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Gold and silver both fell sharply today and some analysts are linking this to US dollar strength. The rally in the greenback over the past week has certainly played a part but it doesn’t really explain today’s slump. I think that concerns over China are a bigger factor.

Overnight the Shanghai Composite fell 2.8% for a second consecutive session of heavy losses. The move was linked to a commodity sell-off. Recently Chinese investors have been taking on highly leveraged trades on all manner of industrial and agricultural commodities. These commodities include obvious ones such as copper, but also more esoteric materials such as iron ore, steel rebar, coking coal and eggs. Volumes in these futures contracts have soared since the beginning of the year. The pick-up in trading activity ties in with the most recent melt-down in China’s equity market. The curbs placed on leveraged trading in stocks from last summer have led to wealth management funds looking for other avenues for speculation. Commodities became an obvious target and Chinese regulators have become concerned about the high levels of intra-day trading taking place.

Once again, the authorities have acted to dampen trading activity. The Asia Times reported that the exchange in Dalian raised transaction fees on coking coal contracts eleven times from 22nd to 27th April. Margins were also increased for other commodities. Trading volumes have declined rapidly and are now closer to levels seen back in December.

Overnight Chinese trade data showed that copper imports fell sharply in April after a record month in March. Iron ore stockpiles in Chinese ports were at their highest levels in over a year. It looks as if the speculative froth is now being blown off those commodities that have seen the biggest run-up in prices this year.

A consequence has been margin calls for leveraged long positions and this has had a knock-on effect across all those markets popular with Chinese traders. So, the stock market has taken a hit as have commodities such as copper, gold and silver.

It’s difficult to know if this shake-out has longer to run. Some analysts are warning that it could presage further liquidation by distressed longs, while others are suggesting that investors keep their nerve. As far as gold is concerned, there’s some support around $1,260 followed by $1,240.

pm05



  
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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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