You’re hearing about it here first. But I promise that you’ll soon be hearing about it virtually everywhere.

Let me explain.

China’s New Profit Catalyst

Most investors are aware of China’s massive profit potential. But what they may not understand is this: Before all that potential can be transformed into actual profits, this Asian giant needs to develop a modern, fully functional financial system. That obviously can’t happen overnight, and China’s been smart – and avoided making major mistakes – by not rushing things.

In fact, despite some stinging criticism from the West, Beijing has held its companies and its financial markets in check to ensure an orderly development. It’s even left some protectionist measures in place to make sure that opportunistic foreign firms don’t overrun its markets.

Naturally, there’s been a near-term cost. It’s held some China-based companies back, making them less competitive in such developed markets as the United States and Europe. Chinese firms were severely limited in their access to funding, meaning they were also limited in their ability to capitalize on business opportunities in these overseas markets.

But I could see that the long-term profit potential for these companies was huge – and I’ve repeatedly said so to the audiences that I’ve spoken to at events all around the world, or that I’ve written to via my columns here in Money Morning. In both venues, I’ve told listeners and readers that the day would come when these companies were able to raise enough investment capital at home to finance their forays abroad.

The day that occurred, I’ve said, is the day when the real fireworks would begin.

Beijing finally lit the fuse.

By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.

The move is very shrewd, for it brings about the confluence of highly complimentary trends.

• For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
• Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
• These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
• And that comes at a perfect time for – up until now – the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.

Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.

Just how big could this new dollar-denominated financing market turn out to be?

At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone.

That amount tallies closely with China’s estimated $23 billion pipeline of outbound mergers-and-acquisitions deals that have been announced this year, but not yet consummated – especially if you factor in the $9.7 billion worth of deals that were announced in the past three years, but that are still pending, Thomson Reuters reports.

Could New Financing Deals Accelerate the U.S. Recovery?

Many Americans will clearly view a big uptick in investments from China with significant fear – especially if they remember the late 1980s Japanese shopping spree that sent ownership of Rockefeller Center, Columbia Records, Universal Studios and the Pebble Beach Golf Course back to Tokyo.

This is different. In fact, I think the new rules are likely to create entirely new funding sources that will boost international trade and that could actually accelerate the U.S. economy’s recovery from the global financial crisis. In fact, it’s entirely possible that this new form of financing will help facilitate a post-recovery golden age of expansion led by such as-yet unsaturated markets as China.

Call it the “Mother of All Carry Trades” – only this time it will be yuan-based, instead of yen-based.

A carry trade is an investing strategy in which an investor takes advantage of interest rate differences between two countries. He’ll borrow money in a country where rates are low and invest it in another market where rates are higher, profiting from the difference. The rate disparities are often caused by the respective central banks; one may be trying to combat inflation with high rates even as another is trying to nurture economic growth by reducing rates.

There are no actual examples to point to, yet, since the market isn’t yet up and running, but we can draw some inferences based on who’s filed to issue this dollar-denominated debt, and look at who’s likely to file in the months to come.

According to The China Daily News, China National Petroleum Corp., the Red Dragon’s biggest oil company, is planning to issue $3 billion in dollar-denominated bonds and is planning to auction as much as an additional $1 billion in three-year floating debt, whose rate will be tied to the London Interbank Offered Rate (LIBOR).

Traders familiar with the new market suggest that CNPC will probably pay a coupon of 60 basis points to 80 basis points (0.60% to 0.80%) more than six-month LIBOR – a much lower cost than the 2.8% coupon for the $2.93 billion worth of yuan-based, three-year, fixed-rate, medium-term bills issued back in December.

Last year, China’s yuan had appreciated steeply against the U.S. dollar, meaning funding costs were high for Chinese companies. Now, however, the situation is reversed, and companies can issue huge amounts of expansion debt for comparatively little money.

As a byproduct of all this, companies that take advantage of the new dollar-denominated funding markets help take the strain off of the People’s Bank of China, the central bank that has shouldered almost all of the dollar-based exchange risk to date.

In Shanghai, which is China’s financial capital, my trading contacts tell me that six-month dollars – which were quoted at 0.40% earlier this year in China, now reflect approximately 0.80%, which is roughly in line with onshore-dollar yuan forward rates for the same time period.

