China Contraction Sees Gold Fall, “Downtrend Continues” In Silver as G7 Weighs Emergency Action on Oil

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March 24, 2012 7:44pm NYSE:GLD NYSE:IAU

Adrian Ash:  With the gold price dipping to nearly its lowest level in 2012 as world stock markets and commodity prices also fell.

India’s jewelry sector remained on strike in protest at last week’s doubling of import duties, and “with physical demand not at full strength and waning investor enthusiasm, the potential for further downside in [the gold price] remains exposed,” says today’s note from Standard Bank.

Silver prices also dropped over 1% in London trade, touching their lowest level against the US Dollar since Jan. 25th at $31.70 per ounce.

Worse-than-expected European data was this morning preceded by news that China’s manufacturing activity has now contracted for five months running.

“Shrinking manufacturing activity in March signals slower demand for resources,” notes a column from Thomson-Reuters Breakingviews.

“Strong imports have heightened the risk of overstocking in precious metals.”

Late-January’s Chinese New Year – a peak season for consumers to buy gold – coincided with sharp falls in the volume of bullion being imported to China from Hong Kong, falls which followed an earlier surge in China’s gold imports during late 2011.

Albert Cheng of global market-development organization the World Gold Council said earlier in March that Beijing and Shanghai stores had reported “fantastic” sales over the Lunar New Year, “completely clear[ing] out the inventory they had built up.”

In the wholesale market, “A lot of people are on the sidelines at the moment,” said Yuichi Ikemizu, commodities chief in Tokyo for Standard Bank, to Reuters early on Thursday.

“We saw some bearish signs, but the [gold price] seems to be holding well. The upside at $1,800 is still looking quite heavy, and investors are waiting for a cue.”

“We feel that gold is consolidating and remains vulnerable to the next leg lower,” reckons Russell Browne at Scotia Mocatta, commenting shortly after Wednesday’s US close.

“Silver also continues to consolidate…[in] a daily downtrend providing near-term resistance around $32.60.”

The ratio of silver to gold prices yesterday hit a 1-month high at 51.6. The Gold/Silver Ratio rises when the gold price outperforms silver, and vice versa.

Last April the Gold/Silver Ratio hit a 32-year low, with each ounce of gold equivalent in price to just 30 ozs silver. It peaked near 85 in the wake of Lehman Brothers’ collapse in September 2008.

Early Thursday, “Speculation of reduced demand for raw materials from China has continued to weigh on risk sentiment,” says Swiss refinery and finance group MKS in a note.

“People are concerned about China’s economic growth,” Reuters quotes a Hong Kong bullion dealer.

“If growth slows down and inflation eases, people may choose not to buy gold.”

Following the Chinese news on Thursday, European economic figures also came in below analyst forecasts, with Germany’s manufacturing PMI contracting faster and Eurozone industrial orders falling 3.3% in January from 12 months before.

UK retail sales also undershot analysts’ predictions, shrinking 0.3% last month from January.

Crude oil prices meanwhile fell 1% Thursday morning, with Europe’ benchmark Brent price slipping to $122 per barrel after French industry minister Eric Besson said that major G7 governments are considering a co-ordinated release of emergency stockpiles to push prices down.

A Gallup poll this month found that 85% of US citizens think Washington “should take immediate actions to try to control the rising price of gas.”

Brent crude hit fresh all-time highs in mid-March for both Eurozone and UK oil consumers, peaking 3% above the previous all-time high of July ’08, reached two months before the global banking crisis accelerated with the Lehman Bros. collapse.

“We can reel off a whole load of airlines that are teetering on the brink or are really gone,” said Tim Clark, president of Emirates Airlines in Dubai, the world’s biggest international carrier, to Bloomberg on Wednesday.

Pointing to record oil prices and a slump in demand, “Roll this forward to Christmas, and we’re going to see [the airline] industry in serious trouble,” says Clark.

Related Tickers: SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), iShares Gold Trust (NYSEARCA:IAU), Sprott Physical Gold Trust (NYSEARCA:PHYS), ETFS Gold Trust (NYSEARCA:SGOL).

Written By Adrian Ash From BullionVault

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.   (c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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