China's monetary policy key for precious metals

（Kitco News） - Puru Saxena is watching China closely these days. The founder of Hong-Kong based Puru Saxena Wealth Management said that China, a substantial user of commodities and natural resources, impacts the direction of precious and base metals’ prices.

“Well China is probably the second most important economy in the world after the United States – whatever the Chinese do in terms of the monetary policy affects everybody else,” he told Kitco News.

On Thursday, The Shanghai Futures Exchange, where the world’s top three metals contracts are traded, announced it will increase margins and daily price limits. This marks the latest move by China to curb speculation and cool inflation. Margins on copper, aluminum, steel wire, gold and fuel oil will rise to 10 percent, the Exchange said in a statement.

This follows last Friday’s move when China raised interest rates for the fifth time this year; the move added some fresh selling pressure to the commodity markets, including precious metals. Beijing raised the amount of money that lenders must keep in reserve from 17.5% to 18%.

“I just believe in this leveraged world you have to watch monetary policy very closely,” said Saxena from Hong Kong. “I think interest rates are going to go up in baby steps but more importantly the Chinese are tightening the credit growth via hikes in the banks’ minimum reserve requirements.”

The Chinese are extremely worried about inflation and increases in food prices, said Saxena. “They are also extremely nervous about property speculation on the mainland and also in Hong Kong where I live –recently the Hong Kong monetary authority has also taken many steps to make sure this speculation stops dead on its tracks and it doesn’t get any bigger.”

Inflation pressures are growing in China. The nation's consumer price index rose 4.4 % year on year in October, well above the government's full-year target of 3%, with the prices of 18 types of vegetable rising by more than 60%.

“Because the bubble is already very inflated, the Hong Kong government has increased the down payment required for new properties to 50% - they have imposed a 15% stamp duty on profits if you buy a property and flip it within six months,” said Saxena.

“They have taken a number of measures to make sure this property bubble doest get any bigger and I suspect interest rates are going to go up,” he said.

Saxena said that the U.S. Federal Reserve’s decision to drop interest rates to zero and print more money is forcing investors to look for higher yields elsewhere.

“As a result of this surplus liquidity in the system, money is pouring into China and Hong Kong and in Asia in general,” he said.

Metals’ Correction

Saxena said that the correction suffered by commodities and precious metals a few weeks back was long overdue.

“We lightened up our positions in precious metals – we were expecting some sort of pullback…low and behold we had a nice little correction over the past few days” he said.

Comex gold futures prices ended slightly lower Wednesday. December gold last traded down $5.20 at $1,372.40 an ounce. Spot gold last traded down $3.40 at $1,373.50.

Saxena does not think the correction in precious metals has run its course. “If you look at the direction of the U.S. dollar index, it has rallied quite sharply over the last week or so. If you look at the chart, it is hitting the overhead treadline resistance around the 79 level. I suspect if the 79 level will continue on the upside, then we can see precious metals correcting further.”

Silver Matters

Of all the precious metals, Saxena said silver is the single most overbought and overextended precious metal.

December silver futures closed down 7.2 cents at $27.50 an ounce Wednesday. Prices closed nearer the session high.

“There is still a lot of froth in the （silver） market. So I wouldn’t be a buyer of silver at these prices. If it does come back down again, then I would look at buying back into this market,” he said.

In the latter stages of the rally, the price of silver starts jumping leaps and bounds, he said. “This is what we saw up until a week ago when silver was going up significantly day after day. If you look at the price of silver at one point, it was roughly 45% above the moving averages and that is a symptom or sign that silver is extremely overextended,” he said.

Having bailed out of physical silver positions 10 days ago, Saxena said he is waiting for a reversion back to the mean. “I think it still has further to go on the downside, simply because the U.S. dollar is rallying, and the price of silver looks overextended,” he said.

Saxena also disagrees when silver enthusiasts say the world is running out of silver. “The monetary policy in the world dictates silver prices and all the other asset prices. As long as the dollar is weaker, then precious metals rally. So I don’t analyze silver as a supply-demand story,” he said.