Good Morning,

Monday's gold trade began on a note of uncertainty. In more ways than one. While values remained firm near $915 after having broken above $900 last week, and while the metal may post its longest winning streak since December (more than four days) the market is receiving a dose of close attention as the Akshaya Tritiya festival draws to a close by tomorrow and as the trade digests last Friday's Chinese gold acquisition story.

Spot gold started the week with a modest loss of $2.60 per ounce, quoted at $910.40as players observed the rising US dollar (up 0.35 to 85.20 on the index), slipping oil (down to $49.07), and were seen as apprehensive about the Dow before the start of trading. Silver added9 cents to $12.98, but platinum lost $22 to fall to $1153 per ounce. Palladium also dropped, starting the day at $230 an ounce with a $2 decline.

And now,

Meet the latest enemy of the global economy and markets.

Here is a worldwide stress test that could keep the economic green shoots from blossoming into mature flora for an indeterminate period of time ahead. Markets hate uncertainty with a vengeance. Whilst one may well be able to hedge against market risk using a variety of tools in the financial products arsenal, one is not able to mitigate uncertainty. Unknown outcomes (Y2K) and surprise developments (9/11) have a way of igniting patterns that send markets into all kinds of directions at least until a new and clear stage takes hold and allays fears. In this respect, the swine flu pandemic might be the one surprise event of 2009 that could engender a quick run into gold for the duration of the panic phase.

The World Bank and the IMF today declared that the globaleconomic crisis (before the flu was even factored in) was showing signs of turning into a 'human calamity' and that unless quick and substantive aid starts to flow towards the 50 to 100 million souls who have been driven into extreme poverty, the risks of extremely nasty outcomes will keep rising. So, would you sell some of your gold in order to help your unfortunate neighbors? Would you clutch it and 'let the poor be damned?' There are no quick and/or easy answers for any of the above.

Overnight goldprices remained steady near $915 as thegrowing fears of the swine flu pandemic hitthe oil and equity markets quite hard. Crude fell 5% and you can imagine what the news did to airline, hotel, and tourism stocks. As expected, drug makers and the dollar received a boost as solution-seeking firms and safe-haven assets received a booster shot from the developments on the health front.

India's auspicious gold-buying day is upon us and Reuters reports that: The marriage season in India is in full swing. But jewelry purchases, an integral part of the big Indian wedding, seem to be dipping. The Rs80,000-crore gold, gems and jewelry market in India is estimated to have suffered a decline of about 25% in the last few months. And those who have been impacted harder are the smaller players like Prabh Saran, the owner of one of about 300 shops in Chandni Chowk in Old Delhi which has a fiercely competitive jewelry market and is a popular destination for wedding shoppers.

Gold demand in India, the world's largest bullion market, turned subdued on Friday as prices rose. Demand had firmed in previous sessions as traders stocked up ahead of the Hindu festival of Akshaya Tritya.We have hardly sold 10 kgs since morning as prices have jumped... till yesterday there were buyers, said a dealer with a state-run bank in Mumbai.

Gold prices have risen about 3.7% in the past three weeks. Dealers said a strong rupee, which makes the dollar denominated asset cheaper, kept a lid on gains. Indian consumers, who bought around 49 tonnes of gold for last Akshaya Tritiya, had been purchasing as prices fell about 13% from an all-time high of INR16,040 struck on 20 February. But, a sudden surge in prices prevented traders from entering into fresh deals.
[ it also gave rise to a fresh spike in scrap sales]

Akshaya Tritiya, which falls on 27 April, is the second-most auspicious day for buying precious metals even as gold prices are projected to further appreciate in the coming months. The World Gold Council (WGC) said last week that India's demand is expected to rise during the festival. It would be fair to say that this (Akshaya Tritiya) is the most favourable time to buy gold, the WGC said in a statement. [this, and Diwali, of course]

Gold imports in India improved in April and according to Suresh Hundia, president of Bombay Bullion Association, Indian imports were around 15 tonnes between 1-15 April against lower imports in the previous months. India will import 25 to 30 metric tons of gold in April after no imports in the last two months, Hundia said.

India, normally the world's top gold importer, may have turned net exporter in the last few months as Indians melt down their jewellery to catch high prices. India has been the world's biggest buyer of gold for years, but imports slumped 48% in 2008 to 396 tonnes. The falling trend has continued this year with imports in January plunging 89% from the same month last year to 1.9 tonnes.

