Gold $1,486/oz - prices fall as new margin requirements on silver prompt selling across commodities

Gold prices fall and then bounce on fears over economic stability

• Comex raised margin requirements for silver on Wednesday causing traders to sell other commodities to cover the new charges.
• Oil prices were particularly hard hit with traders and investors universally long and little reason for shorting with potential for further supply disruption in the Middle East. However, there is no shortage of physical oil at present and consumers are only likely to come back into the market at around $105/bbl for Brent.
• Market moves are accentuated by high-frequency traders which now account for more than 50% of trading volumes in many markets
• Further reduction in liquidity is likely as investors deleverage as market volatility rises.
• While the London market looks relatively stable Asian markets may well suffer further deleverage and stop-loss selling.
• Risk-Off: Commodity funds are largely long and a turn in market direction is bound to prompt risk-off trades, effectively selling ETFs, indexes and futures positions.
• US non-farm payrolls are out at 1:00 today. If the US economy appears to be stalling then commoditues could take a further kicking.

China - clampdown on liquidity has potential to dampen GDP growth

• Traders are talking about Chinese GDP growth rates falling to 7% or even 5% from the recent 10% level
• New banking regulations are planned to force banks to increase their Tier 1 capital requirements
• The clampdown is largely on speculative activity in property and private enterprise but this may also cause investors to sell commodities at a time when consumers are standing clear
• In many respects China should not continue to grow at a double digit rate
• China is looking to invest $115 billion on building railways this year
• China PMI and inflation data is due next week which may add further fuel to this new market volatility

ECONOMIC NEWS

Dow Jones Industrials -1.10% at 12,584.17

Nikkei 225 -1.45% at 9,859.20

HK Hang Seng -0.44% at 23,159.14

US - All focus today will be on the employment figures released at 13.00. Expectations are that the pace of hiring slowed in April as rising material and commodity prices forced companies to curb spending.

China - The official PMI dropped to 52.9 in April down 53.4 in March according to figures released by the China Federation of Logistics and Purchasing.

• The vice Finance Minister has stated that the Government is closely watching the debate underway in the US surrounding the debt ceiling, and is "hoping that the US can take effective measures toward fiscal reorganisation just as President Obama suggested"
• The China Banking Regulatory has announced that it will require banks to implement new regulations from the start of next year in order to better protect against risk.
• Former advisor to the PBOC has forecast that the country's monetary policy may shift to "less tightening" in the second half of the year as prices start to moderate as a result of the governments efforts.
• The removal of government incentives has hit car demand in China. Figures released by GM, the largest overseas automaker in China showed that sales fell in April. The decline comes on the back of an increase in deliveries of 1.2% in March and 6% February. Ford also reported slowing sales growth in the country. Additionally regulations in major cities like Beijing, aimed at reducing the number of cars on the road are also starting to have an impact.
• There are conflicting reports emerging this morning on plans for rail investment in China. The next five year plan sets out plans for as much as 2.8 trillion yuan to be invested in railway infrastructure however there has been speculation of late in local media that losses in the railway ministry would force cuts in the budget.
• The Ministry of Finance has announced that China will subsidize some industries including power, iron and steel smelting and other metal refining cutting outdated capacity in an effort to improve the quality of output and hit new emissions targets.

Europe - The ECB kept rates unchanged yesterday and comments made by Jean Claude Trichet in the subsequent press conference indicated that a rate rise next month is unlikely as the Eurozone faces a number of headwinds.

Australia - The Reserve Bank increased forecasts for inflation and suggested that an increase in rates would be required at "some point" in the near future. Consumer prices will rise to 3.25% over the year, an increase from the initial forecast of 3%.

South Africa - ANC Youth leader Julius Malema has called for a mass seizure of land and nationalisation of major industries, a move that puts him at odds with the ruling party's philosophy and one that will likely further alarm investors. The comments are the latest in a long line of statements by the youth leader that have the potential to starting making more of an impact should the party perform poorly in local elections later this month. This is a serious subject and the threat it poses to the mining industry in the country is colossal.

Libya - Mahmoud Jibril, head of the Libyan opposition, named the Transitional National Council has briefed authorities from around the globe in Rome on the planned road map post Gadhafi. The plans involve installing an interim government while a constitution is drafted and parliamentary elections are held. The plans in theory make sense however getting to a post Gadhafi situation still appears to be a long way off.

