Good Morning,

Whatever disconnect was manifest between gold and the dollar on Tuesday, this morning's surge in the US currency -and its concurrent effect on the euro, for example (the common currency hit 1.41, a five-month low this morning)- was no longer easy to overcome with physical buying such as we saw yesterday.

The greenback climbed significantly, gaining 0.66 on the trade-weighted index, and reaching 78.16 at last check. Most of the advance in the dollar was an amalgam of reignited Chinese lending curbs fears and optimism engendered by the election of a Republican candidate to a Massachusetts seat long occupied by a Democrat. Speculators believe that the GOP has what it takes to tackle US deficits.
As a result of the Chinese news reports that some local banks have already been told to turn off the lending spigots, commodities and emerging market equities declined in the early Wednesday trading hours. According to the Financial Times, Chinese regulators have told some banks to temporarily halt lending amid growing fears of asset bubbles and inflation. The renewed efforts to rein in credit growth follow a burst of frantic lending activity by Chinese banks that have raised concerns about overheating in the Chinese economy.
At least two banks - Bank of China and Agricultural Bank of China - have issued orders to lower level branches to stop issuing loans to corporate customers without explicit approval from their headquarters, employees at those banks told the FT. A state-run newspaper on Wednesday cited unnamed banking sources as saying some banks had been told to stop all lending for the rest of January and that Bank of China, which has been the most aggressive lender among the large state banks, had switched off its internal electronic loan approval system.
Banking news of another flavour was being treated with a different type of apprehension over in the US. No sooner had the ink dried on the news that Citi bled some $7 billion following its latest earnings tally, that news that BofA lost over $5 billion in Q4 -albeit the figures need to be placed in perspective as the banks used some $20 [Citi] and $4 billion [BoA] in repayments of TARP-flavoured assistance funds to Uncle Sam. A process which is actually seen as part of the exit from the dark forest of 2008/2009.
New York spot metals trading started off with losses across the board in the complex. Spot gold opened with a $12.50 decline, quoted at $1125.00 per ounce, after having reached lower level support near $1126 in the wee hours. The yellow metal remains confined within the $1120-$1145 price channel as significant players are still sidelined awaiting a more decisive break.

A London-based senior metals broker told Futures and Options Intelligence this morning that he was concerned about countries with hitherto loose monetary policies making noises about tightening policies. He opined that gold's bull run could be hit by a round of fiscal tightening and changing investor perceptions. Gold pool positions over at derivative and forex online trading firm Finotec were 34% long, implying that most clients were sellers at the moment.

Silver started the session with a 28-cent decline, quoted at $18.48 per ounce, while platinum erased some $17 of its Tuesday gains, following profit-taking which brought it down to the $1627 per ounce spot bid level. The noble metal has racked up some $250 per ounce in gains over the past month. Call it ETF euphoria, we will.

Palladium lost $7 on the open, quoted at $457 an ounce. That metal added some $110 to values during the same 30-day period, on account of the same market-moving factor. As with gold, one has to wonder what a 50 or 100 thousand ounce redemption in the future might do to market prices. Everything needs to be viewed in the context of being a two-way street. Against this metals market opening, the US dollar was last seen at 78.18 (up 0.69) while crude oil fell $1.16 to $77.86 per barrel.

And now, for something completely different: Are foreigners getting some kind of a bitter taste of US debt and are they about to dump the US currency and US debt instruments into the mass grave of fiat money that has been dug out over decades? Is the US hooked on such sources to the extent that the entire system will come crashing down? Not according to the latest observations from Roubini Global Economics, who reports that: According to the Treasury Department's monthly data on capital flows to the U.S., foreign investors have continued to buy U.S. government debt since the end of Q2 2009 and have migrated to longer duration assets, matching the return to reserve accumulation.

With the Federal Reserve having ended its Treasury buying program in late 2009, many analysts expressed worries that demand for long-term treasuries might suffer. So far, investment in long-term treasuries has remained strong, and it increased markedly in November 2009. The share of total Treasurys held by foreign investors has fallen as the U.S. savings rate rose. The fall in the current account deficit (led by a collapse of imports) means the U.S. requires less foreign investment, even as the financing needs of the government have climbed.

Hand-wringing continues to be manifest as regards the Fed and what it might or might not do in coming months. One thing that jumps out at us is just how profitable the central bank appears to be. Evidently, creating money has its own rewards - of the kind that some commercial banks would salivate over, just about now... Bloomberg's Caroline Baum reports that trials and tribulations are on the horizon, but that it is (still) all about potentially misplaced worries:

The Fed is scheduled to wind down its $1.25 trillion MBS purchases by the end of March, but at the Dec. 16 meeting policy makers discussed extending the program if the economy weakens, according to the minutes. When interest rates rise, the Fed will incur capital losses on its securities if it decides to sell them. If it doesn't sell them, or isn't successful in locking up banks' excess reserves, inflation will be waiting behind Door No. 2.
Last week, the Fed reported record net income of $52.1 billion for 2009; it earned a bundle on the money it created. After operating expenses and interest on reserve balances, the Fed remitted $46.1 billion to the Treasury. The Fed has always been self-financing, which underpins its independence.  
Raymond Stone, chief economist at Stone & McCarthy Research Associates in Skillman, New Jersey admits it may be premature to worry about the Fed's net interest margin at a time of record profitability. On a scale of 1 to 10 of things to worry about, with 1 being long- term unemployment and 10 being the sun going dark in 5 billion years, I'd give it at least a 4. -he said.
Watch for bank earnings (or lack thereof), dollar upside, euro having broken its 200-day MA, and anything coming from China, as usual. The new 'normal' in 2010 might not be normal, at all.
 PS - Haiti has just been hit with another 6.0+ magnitude quake, at a time when it struggles to recover.

Until tomorrow,

 Jon Nadler