Good Afternoon,

Friday's insta-rally turned oversold conditions in the gold market to overbought ones in a matter of a few hours. The new week's starting conditions displayed some of the factors that brought gold right back up to the $960s resistance area, as still in play, chief among them, the near-$72 price tag that is still attached to a barrel of crude oil.

A rise in Chinese factory output to levels not seen in about one year, coupled with similar findings last week in the US, is clearly encouraging red-hot speculation in the commodities complex, and is thought to be among the factors helping gold get back to values last seen on June 11. Along with this, the return of the ever popular chants of ‘Here we go!' Again. The lunar surface remains the target. Again.

However, along with such profit motive-driven plays come other price tags as well. One Japanese fund manager describes gold at the current level as trading against a background where: The gold ETF is unchanged, India demand remains slack, COMEX positions stay high, showing that everybody who wanted to buy gold has bought, leaving a question as to who's left to buy. And, yes, from a technical viewpoint, bullion does appear overbought. Last time we checked, that did not appear to prevent oil from doing what it is doing. It is just that it makes the inevitable corrections that much more spectacular, as well.

Monday's trading session saw gold opening with a near half-percent further gain, quoted at $958.40 per ounce. The metal rose to an intra-day high of $963.50 on the offer side, and then retreated as fresh buyers became scarce. By 3pm NY time, bullion was ahead by only about $1.70 per ounce - translating into $956.20 spot bid. Silver added 34 cents to start and end near $14.25, while platinum rose by a hefty $26 to $1235, and palladium gained a massive (for it) $10 to $272 an ounce.

Traders we polled early on Monday alluded to the boisterous party in the base metals pits as the reserve fuel for the one that unfolded in precious metals early in the day as well. The US dollar was still off by 0.56 at 77.59 on the index this afternoon, and back to 1.4421 against the euro as metals tickers started rolling again. Time to pull that 1.46 recently mothballed euro forecast back onto the market stage?

Nickel and zinc, for instance, gained better than 4% this morning, pushed along by speculators who see nothing but gains in commodities from the reading in the Chinese manufacturing index. Certainly, as far as the noble metals are concerned, the party that General Motors is attending in China is a happy one indeed. Its sales in the country were up 77.7% last month, representing GM China's best July ever.

A Reuters analysis sees that: Gold may face strong resistance breaking and keeping gains above $960 as net long futures positions and a narrower gold/silver ratio suggest investors may find other precious metals more appealing than bullion. while India's Livemint finds that: There were no buyers as prices went up on Friday, said a dealer with a state-run bank, adding Though the rupee is supporting, traders are waiting for lower prices. Thus far, the yellow metal did indeed run into softness as it neared $965 - a level from which it has previously turned away.

Yet, Marketwatch's Peter Brimelow observes that the 1K vigil is on again: For the umpteenth time, gold bugs think gold may be poised to break $1,000. The last week of July definitely lacked summer somnolence in the gold market. A brutal $14.40 sell-off on Tuesday caused chartists great distress. But gold held. And then on Friday it staged an even more powerful recovery, rising some $20, closing at $954.50 and repairing the week's technical damage. Of course, the gold bugs are ruefully aware that they've been here before. They are aware of the danger of taking summer Fridays, and especially month-ends, at face value.

Something we can take at face value is today's GFMS synopsis of central bank gold sales as regards the first six months of 2009:

Net sales of gold by central banks in the first half of 2009 plunged by 73% on the year to 39 metric tons, the London-based consultancy GFMS Ltd. said in a report Monday. GFMS said it expected sales by central banks to be slightly higher in the second half of the year, and forecast a net sales figure for 2009 of 140 tons, the lowest level since 1994.

Central banks sold 95 tons of gold and bought 56 tons. Gold purchases were nearly double on the year, but were down 39% compared with the second half of 2008. Most of the sales were by European countries party to the Central Bank Gold Agreement. France was the biggest seller with sales of 44 tons, followed by the European Central Bank at 35.5 tons.

