Commodity Trade Mantra

China Economy Health Crucial to Gold & Metals Rally

China Economy

China Economy Health Crucial to Gold & Metals Rally

China’s slowing economy could have grave consequences for Gold Prices. A slowdown in China augurs for lower inflation or perhaps even deflation and higher real rates which drastically tighten the money supply & movement which all boils down to being highly negative for Gold Futures prices. China GDP grew 7.4% in the third quarter, matching analyst estimates, slowing from 7.6% in the second quarter and 8.1% in the first. Industrial production rose 9.2% as against the 9% expectations. China’s GDP reached 35.35 trillion yuan (5.61 trillion U.S. dollars) in the first three quarters. China’s stocks rose, driving the benchmark index to a five-week high, after Premier Wen Jiabao said the economy has started to stabilize and industrial production and retail sales data beat estimates. Wen said the government is confident of achieving annual targets and the Chinese Economy will continue to show “positive changes,” the Xinhua News Agency reported. China’s industrial value-added output grew 10% year-on-year in the first nine months of 2012. The Shanghai Composite has rebounded 6.4% since reaching a three-year low on Sept. 26 on expectations regulators will introduce measures to stabilize the market ahead of a once- in-a-decade power transition of the Communist Party in November. The gauge is still down 3.1% this year and trades at 10 times estimated earnings, compared with the 17.9 average since Bloomberg began compiling the weekly data in 2006. Today’s data in China followed reports showing exports exceeded forecasts in September and money supply grew at the fastest pace in 15 months. Inflation last month was close to the slowest pace in two years and producer prices fell the most since 2009, government data showed on Oct. 15, giving authorities more room to ease policy.

China Exports, Employment & US Housing Data revive Base Metals Rally:

Stronger U.S. housing data enabled Copper & others in the Base Metals Complex as expected, to finish higher on the London Metal Exchange & Copper Prices got a $100 boost. A weaker US Dollar also is boosting the “risk-on” sentiment. Robust & better than expected US housing data dulled some of the earlier gains in Gold & gave the much needed boost to Base Metals. Stronger US Economic Data is a negative for Gold Prices because it leads to notions the US Federal Reserve will begin to turn off its monetary policy stimulus programs which have so far, for the past four years been the strongest drivers of the Gold Price Rally. Construction starts on new U.S. homes surged 15% in September to an annualized rate of 872,000. Economists polled by Reuters had forecast residential construction rising to a 770,000-unit rate. August’s starts were revised to show a 758,000-unit pace instead of the previously reported 750,000. That was the quickest pace since July 2008, though data on starts is volatile and subject to substantial revisions. The housing starts rate is still about 60% below its January 2006 peak. Building permits grew by 11.6% to a 894,000-unit pace in September. August’s permits were un-revised at 801,000 units. Economists had expected permits to rise to a 810,000-unit pace last month. Going forward, home sales and construction could still be partly depressed by a slowly growing US economy and a high unemployment rate that limits the number of prospective buyers. It is important to also understand, how far the rebound can go with unemployment rate where it is.

China’s retail sales grew 14.1% year on year to 14.94 trillion yuan (2.37 trillion U.S. dollars) in the first three quarters of this year. The total retail sales in September hit 1.82 trillion yuan, up 14.2% over the same period last year. China’s exports saw a surprise surge in September, rising 9.9% to 186.35 billion U.S. dollars. Export growth sharply increased from 2.7% in August, according to customs data. Imports grew 2.4% to 158.68 billion U.S. dollars, ending three months of consecutive drops. Exports are expected to continue recovering in the fourth quarter on improvements in the EU and U.S .economies following a new round of quantitative easing (QE3) in the US and the launch of a permanent bailout fund, the European Stability Mechanism, in the Eurozone that aims for financial stability in the region.

China created 10.24 million new jobs in the first quarter, exceeding the annual target of ten million. During the same period, the disposable incomes of urban residents rose 9.8%, while those of rural residents grew 12.3%. A rise in people’s disposable incomes and a stable employment situation further paved the way for recovery, which will be boosted by more consumption and a faster pace of investment following an upcoming leadership transition. China’s fixed asset investment rose 20.5% year-on-year to 25.69 trillion yuan (4.08 trillion U.S. dollars) in the first nine months of 2012.

Gold Futures Remain Steady:

Gold which fell to a one-month low on Monday has been underpinned overnight by a stronger Euro. A firmer euro is the main catalyst supporting higher Gold Prices. There is a distinct lack of aggressive follow-through selling in Gold, and physical players are stepping in to help support the downside. Gold Futures moved upside on renewed support & demand prospects on growing optimism & progress towards a solution to Eurozone’s debt crisis helped strengthen the Euro & weaken the US Dollar. The catalyst for buying seen in Euro was Moody’s Investors Service affirmation of Spain’s sovereign rating at Baa3, albeit with a negative outlook. Weakness in the dollar tends to aid dollar-denominated commodities, such as gold, because it makes them cheaper for holders of other currencies. Gold prices will be seasonally driven by increased jewelry & bullion demand ahead of the Indian festivals & Christmas. Other factors to benefit gold and silver late this year include continued bailout concerns surrounding Spain and Greece, and a bounce back in Indian Gold demand on the rising Indian Rupee after a weak first half of this year.

Markets have rallied on expectations Greece won’t get kicked out the euro, Spain will get the money it needs and the ECB will use its balance sheet to limit potential turmoil. They pared some gains today after Spanish 10-year bond yields fell yesterday to their lowest in six months. With European officials saying no decisions were likely at the summit, the draft of the statement to be issued after the meeting sidesteps how the EU plans to backstop its financial system.

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