Although there has been some improvement in physical demand compared with a month ago, it is still around 50% below that of last year, said Daman Prakash, director with trading house MNC Bullion.

The one place where some better conditions in gold imports have been detected since this year started, turns out to be Dubai. Reports from the country indicate that bullion imports have risen 15% during Q1 to a 140 tonne figure. About 115 of those tonnes were exported to Switzerland, Pakistan, and India (Dubai being a gateway spot for bullion).

As previously expected, the China gold story made the rounds quite swiftly over the weekend. All of the REGB (Radical Extremist Gold Bug) forums and newsletters were abuzz with the 'news of the century' -as far as they are concerned. When you apply some more in-depth reasoning to the news, it turns out to be quite a bit less of a tectonic shift and more of a continuing unfolding of alogical pattern. Here is a series of points that were made by Latin American blog site Inca Kola News over the weekend.

Again, without taking away any of the positive aspects of the fact that China continues to hold a small gold allocation strategy as an integral part of its reserve strategy, and without denying that -as central bank purchases for the five-year period in question go- the tonnage amounts to the largest such offtake from the official sector, we also need to inject a healthy dose of realism into the feverish pronouncements we found all over the REGB network. Take it away O.R. Oh, and spare the e-mails. The author has no intention of replying to opinions on his...opinions. Which, is what they are:

The problem I have with goldbugs isn't their shrill calls of to da moon, Alice. It's not their hushed whisperings about how the illuminati control my life, either. My problem is their 'lack of intellectual rigor' , as my superbly diplomatic friend PP would say. Or that 'they run with the hare and the hound' as my literary friend JL would say. Me? I just say 'dumbass'.

Case in point: Some time late last week some Chinese dude let slip officially that China's gold reserves now stand at 1,054 metric tonnes (MT) of the yellow stuff. Before you could say Can I have your autograph, Mr. Sinclair the interwebnetpipes were chock-a-block with reports and analyses that all go for variants on the same bottom line, namely that gold is going up due to this. I've had several problems with this propaganda overload, so here we go with a rundown:

1) There has been no balanced viewpoint. This news is automatically bullish and so no counterbalance viewpoints or thoughts are allowed to be included. Any one-sided argument makes me suspicious ( except my own, of course :-) but a dozen one-sided arguments and it's unfurl the red flag time.

2) Errr....dudes....this isn't news. Well it is I suppose, but on the other hand it's nothing to be shocked about. That China has been adding to CenBank gold reserves is an open secret and has been that way for a couple of years. All we've had is an official recognition and a precise number. Both good, of course, but neither comes from left-field.

3) But the thing that gets me most is the hypocrisy in the goldbug argument. These people drone on for hour after hour after article after article telling us that gold is different, gold is special, gold is money and gold cannot be classed as a commodity the same way as, for example, copper.

Please note that I agree with this droning. However, what I don't do and will never do is change my argument at the drop of a hat when some convenient piece of news comes along. Because all of a sudden, with the news of this China reserves stock, the same people that say gold can't be classed as a commodity are shouting from the rooftops about how supply and demand is the overriding bullish case! This is ridiculous and it's what I meant with those phrases from PP and JL in the introduction (hi guys) . Normal, rational people don't change their base philosophies on a whim, but the goldbug self-support group community sees no problem at all in doing precisely that. In fact, I doubt they even notice when they do it, wrapped up as they are in their own little world.

4) As mentioned above, I happen to agree that supply/demand dynamics don't apply to gold. This because it's a store of wealth (be it logical or not, Mr. Buffett, it's the way it is) . Gold is not a commodity that gets used, rather something that gets saved. And because of this, all the 162,000MT or so of gold that has been mined through history (according to the World Gold Council, at least) is still out there and available to us in its refined form. Because of this, even if demand outstrips the year's new supply by two to one in any given year, we're talking a very small percentage of the gold out there that is available. As a practical example of what I'm talking about here, did you see those TV adverts for rip-off companies such as Cash4Gold suddenly appeared when gold hit $1,000/oz headlines? This is not a coincidence and the bling that got melted down shows where new supply can come from very quickly. We all have our price; even the IMF has its price (so we're told, via another revolving goldbug rumour).