Still dazzled by various hard-money newsletter ‘research findings' that point to China as a ‘massive' buyer of gold while it reportedly ‘abandons' the US dollar? Be dazzled no more. Be more like, suspicious:

GFMS didn't give a breakdown of purchases by country. The consultancy said it didn't believe China was a substantial buyer in 2008 or in the first few months of this year. We see no evidence of large-scale and direct purchases in the open market by this country either in 2008 or during the first few months of 2009.

They are the very same ‘well-informed' sources that must be telling the writers of these marketing pieces disguised as ‘news(letters)' that US embassies have been quietly suggesting that their staff load up on currencies (other than the USD) in anticipation of a dollar ‘collapse' scenario. Or, the same ‘sources' that have ‘concluded' that a surprise US bank holiday and/or US dollar instant devaluation is ‘assuredly' in the works. Someone skipped their meds again, or has a very marginal grasp on logic (or both) or just wants you to buy one more issue of their drivel. It is your money, it is your mind. What could go wrong?

Thus, we are back to China driving, well,...everything. Again. Or, so say the agit-propsters. At least until speculators regain the awareness that it takes a bit more than one reading from one country to make things all better, all over the globe. That, and the recognition that demand destruction is the typical reaction to momentum players having pushed values beyond certain limits.

Then again, an ‘outside' event that is purely home-made is all that is needed to curb this latest version of the China Syndrome. Once the clamp-down on the perpetual asset bubbles that are still popping up all over the mainland gets underway (read: the reeling in of the ultra-liberal amount of liquidity that is helping shares perform as if under no laws involving gravity) and the emergency brakes are applied, you can reconsider the entire ‘insatiable' theory as regards China and commodities.

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Look for a lot of media attention if gold manages a break even to $974 on this teeter-totter of a chart. And keep a small note in the back pocket - one containing the warning by Nouriel Roubini that China's restocking in commodities has been excessive, and that it might lead to a fall in commodity prices before this year is over.

China may have overstocked on commodities, risking a slowdown in buying and a correction in prices in the second half of this year, top economist Nouriel Roubini said on Monday, also reiterating that the global recession would continue until year-end. Roubini, a New York University professor and one of the few economists who predicted the magnitude of the financial crisis, said he expected most commodity prices to continue a gradual recovery in step with rising general economic growth.

The recession will continue to the end of the year, Roubini said at the Diggers and Dealers mining conference in Western Australia. But he added: As the global economy moves toward growth as opposed to a recession, you are going to see further increases in commodity prices, especially next year.

Still, he warned there was still a risk of a second slump. [Recall that the worst collapse in fifty years in this niche took place from July 7 until at least late October, in 2008, as funds ran for the exit doors, in concert.]

In the short term there has been a massive stockpiling of commodities by China, he said. My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy.

China went on a buying spree after the global collapse in demand for oil, metals and other industrial staples, bulking up its domestic government inventories and snatching up overseas assets from Australia to Africa to Canada to safeguard growth. A state-owned Chinese firm bought most of the assets of one of Australia's largest mining companies, OZ Minerals, in a $1.4 billion deal earlier this year.

Another, Chinalco, came close in a failed bid to double its stake in global miner Rio Tinto, after Rio struck a separate deal with fellow Anglo-Australian miner BHP Billiton. China's refined copper imports, at 1.8 million tonnes in the first half, were up 160 percent on the same period a year earlier, while primary aluminum imports rose a stunning 16-fold.

Chinese buying has helped drive up both Shanghai and London Metal Exchange prices this year, by around 80 percent on both LME and Shanghai copper and 75 percent on LME lead, 40 percent on zinc and nearly 20 percent on aluminum.

As a result, there is a risk commodities prices will slump again as China now slows its buying spree. The risk in the second half of this year is that the rate of accumulation in China must slow down -- one of the factors that a downside correction in commodity prices, however modest, may occur, Roubini said.

Nota bene.

And now, for something completely...the same. A cartoon on the subject. Credit goes to BlogIversity.org and Cartoon the creator. Take it away, Gregg and Lila:

http://www.blogiversity.org/blogs/cartoons/archive/2009/07/17/world-economic-crisis-the-chinese-commodities-bubble.aspx