GOLD CORRECTS ON CHINA WORRIES

Gold fell back again this morning, testing $1,100 and holding. From there it bounced nicely, moving back into positive territory above $1,108 an ounce.  Silver also performing quite well, bouncing off support and then moving to a $.12 gain to $17.14 an ounce. The dollar is up 8 basis points at 80.52 and oil is down $.42, while the Dow is down 24 points.

The correction this morning in the metals was due to worries that China may begin to tighten monetary policy due to rising inflation pressures in their country. Gold rebounded on an unexpected narrowing in the U.S. trade gap with the trade deficit declining 6.6% to $37.29 billion. The trade deficit was lower than Wall Street expectations, of a $41 billion short fall. Chinese consumer prices jumped 2.7% indicating inflation pressures are increasing, while their money supply was up 25.5%. These numbers are probably not sustainable and may force the Chinese to either revalue their currency upward or tighten monetary policy or some combination of the two. If they are doing this on their own and not perceived to be doing it at the urging of the U.S. or other western nations they will have more latitude to increase the value of their currency in an effort to cool off their inflationary pressures. I suspect this will increase the demand for gold in China, which could be very positive for the gold market. I think at some point we may also learn that China has been continuing to acquire gold for its reserves.

I think this is also true in other emerging nations where the demand for physical gold is strong on all dips. This is the view of James Steele of HSBC Bank. There seems to be a consensus of analysts who think that a dip below $1,100 would be halted at between $1,075 and $1,080 where there will be very strong demand for physical gold. Apparently, traders have buy orders in their pockets from China and other parts of the emerging economies to buy at those levels. It is likely that whatever corrective moves are going to occur, will be occurring this week and possibly next. By the middle of March, we should see these markets turning around nicely as seasonal demand comes into effect, which should increase the demand side of the equation and push gold higher.

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