Burkina Faso - President Blaise Compaore has sacked the country's police chief on the back of the riots that have stretched the country over the last month. In the wake of the protests the President has moved swiftly firing a number of people in his government, several military chiefs and offered bonuses to disgruntled soldiers.

Currency - The yen fell from close to a two month high as speculation increased that authorities would intervene to curb recent gains that could potentially impair exports. The aussie dollar moved up on the back of the announcement that an interest rate rise is on the horizon. The dollar is off slightly this morning against its most traded counterparts.

US$1.451/eur vs $1.487eur yesterday. Yen80.44/$ vs 80.30/$, SAr6.757$ vs 6.654/$ $1.635/GBP vs 1.647/GBP

COMMODITY NEWS

Precious metals:

Gold US$1,486/oz vs US$1,514/oz on yesterday - Prices are up this morning as investors look to trade back into a relatively safe investment in the wake of commodity prices falling yesterday and negative sentiment intensifying regarding the economic recovery in the US. Additionally the dollar is slightly weaker this morning encouraging investors back into gold.

• Venezuela has announced plans to boost production of gold and fight the illegal miners that account for almost 50% of the country's current output. The country is currently only producing around 11t of gold a year, with illegal miners extracting another 11 tons.

• SPDR gold trust holdings fall further to 1,208.42t (38.851moz) from 1,219.94t (39.222moz) current value US$58,680bn

Platinum US$1,782/oz vs US$1,823/oz yesterday -

Palladium US$717/oz vs US$739/oz yesterday -

Silver US$34.66/oz vs US$38.88/oz yesterday - Prices are heading for the worst weekly decline in over 30 years as the increase of margin requirements coupled with a general slump in commodities across the board hits prices hard. Loses for the week so far sit around 28%.

Rhodium US$2,250/oz unchanged

Base metals:

Concerns on global growth and rising interest rates are impacting the market today.

Copper US$8,712/t vs US$9,028t yesterday - Falling demand prospects in China and the US are hurting prices this morning.

Aluminium US$2,579/t vs US$2,721/t yesterday -

Nickel US$24,100t vs US$25,250/t yesterday -

Zinc US$2,083/t vs US$2,155/t yesterday - Prices have taken a hit today as concerns re-emerge over the sustainability of the global economic recovery and the subsequent impact that a deep would have on demand.

Lead US$2,230/t vs US$2,404/t yesterday -

Tin US$28,450/t vs US$30,025/t yesterday -

Energy:

Oil US$106.08/bbl vs US$121.24/bbl yesterday - Prices are off again this morning as the general trading out of commodities continues. It appears that the market has started to realign itself with fundamentals and recent demand prospects in the US are now being weighed against the threat to production that unrest in the middle poses.

Natural Gas US$4.223/mmbut vs US$4.560/mmbtu -

Uranium US$55.25 vs US$55.50 last week -

Other:

Steel - Falling domestic prices have forced several steel mills to slash their export offers of Hot rolled coil to circa US$685/t.

Rare Earths - Local media is reporting that the Chinese province of Inner Mongolia is planning to consolidate its REE industry. China is currently reviewing its export quotas for REEs.

Tungsten - Concentrate prices have moved up to touch a new record as a jump in contract prices at a number of major mines influences the market. Chinese producers announced an increase of 17%. Prices now sit at around US$22,843/t. The spot market price is trading at $24,000-$24,320/t

COMPANY NEWS

Mining last week:

Ampella Mining (AMX AU) 206c/s, A$416m - pre-feasibility starts on 2.2moz Konkera gold project BUY

Centamin Egypt (CEY LN), 130p Mkt cap £1.42bn BUY

Medusa Mining* (MML LN) 522p mkt cap £975m - Fidelity take stake to over 11% BUY

Glencore - price range set at 480p - 580p as Glencore prepares to publish prospectus for listing

Hambledon Mining* (HMB LN) 5p mkt cap £36m - Rising gold sales push Hambledon to profit in 2010

Ormonde Mining* (ORM LN) 10p mkt cap £30m - placing raises £4m to advance Tungsten project

BUY - Target Price raised to 21p from 19p

Glencore - unapologetic opportunists reap rewards of strategic position

Shanta Gold* (SHG LN) 32p, mkt cap £58m - Chunya gold resource rises to 1.2moz

* Fairfax acts as advisor to Medusa Mining

DISCLAIMER - Non Independent Research

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