By comparison, the six-month implied forward rates hit 15% in March 2008. So you can see why Chinese companies have such a powerful incentive to use this new funding venue – especially when so many otherwise-solid global companies have been brought to their knees by the credit crisis.

The Three Keys for Investors

So what does this mean for investors?

In a word, plenty.

First, it’s conceivable that the sheer volume of dollar-denominated bonds could indirectly prop up the U.S. dollar. Not only would that potentially wreck traders who are betting that it’s headed the other way, it could actually solidify U.S. and global markets that are still searching for an anchor. By implication, this could also wreck the “gold bugs” who are betting the farm, instead of investing in the precious metal as part of a disciplined investment strategy.

Second, for those on Wall Street who continue to believe they are the “masters of the universe,” the strength and ferocity with which China’s dollar-denominated bond market may develop will probably come as a rude shock. Not only are the vast majority of Wall Street firms likely to be cut out of the underwriting process, but chances are very good that they’ll probably be relegated to the back seat when it comes time to pony up in the never-ending game of global one-upmanship.

And third, depending on the ultimate size of this new bond market, the prices of resource-based companies and commodities could go sharply higher as investors realize there is a potentially unlimited source of funding chasing relatively few quality assets. To the extent that Chinese companies mirror Beijing’s plans for the future, the same will be true for technology, medical and infrastructure plays.

Will this happen immediately?

Probably not. Even though the market is potentially huge (like just about everything else here in China), Beijing will almost certainly keep its hand on the throttle, meaning it will grow at a reasonably impressive – albeit measured – pace.

Beijing is very aware that an imprudent use of debt was a key part of the elixir that created the global financial crisis, meaning government officials will work hard to make sure the tiger stays in its tank – so it can’t bite anyone.

Over the long haul, however, there’s no question that this new market is an important – and much-needed – step in China’s continued development into a global financial juggernaut that investors cannot afford to ignore.

Source:  How the New ‘Yuan Carry Trade’ Will Add to China’s Global Muscle, and Possibly Even Accelerate the U.S. Recovery

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this; "New Reality"; will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as"The Golden Age of Wealth Creation" The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

]]> http://www.contrarianprofits.com/articles/how-the-new-%e2%80%98yuan-carry-trade%e2%80%99-will-add-to-china%e2%80%99s-global-muscle-and-possibly-even-accelerate-the-us-recovery/16649/feed 0 http://www.contrarianprofits.com/articles/japan%e2%80%99s-exports-halved-by-crisis-boosting-odds-for-drop-in-yen/14216 http://www.contrarianprofits.com/articles/japan%e2%80%99s-exports-halved-by-crisis-boosting-odds-for-drop-in-yen/14216#comments Thu, 26 Feb 2009 13:00:04 +0000 Jason Simpkins http://www.contrarianprofits.com/?p=14216 Japan’s exports were cut nearly in half last month as the global downturn crushed demand for the country’s electronics and automobiles, a development that increases the odds that the Japanese yen could be poised for a tumble.

Japanese exports fell by 45.7% in January from a year ago – the steepest decline since 1957 – as exports to three of Japan’s biggest overseas markets fell by record levels. Exports to the United States fell by 52.9%, exports to Europe declined by 47.4%, and exports to Asia dropped by 46.7%, Japan’s Ministry of Finance reported.

The sharp drop in exports has had a crushing impact on Japan’s trade deficit, which grew for a fourth straight month to a record $9.84 billion (¥952.6 billion). But…

Platinum also fell off steeply from its European highs, and traded within a tight $10 range through the New York day, ending at $812/oz., down $7. Overnight, platinum has edged higher.

Silver soared in Hong Kong, rising as high as $10.20, but that was it as it dropped off sharply, falling below break-even late in the Comex and coming to rest in the Globex at $9.79/oz., down 7 cents. Overnight, silver is trending higher. (Click here for charts)

It was a very lackluster day for the precious metals yesterday, as early rallies in all of them got snuffed out, leading to minor losses across the board.

Gold got no help from the usual suspects, as the dollar continued its latest advance against the euro, and oil prices sank.

