Good Afternoon,

Gold prices managed a second day of mild gains, but perhaps more importantly, they also managed a second day of an above-$900 track. Most of the assistance to bullion came from a downturn in the US dollar which was in turn precipitated by the sudden jump in jobless claims in the final week of March. Players might continue to dwell within the $885-$915 channel for a bit longer and will continue to take cues from the commodities complex as well in addition to the usual suspects they follow.

Although the dollar gained significant ground against the euro earlier in the session (especially as european retail sales slumped recently) Japanese currency strategists have called a turn in the rise of the euro overnight following a recent double top against the dollar and they foresee a $1.53 target as achievable within perhaps as little as ten days. For the moment however, the greenback was down .06 at 72.20 on the index as the aftershocks of the jobs data reverberated through the markets.

NYMEX trading opened lower this morning, with gold shedding $11.70 quoted at $892.30 per ounce as the trade geared up for a second installment of the Bernanke interrogation on Capitol Hill today. The poor jobs data then gave players a good excuse to sell the dollar and buy gold even as the strategy is wearing as thin as Mr. Bernanke's incessant rate cuts since September.

Gold spent the better part of the remainder of the day at near $905 in the cash markets and reached for a test of $910 for a brief period. At last check, the yellow metal was down $1.00 at $903.00 bid. Silver rose 16 cents to $17.37 while platinum gained $31 at $1994.00 per ounce. Eskom's on-going electricity delivery woes supplied most of for today's gains. Palladium fell $2 at $442.00 per ounce. The fact that Mr. Bernanke has dropped hints that the Fed's rate machete-wielding campaign may be drawing to a close shortly, the bias at the moment is anti-dollar as participants expect one more rate accommodation in the near future.

Still convinced that Chindia will keep the commodity supercycle aloft? Still reading articles that all of this is a one-way street? At least the Chin part of the equation may now be subject to some reasonable level of doubt. According to an overnight article in the Wall Street Journal:

Investment spending on factories and infrastructure, long the main driver of the nation's growth, has begun to ease. Loans are harder to come by, with real-estate developers in particular feeling the effect of government curbs on credit imposed late last year. Some companies squeezed by higher raw-materials costs are reporting smaller profits, leaving them less money to finance expansion. Such a cooling of frenzied investment and speculative bubbles is something China's government has long sought, largely without success. Now, markets are showing the effects.

A slowdown of growth to a single-digit rate [forecasts call for a drop to 9.4% growth this year] will shock the markets, we believe, and may well trigger a retracement of prices for energy and industrial commodities, said Carl Weinberg, chief economist for High Frequency Economics, in a research note this week. Look out copper, look out silver. Look out many other metals as well as oil.

Was such a set of conditions correctly predicted as far back as 2006? You bet it was. Read the brief excerpt from the London-based team at Capital Economic Research and judge for yourself:

Chinas rapid GDP growth cannot in itself explain the jump in demand for metals. The key lies instead in Chinas investment boom. End-use statistics are not readily available for China, but the degree to which investment spending is commodity-intensive can be shown in US data. Construction accounts for only 8% of US GDP. But construction alone accounts for 14% of total US demand for aluminium, 20% of iron, 45% of zinc and 49% of copper. In addition, other investment uses will also have resulted in heavy demand for these commodities. As investment in general (and construction in particular) is a much higher proportion of GDP in China, so we must expect investment to account for the majority of Chinas demand for metals.

This is not sustainable. An investment ratio of almost 50% is unprecedented compared both to Chinas own history and to other emerging markets. Premier Wen has stated bluntly that investment is still expanding too fast, and the government plans to rebalance the economy from investment spending towards consumer goods and services. Specific measures have already been taken to slow lending: interest rates were raised in April, and a range of restrictive new guidelines has been introduced to restrain lending.

CE's conclusion: Over recent years global demand for metals has been boosted more than anything else by the investment boom within China. But investment is set to decelerate as the Chinese authorities pursue their policy of rebalancing growth from investment into consumption. Thus overall growth in demand for metals is set to decelerate sharply.

The premonitory report also contains equally compelling myth-busting facts about India, but we will leave that for another day.

Friday's economic data may provide more reasons to trade the range, but the market is already looking down the road at bigger fish to fry. Fed action or lack thereof, Wall Street bad news (but especially the lack thereof) and the behaviour of funds vis a vis commodities as a group. Before 'deleveraging' became the overused word of the day, 'sector rotation' gave the complex quite a boost. With the merry-go-round at high RPMs, many are watching the riders and the sturdiness of their horses.

Happy Trading.