Dips in the Gold Price are Short-Lived Thanks to China

05/12/11 Beijing, China – Another day, another leg down in stocks and commodities. And once again, it’s driven by news from here in China.

But if you’re a precious metals investor, things are happening here beneath the surface that should give you cheer. Let’s dive in…

China has raised its reserve requirements for banks yet again. It’s the fifth time this year, and the eighth since last October.

When the new rule kicks in next Wednesday, banks will be required to keep a record 21% of customer deposits in the vault or at the central bank.

It’s no surprise – not after April consumer prices clocked in yesterday at an annual 5.2%. But it feeds the meme that China’s about to slow down at a time industrial production and retail sales here are already starting to run out of steam.

Thus, “it’s a risk-off trade” one fund manager tells Bloomberg. Here’s the damage report…

• The Dow and the S&P are adding to yesterday’s losses; both indexes are down another three-quarters of a percent

• Gold has been knocked back to $1,490; silver’s back to its lows from last week, at $33.24

• Oil is down to $96.59

• Copper, which briefly poked its head above $4.00 a pound on Tuesday, is back to $3.90

• The dollar index is up 3.4% from its lows at the end of April. At last check, it’s 75.5.

“We saw buying when gold dipped below $1,500 from China, India and Indonesia,” an anonymous Hong Kong-based dealer tells Reuters, “but not much scrap selling, as people are still bullish on gold.”

This corroborates Richard Russell’s notion that we shared here on Monday – there’s a “Chinese put” under gold. “Whenever gold corrects a bit, China is there loading up on whatever is available.”

Sure enough… Gold crossed $1,500 for the first time three weeks ago. Whatever dips have come since then have been shallow, and brief:

That’s the short-term picture for precious metals here. Long-term looks equally bullish…

Addison Wiggin
for The Daily Reckoning

Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

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