One positive note was sounded by Matt Zeman, a metals trader at LaSalle Futures Group in Chicago, who said that, “Gold took a very steep drop last month, so [we’re due for a] gold bounce on a technical basis.”

Zeman added that, “The dollar has strengthened so much in the past eight weeks that it’s just overdone … There are some buying opportunities here.” And he doesn’t mean in the buck.

As this is a fair and balanced presentation, we should note that at the other (far) end of the spectrum we find über-pessimist Jon Nadler of Kitco, who wrote that: “Investors should sell into rallies and only accumulate at $675, $640, $580, and $540 if those targets are reached … Gold lost some of its safe-haven attributes in this last crisis. Liquidations and deflation are alive and well.”

We agree that liquidations and deflation are alive and well, but they are temporary. Deleveraging will eventually end, and the truly staggering inflation in the monetary base over the past couple of weeks will overwhelm deflation. It is a matter of when, not if.

Overall, as Mark O’Byrne of Gold and Silver Investments notes, the recent rally in mining shares is significant, with the Amex Gold Bugs Index up 15% last week. O’Byrne sees this as “an indication that we are at or near a low in this sell-off,” as the stock indexes “tend to be a leading indicator of a trend reversal in the precious metals.”

Source: Precious metals tread water -  Early rallies snuffed out

Platinum bottomed near $770 in late Hong Kong trading, but moved gradually higher through most of the rest of the day, ending at $819/oz., down $7. For the week, platinum gained 3%.

Silver also hit its low late in Hong Kong, and it too pushed steadily higher, making it back into positive territory to close at $9.86/oz., up 13 cents. For the week, silver tacked on 5.2%. (Click here for charts)

While silver had a decent day, gold turned in yet another lackluster performance, ending October with a loss of 18%, the largest monthly decline for the metal in 28 years.

Gold was also held back as the dollar strengthened again vs. the euro, which offset any boost that might have been gotten from rising oil prices.

The reason for weakness in gold seems simple to Adrian Day, the president of Adrian Day’s Asset Management: “Global liquidation means more money from foreign assets are going into the dollar,” Day wrote. “The dollar is seen as a safe haven. There’s also liquidation of gold itself, which is easily sold.”

James Turk, the founder of Goldmoney.com, had a different take, though, saying that, “The dollar is in a short squeeze that won’t last much longer … Gold is dropping in dollar terms because of central-bank intervention and the massive deleveraging of dollar debt.”

The general sector weakness is also obviously playing in, with the Reuters/Jefferies CRB Index of 19 raw materials notching its steepest monthly decline since at least 1956.

“There’s significant pressure on all metals and commodities,” said Paul Sutherland, of Financial & Investment Group in Traverse City, Michigan. “Gold is not acting like a currency. It’s acting like a commodity. People are selling gold and gold shares because it’s something you can sell to raise cash.”

Source: Gold has another disappointing day – But silver rises again

But don’t despair. Because a trend that has long been talked about – economic decoupling – is finally starting to manifest itself as other world economies, particularly the so-called “BRIC” markets of Brazil, Russia, China and India, have continued to grow even as the U.S. economy has slowed. That means profit opportunities abound for U.S. investors, despite myriad messes on the home front that include a collapsed housing market, a mortgage crisis that turned into a five-alarm credit conflagration, and a plunging greenback that seems to have left its parachute on the airplane that it jumped from.

Some of the profit pathways to play:

• Investors can eschew the U.S. market completely, and pursue profits abroad.
• They can latch onto the U.S.-based members of the “Global Titans” club, companies with their headquarters in America that derive a hefty chunk of their profits from overseas markets.
• Or investors can ferret out U.S. investments that are either immune to some of this country’s current economic afflictions, or that are problem-plagued now, but a good bet for a turnaround later.

A Year to Forget?

Like a Dickens’ novel, 2007 was a definite “Best of Times/Worst of Times” combination for the U.S. economy. Volatility and crisis were the watchwords for much of the year. After key stock indices reached record highs in the middle of the year, the explosive emergence of the subprime mortgage debacle and related credit crunch pushed share prices into a nosedive that steepened as the year progressed.

