks will only repossess homes as quickly as they can sell them," says RealtyTrac's Rick Sharga, who doesn't see this bottleneck easing for another three or four years.

Retail sales rose 0.5% in April, according to the Commerce Department. Sounds good, except that most of the increase was driven by gasoline (up 2.7%) and groceries (up 1.5%).

Wholesale prices rose 0.8% in April, driven mostly by rising fuel costs. The producer price index, according to the Labor Department, is up 6.8% in the last year.

That's the biggest 12-month increase since — uh-oh — September 2008.

Tomorrow we'll see how much these prices have been passed on to you and me with the consumer price index. As always, it will be severely distorted… but we'll dig into the numbers to find the real story.

We have a new addition to our list of things desired by thieves in the midst of rising commodity prices. But this time there's a twist.

Unlike copper manhole covers, lead church roofs or fryer grease useful for fuel… it's not the commodity itself that's in demand.

You know times are desperate when people don't mind being seen on one of these

Statistics are hard to come by… but there's anecdotal evidence of a spike in thefts of motorized scooters.

Nashville metro police say scooters are definitely a target. "The last time gas prices were really high, we also saw scooter thefts," says Sgt. Dan Ogren. One dealer of scooters and motorcycles has had several break-ins — despite being surrounded by fences and locked gates.

Elsewhere, Police in Conway, Ark., report a string of scooter and motorcycle thefts — at least seven since March. One cycle was the personal vehicle of a local cop.

Scooters might look dorky, but 90 miles a gallon is hard to argue with.

"After four years at 7.37%," writes a reader winding down our tales from the mortgage front, "I called my U.S. Bank mortgage office to find out if I qualified for the 'Making Home Affordable Program.'

"I was told I would not be considered until I was two or more months behind on my payments. That's easy, I thought.

"But after 11 months of playing chicken with us bank (purposely typed in lowercase); resubmitting forms, often weekly; no one returning my phone calls; and in the end hiring an attorney to add a little horsepower, I just paid up the two months and decided to fight other battles.

"The official reason I was turned down? They said I did not provide pay stubs in a timely manner. So sending every pay stub for the past 11 months as they rolled off the press was not adequate. Nor were the myriad forms faxed with send confirmations. Nor were the endless phone calls (messages) by myself and attorney to the nice lady in the refi department.

"Unresponsive. Unclear directions. Vague rules. Never a return call. Poor customer service. They played us like a cat with a beat-up mouse — for sport. They must wake up laughing. What a racket."

The 5: Count yourself lucky — the racket is worse than maybe you realize. Many people played this game — "You'll qualify for the lower rate only after skipping a payment or three" — only to later receive a foreclosure notice.

"I'm a Canadian, so I'm not going through the refi nightmare you guys are. However, I did find a way to get their attention once.

"I work in the financial business, and anytime you mail or fax info, it has to go into your file.

"I once had a problem with an institution that was ignoring my concerns over an error it had made.

"After getting no response, I obtained an old-style fax machine and taped three copies of my concern letter together, making a continuous roll, and faxed it and let it run continuously for about two hours.

"I got a call back, and issue resolved."

"Enjoyed the comment about baijiu, although I saw much more beer (pijo) when in Beijing. They drank it from what we would deem a wineglass, most likely due to a lot of toasting and 'bottoms up.' Four ounces are easier than 12, especially considering a general intolerance of alcohol prevalent among the Chinese.

"Baijiu can't be much worse or better than Korean soju or Irish poitin. Any or all would take paint off battleships."

"I got a kick out of Addison's initial experience with baijiu," a reader writes. "You might call it Everclear or 'white lightning' back home.

"As an investment opportunity he might look into vintage, c. 1958, Maotai — a bottle of which recently went at auction for 1.45 million yuan. At the current exchange rate, that comes to $223,000

"If you had bought it just a few years ago, it would have cost 25.5% less on the exchange rate alone. Gan bei!"

The 5: Our chief copywriter, Greg Grillot, who's in Beijing here with the Agora delegation, swears in all caps he will never drink baijiu again.

If you know him, that speaks volumes, doesn't it? If you don't… well, I'm sure you can imagine.

Business deals get concluded over bottles of the stuff, however, here in China. We consider ourselves in training.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. We were interviewed by several newspapers this week. The two most prominent questions regarded silver… and the impact of bin Laden's death on the markets.

On the first, three increases in margin requirements in one week are plenty to tank the price.

And the second, oy, it was priced in a long time ago.

P.P.S. TThere's that "Chinese put" again: As we send this issue off to the HTML wizards to make it nice and pretty for your benefit, we see gold is back above $1,500.

It's still not too late to get rich from gold… but all the same, you don't want to waste much time getting going. Here are nine ways that'll give you a running start.

rspertzel

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