Good Morning,

China's falling equity index once again set the pace for overnight market developments around the rest of the world. Apprehensions about contracting credit and the realization that bullish speculative sentiment has been way out in front of economic realities dented the Shanghai Composite by nearly 7% last night. That would be its largest decline in 14 months.

Other equity markets followed lower in sympathy with that in Shanghai, falling by various amounts, from Tokyo to Frankfurt, albeit some analysts at least partially peg Japan's market losses to the DPJ's election victory. Over in Euro Zone, inflation remained looking like disinflation, for the third month in a row. Prices fell by 0.2% in August, even as the region appears to be climbing out of recession.

As for the US, a Bloomberg survey of economists finds that they see the Fed having to cope with an overshoot of its 2% inflation target in coming years. Hardly the Harare-on-the-Hudson that the hyperinflationary hyperactive crowd is warning about, but 3% per annum is still 50% above target, and the highest inflation level since 1992. Again, these are expectations, and not current reality. The struggle of the moment is to keep afloat and not sink into the opposite direction despite several recent dips under the waterline. There remains that danger, and then some, according to some sources.

For example, uber-pessimistic Elliott Wave Financial Forecaster sees that the debate over 'universal health care' is the perfect place for the optimistic psychology of a Grand Supercycle degree peak to have its last stand, as stocks reach back toward Dow 10,000 one last time ... such reforms [are] obvious manifestations of an extreme attitude about entitlements to comfort and support that may not have existed in history except perhaps in the late Roman Empire.

The dollar recovered previously lost ground overnight, rising to 78.50 on the trade-weighted index, while crude oil took one on the chin -falling more than $1.35 in early going on Monday, and nearing $71.30 per barrel. The decline was largely attributed to the slump in Chinese equities. Little wonder, as the country is in fact the planet's second largest consumer of fossil fuel. US stock futures was also pointing to lower levels following the rout in Shanghai last night.

Gold and other precious metals prices traded significantly lower against the above-mentioned background conditions, with little in the way of bullish news to drive them on this last day of August. Spot gold opened with a $10.00 per ounce loss this Monday morning, quoted at $945.50 and traders will have very little to track in terms of US economic news until the labour market statistics hit near the end of the week. It will be a stock, oil, and currency markets-driven week, once again. The Bloomberg analyst survey for the week indicated a nearly split consensus: 11 bulls versus 9 bears and 5 neutral respondents. Whilst the range has not been undone on either end, the market's tilt appears to b pointing towards more corrective action (see COT analysis below).

Silver started the week with a 24-cent drop, quoted at $14.56 per ounce. Platinum headed $10 lower on the open, trading at $1235.00 per ounce. Palladium fell $1 to $286.00 an ounce. The noble metals appeared unaffected by the strike action at the world's second largest platinum producer - Impala - entering its second week. The offsetting factor -according to metals pundits- remains the slumping auto demand curve. This, despite the rather artificial spike that was likely recorded in August on the heels of the US CFC trade-in programme.

The 30-day net change in gold was last seen at the nearly flat percentage level despite a third month of average monthly prices of well above $900 per ounce. Or, perhaps, due to the same. Analysts at GoldEssential.com opine that- based on their COT figures dissection- the conclusion is that current price levels remain based on an over-extended long positioning and thin market participation (open interest).

As such, we see any fundamental run to above the $1,000 eventually running into heavy consolidation and as such will prove little sustainable, with a high risk of resulting in significantly downwards pressure. We still feel that a correction towards $850 would result in a healthier positioning.

That which we feared just last Friday in our closing comment, appears to be headed towards becoming actual headlines: India's gold import may have slumped by 90 per cent in August despite the advent of the festival season, as high prices prevented people from buying the precious metal, especially after drought triggered fears of dent in rural income.

Gold imports in August will remain within 10 tonnes as prices are high at over Rs 15,000 per the 10-gram level, Bombay Bullion Association Director Suresh Hundia told PTI. India imported 98 tonnes of gold in August 2008, highest in a month last year, as prices fell leading to an escalation in demand in the build-up to the previous festive season.

However, as the country is now facing a double whammy of drought in about half the region and soaring food prices, demand for gold remained subdued, as people preferred spending on basic necessities to buying jewellery, according to Hundia.

Poor rains this year have raised fears of a slump in farm output affecting rural income, as over 60 per cent of India's population still depends on agriculture for livelihood. More importantly, the import of gold this festival season (September-December) may not match the last year level of 146 tonnes if prices remain firm, Hundia said. -  this, according to India's Economictimes.

Until later today,

Jon Nadler
Senior Analyst
 
Kitco Metals Inc.
North America