With a 0.6% increase in gross domestic product (GDP) for the fourth quarter of 2007 and a first quarter that’s supposed to be flat at best, it’s clear that we’re not out of the woods, yet. Many fear that 2008 will find the United States in a recession. Other investors believe we have already experienced the first elements of a recessionary contraction.

“If I had to be bold, I’d say we began a recession in December,” Bill Gross, manager of the PIMCO Total Return Fund (PTTAX), told the Financial Times in a recent interview.

The Homeowner Blues

As 2007 progressed, many Americans experienced a growing despair as they watched their largest asset – the family home – experience a significant value decline. The United States is experiencing its worst housing recession in more than 15 years. And that domicile downturn is far from over. Consumers are being forced to watch as the housing slump siphons off the equity they’ve built up, even as it shaves the market value of their homes. Consumers with marginal credit who’d signed up for adjustable-rate loans have seen their mortgage rates “reset,” and then had to watch as their monthly mortgage payment ballooned to the point that they could no longer afford those payments.

For many, unfortunately, refinancing hasn’t been an option. The vanishing homeowners’ equity made such deals unfavorable to lenders. And with the burgeoning credit crisis that quickly became global in nature, banks and mortgage firms have slashed the available amount of refinancing loans that homeowners needed to escape their soaring mortgage payments.

Soon, the banks that had made the questionable calls on subprime loans were in trouble, too. With the housing market cooling, the homeowners who couldn’t refinance also discovered that they couldn’t sell. Homeowner defaults – loans that are 30 days or more past due – soared and started a firestorm that has swept through the global financial-services sector, singing such stalwarts as Citigroup Inc. (C), Fannie Mae (FNM), UBS AG (UBS), and others.

“It will take most of the year to work out of the housing slowdown. Currently, the inventory of unsold homes is at an eight to nine-month level. We have to get this down to a more normal level of four to five months. In order to get to this level, housing starts will remain low,” Dr. Robert Sweet, an economist at MTB Investment Advisors, the investment-advisory subsidiary of M&T Bank Corp. (MTB), said in an interview with Money Morning.

And we might be getting closer to the bottom. In fact, existing home sales rose in February, the first such increase in the past seven months. But it’s probably too soon to get excited about a full housing recovery.

“It looks like this may be a temporary pause,” Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Mass., told Bloomberg News after the existing homes sales report was released. “The price declines have helped, and people are still getting financing, though not on the good terms they could before.”

“We’re still a long way from a recovery in housing,” Gault said.

The Fed to the Rescue?

U.S. Federal Reserve policymakers cut the benchmark interest rate by less-than-expected three-quarters of a percentage point at their last meeting, a move that was designed to energize a badly flagging economy without causing inflation to spike or exacerbating the greenback’s decline.

When central bank policymakers reduced the key Federal Funds rate from 3% to 2.25% on March 18, it was the sixth time in seven months the closely watched benchmark had been reduced. Many analysts had been expecting a reduction of a percentage point – or even more – as such recent events as the near-collapse and subsequent Fed-led bailout of U.S. investment bank The Bear Stearns Cos. Inc. (BSC) stoked fears that the U.S. financial system was ready to seize up.

The policymaking Federal Open Market Committee (FOMC) has now cut the Fed Funds rate six times and slashed the Discount Rate for direct loans to banks eight times since August, when the subprime mortgage market collapsed and created a global credit crisis.

While the FOMC made it clear that inflation has grown as a concern, it still says that economic worries remain the biggest problem and emphasized that it was ready to act again if need be.

“Today’s policy action, combined with those taken earlier, including measures to bolster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity,” the FOMC said in its March 18th statement. “However, downside risks to growth remain. The committee will act in a timely manner as need to promote sustainable economic growth and price stability.”

Meanwhile, on Wall Street, analysts are slashing profit forecasts that still look way too high to me.

Already, high-profile investment firm Lehman Brothers (which, like some other brokers, closed its books May 31) plunged in value because the market anticipated a large loss for this quarter. It will be Lehman’s first loss in nearly 25 years – and more asset write-offs are likely. Lehman will fess-up on June 16…stay tuned.