5) But let's suppose, for argument's sake, that the supply/demand argument being used by the goldbugs this time around is a good one. Let's say that this new China CenBank squirreling is what the goldbugs think it to be and is this new dynamic (or whatever phrase it is being used). It seems to me that if China wants to affect the WORLD price for gold it has to be out there affecting the WORLD demand. If it just swaps dollars for gold internally it's a zero-sum game for the rest of us. And this means that the true way of measuring just how much China has changed things is to try and find out the Chinese trade balance of gold with the rest of the world. So here come a few charts that I obsessed about yesterday instead of writing the reports I should have been writing.

Please note before we go any further that sometimes estimates and extrapolations have been made with the numbers used. As much as possible, sources such as the World Gold Council, GFMS and Chinese Central Bank and official news agency numbers are used. However the nature of Chinese statistics publications is always patchy at best, so sometimes estimates are used. However I'm pretty confident that the guesstimates are in the ballpark. Also, in the end it's the final round-up totals for the aggregated years that are most important, not the annual breakdowns. This is, after all, big picture stuff.

So firstly, here are my estimates for yearly China CenBank holdings. Of the years in question, we know the 2003 number and we know the recently announced 2009 number. We're also pretty sure of the 2005 number as we have 650MT was published in a China Gold Industry report in early 2006. The other years are my extrapolated estimates of how the years in between behaved.

So now to the argument of just how much China affects world demand for gold. Firstly we have to look at just how much gold China has produced recently. Here's the chart:

The numbers to 2008 are from GFMS. Out of interest I've added the WGC estimates for the next two years. As we can see, China has upped its gold production sharply in recent years. This means that it is less reliant on imported gold to satisfy its demand, of course. So the next job is to look at Chinese gold demand. Here it is in the crucial 2006-2008 period:

Each bar is broken down into its three main components, namely jewellery demand, retail investment demand and CenBank demand for its reserves (using my estimates from above). As we can see, jewellery is still by far the biggest user of gold in China.

So if we now place supply and demand for these years next to each other.......'s pretty clear that Chinese internal production for gold falls well short of the demand for the stuff inside the country. So we're now close to being able to estimate China's trade balance of gold with the rest of the world. To do that we have to take the shortfall above, which is logically made up by gold imports, and compare it to the amount of gold that leaves China. As exporting of bullion is illegal in China the only way it leaves is via its jewellery trade. This chart shows the two stats side-by-side:

The export figure for gold jewellery is based on the 2007 figure reported by the China Gold Industry. This is the only estimate I feel I'm guessing at more than I'd like to, as I've used the amount total jewellery production in China to the amount of jewellery exported (i-e- the figures reported by China and used the same percentage ratios to estimate both 2006 and 2008 numbers. I can't for the life of me find the 2008 number, so if anyone has a better figure for Chinese jewellery exports in 2008 I'm all ears.

So in the period 2006 to 2008, when China likely added 304MT to its CenBank gold reserves the real effect of China's gold hoarding with the rest of the world (according to our estimates) has been just 81.4MT of gold spirited away from the world that is not China. And when you look at just how much gold is produced every year.....

...81MT or so isn't going to set the world on fire, not even lumping it all on the 2008 production figure. China's gold trade balance effect in 2008 amounted to a little over 3% of world supply. Compare that with India in the same period, as according to the WGC 2007 demand for gold in the world's biggest market for Au was 773MT and in 2008 it dropped 113MT to stand at 660MT. Just the drop in India more than makes up for the rise in China.

The conclusion to all this is pretty simple. The news out of China last week, although definitely not a negative for gold, really ain't no biggie. For one thing, it was an open secret anyway. For another thing, goldbugs are being hypocritical to genuflect at the temple of Adam Smith after telling us for so long that gold isn't a commodity and can't be treated as such. But even if we buy that supply/demand argument, the gold trade balance that China has with the rest of the world, although net importers, isn't that telling when compared with the whole of the industry. When all is said and done, the relationship gold has with other currencies (dollar foremost) will still be by far the most important influence on its price in the months and years to come. And tellingly, on the subject of the dollar it's interesting to note that in 2003 China held 1.6% of its reserves in gold. In 2009 that's now 1.7%. Hardly a seismic shift in attitude, is it?

We will now put this story to bed. At least until we learn of more secret purchases or public announcements of sales from various official sector players.

More important developments loom on the horizon, and/or are already upon us.

Until later,