“Dear Friends,

As you know by now, China announced last evening that they intended to tighten credit availability in an attempt to stave off “overheating” in their economy. The markets today interpreted this event as evidence that inflation fears are unwarranted. Thus the bids beneath the gold market evaporated, allowing the bears to push prices low enough to take out some of the downside sell stops.

While today’s markets have become the domain of the 3 minute bar chart traders with short term factors creating excessive volatility as the norm, as investors it still behooves one to try to understand the longer term macroeconomic picture.

The Chinese are more than concerned about the long term viability of the US Dollar due to the recklessness of its stewards here in the US. The recent TIC reports reveal Chinese net selling of US Treasuries. Having surpassed Japan as the largest holder of US Treasury debt, this is not insignificant as those actions speak to their suspicions about the Dollar’s fate and the effect on their reserves.

If you recall not that long ago, India surprised the entire gold market by scooping up some 200 tons or so of gold. That drove the gold price up through the $1,000 level – a level which it has not seen again. I believe that India’s actions caught China flatfooted as it is no secret that they are actively looking to acquire a larger percentage of gold in their reserves as they slowly move out of their lopsided holdings of US Dollar based debt.

Having been unable to secure gold at the price that India did, and having a desire to acquire more of the metal at a better price, it is my opinion that the Chinese authorities completely understood in advance the effect that their announcement would have on the commodity markets and on gold. China is still looking to secure stockpiles of strategic commodities as their long term growth strategy requires sufficient quantities of such to make them well supplied. The Chinese do not chase market prices higher – they buy stuff when no one wants it or when the hedge fund managers in the West are throwing it away.

Gold may well move lower from current levels but the Chinese will be there to greet its potential descent as will India, which also wants to own more of the metal. The amount that they are looking to acquire is not miniscule. Remember that when you hear chatter about the demise of gold.

Remember also that a growing number of US states are for all practical purposes, fiscally bankrupt, with rising pressure mounting in those states to receive some sort of Federal bailout. Unemployment levels that remain stubbornly high guarantee lower tax revenues for the Federal Government, and state governments in those cases which rely upon a state income tax as a primary means of revenue. Tighter credit restrictions here in the US, as lenders seek to cover their own rear ends, means that consumers will have more difficulty increasing purchases of larger ticket items. When you see stock analysts upgrade and then issue buy recommendations for McDonalds based on cash strapped consumers looking for food bargains who are bypassing more expensive, higher end restaurants, rest assured that disposable income is not exactly proliferating.

All of this translates to an economy that is moving along in that “L” shaped “recovery” that I have mentioned before. A plunge, followed by a long period of mediocre or subpar growth marked by high levels of unemployment and huge amounts of government deficit spending and massive QE by the Fed. How this quantifies a bull market in the Dollar eludes me.”- Dan Norcini, More at http://www.goldseek.com/email/lt/t_go.php?i=2173&e=MzM0MTg=&l=-http--www.jsmineset.com/">JSMineset.com