Also, two leading banks just sacked their CEOs amid mounting sub-prime losses. Wachovia got rid of Ken Thompson, who had the misfortune of buying California lender Golden West Financial for US$25 billion…pretty much at the top of the sub-prime boom two years ago.

That acquisition turned out… badly, to say the least. Meanwhile, Washington Mutual’s Chairman will “step down” according to the bank.

These are just the latest casualties from the sub-prime credit crunch, but rest assured, more heads will roll before this financial reign-of-terror is over.

So what’s ahead for earnings this quarter?

Financial stocks are expected to fare the worst, once again this quarter (surprise, surprise). Consumer discretionary shares are next in line, with an earnings hit of -10% expected this period.

There is some good news however. Energy sector stocks should post 16% earnings gains, which is no surprise with sky-high oil and gas prices. Tech-sector profits are also expected to shine this quarter, which is a pleasant surprise to investors amid a slowing economy.

Technology stocks are enjoying a healthy export boom, due in part to the falling buck, but also from healthy demand from overseas markets. Also, tech companies just aren’t as impacted by soaring raw-material costs, like rising oil prices, which does impact so many other sectors of the economy.

The result is likely to be 15%-plus profit gains for technology shares this quarter. That’s a very nice showing amid the Wall Street gloom.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR’S NOTE: Right now, Mike is researching several key ways to play the technology sector for a possible double or triple-digit gain in the coming months. Keep an eye on his Market Shock Trader alerts for more updates on these stellar plays.

Source: Why More Heads Will Roll Down Wall Street

The bank said its annual subprime-related losses were more than 120 billion yen ($1.15 billion) and that it could lose another $480 million this year because of subprime exposure.

According to a report by Thomson Reuters, the bank’s president, Nobuo Kuroyanagi, said: “Subprime had a very broad effect on us. When you start talking about the related impact, the Japanese stock market has fallen a lot and that sparked losses on our stock portfolio.”

This from Thomson Reuters:

[Mitsubishi UFJ] has not been hurt as badly as Mizuho Financial on bets on risky U.S. subprime mortgages. Mizuho, Japan’s No.2 bank, lost 645 billion yen on subprime investments in the year to March, becoming one of Asia’s biggest subprime casualties.

But Mitsubishi UFJ has been dragged down by its consumer finance business after tighter government regulation squeezed profits, and is faced with sluggish lending growth and higher provisions against bad loans as Japan’s economy slows.

Future growth depends on MUFG’s ability to take advantage of opportunities overseas as Western banks, which have been hit much harder than Japanese banks by the credit crisis, become more cautious in extending loans, one investor said.

The loose bilateral trade association between China and Japan could be a major boost to the Japanese economy, which could become part of the world’s next superpower, says Martin Hutchinson in Money Morning.

“Free trade and free movement of labor between the two countries would enable them to deepen their economic relationship still further, making the Japan-China trade axis the most important in the world.

“Longer-term, an EU-style economic union could become the world’s leading economic power, surpassing even the United States and the EU itself. As a U.S. geo-strategist, one worries somewhat about this … As an investor, one rejoices in it and seeks to find sources of future profit from the two countries’ deepening relationship.

Read on here to find out how to profit from this geopolitical development.

Overnight, gold has edged higher in the overseas markets.

Platinum also caught fire at the New York open, and moved higher through the day with only minor pullbacks, ending at $2081/oz., up $49. Overnight, platinum has been pushing higher.

Silver followed gold’s chart pretty closely, although it didn’t fare quite as well in the afternoon, closing at $16.65, up 16 cents. Overnight, silver has been trending higher.
(Click here for charts)

A very interesting day for the precious metals, especially gold, with the metal moving sharply higher despite the headwinds set up by the usual suspects, as the dollar held steady to higher and oil retreated.

What happened?

One opinion: “Gold surged initially on technical buying and short covering prior to weak data in the form of Empire and Philly Federal Reserve indices, industrial production, weekly jobless claims and the TICs data — all of which were neutral to negative, which exacerbated the move to the upside” for gold, said Mark O’Byrne, of Gold and Silver Investments Ltd.

One day, of course does not a trend make, particularly in light of the metals’ recent weakness, but the day did have some optimists flying the up banner.

“You’re seeing some new buying come back into gold,” said Frank McGhee, of Integrated Brokerage Services in Chicago. “The dollar has stopped its immediate- term rally. Gold is still $200 too cheap, given where oil is.”

Needless to say, adding $200 would take gold well into new record territory.

If gold should detach from oil, as traders come to see it as a cheaper alternative inflation hedge, it will be a radical departure. Last year, gold moved in tandem with oil 92% of the time, according to Bloomberg.

But even gold bear Dennis Gartman, editor of the Gartman Letter, admits that, “Crude is inordinately expensive relative to gold.”
Source: Gold Stages Strong Rally

Overnight, gold has edged higher in the overseas markets.

Platinum fell as low as $2000 in Hong Kong, but came smartly off that low even though it never made it back to break-even, ending at $2032/oz., down $18. Overnight, platinum has fallen off.

Silver pushed well into the black above $16.80 at the New York open, but then was sold off steadily for the rest of the day, closing at $16.49, down 19 cents. Overnight, silver has been pushing higher.
(Click here for charts)

It was another grind-it-out day for the precious metals, as they struggled to keep their heads above water with both the firm dollar and declining oil moving against them.

The Hightower Report wrote of the day’s tepid action: “The gold market mostly favored the downside in the action on Wednesday which initially seemed to be the direct result of ongoing strength in the US Dollar. However, gold prices did manage to bounce by as much as $6 an ounce off their post report lows with the still mostly Dollar holding in positive ground. The currency trade continues to suggest that a close above the 74.00 level in the June Dollar Index is an extremely critical level and it appears that the gold market is also watching that level as well. In the end, the bull camp in gold might suggest that prices held up relatively well in the face of minor Dollar strength and moderate weakness in oil prices. In fact, a number of physical commodity markets were under pressure Wednesday and even that didn’t seem to add to the initial weakness in gold prices.”

At this point, fundamentals to the contrary, one would have to admit that the bears are pretty much in control.

“There’s no buying interest in gold at the moment,” Matt Zeman, of LaSalle Futures Group in Chicago, stated flatly. And, “The CPI coming in tamer than expected is not going to help,” he added.

And, “I would look for the buck to continue firming,” said Ralph Preston, an analyst at Heritage West Futures in San Diego. “A test of $850 appears to be in the cards for gold on the back of the inflation numbers.”

But on a more upbeat note, Société Générale said in a recent report that while chart analysis shows silver will be little changed to lower during most of May, the price will average $20.25 an ounce in the second quarter. That would be quite a rally.

Source: Precious Metals Slide More

Platinum climbed higher in small fits and starts, from a low of $1890 in the far East to end at its intraday high of $1927/oz., up $27. Overnight, platinum is slightly lower.

Silver leveled off after posting solid gains in the far East, shot higher to peak at $16.80 in the second hour of New York trading, but then slipped later in the day to close at $16.69, up 33 cents. Overnight, silver pushed higher in Hong Kong but has pulled back to flat.
(Click here for charts)

The bargain hunters among precious metals traders surely came out of the woodwork yesterday, a welcome sign after the beatings absorbed last week. And all last month, for that matter, as gold fell by 6.1% in April, the biggest monthly drop in four years.

It was also a very supportive day on the part of the usual suspects, surging energy prices and a dollar that has begun collapsing again after its strength in the wake of the latest round of interest rate cuts.

Kitco’s Jon Nadler tabbed the recovery as “ultimately attributable to some bargain hunting offtake ahead of India’s May 7 auspicious date, but more so to the … rise in crude oil on the heels of Nigerian- and Iranian-driven apprehensions.”

Nadler noted that May 7 marks the day of the Akshaya Tritiya Festival in India, the Golden Day of Eternal Success. It is “probably South India’s biggest gold-buying festival of the year,” he said.

As the correction runs its course, it’s well to remember that gold futures averaged just $701 an ounce in 2007. Expect that to ramp up to an average of $906/oz. this year, wrote Citigroup analyst John Hill.

Since jewelers account for some 60% of gold purchases, “It will be important for damped fabrication demand to recover before gold can move higher,” Hill said. “The key will be downside support from fabrication, probably three to five months out.”