A pattern seems to be emerging that first sees heavy gold ETF sell-offs that are almost immediately followed by strong physical buying. That certainly has been the case today in which yesterday's losses were virtually wiped out by today's gains.

In fact, Reuters has called the physical demand "frenzied." The wait for gold bars as investments is as much as 3 weeks in the United States and longer in some places such as east Asia. In countries such as Dubai and Saudi Arabia, gold is actually being scooped up by government central banks from the retail market, which in turn are replenishing their supplies piecemeal.

The impatience of the paper gold traders seems to have backfired on them and they are now caught in a vicious spiral in which they are forced to sell gold because of distress sales of their corporate stocks, lowering their demand energy and kicking the cycle over again as physical buyers step in. 

We have said a number of times that we have to beware of figures that come out of China concerning its economy. Finally it seems as if that dog will hunt as a number of western analysts as well as a number of east Asian observers.

China has been spinning their export figures to reflect the former value of the yuan rather than the new "appreciated" value. So, exports in dollar terms are going up because the dollar has been depreciating. (Much of the world expresses its economic activity in the dollar to make understanding easier.) It has become clear though that China is in the midst of a serious slowdown. 

Europe simply isn't buying what China makes. Japan will buy but a very rich country has little need for more cheaply made goods. The United States is buying but more meticulously since American goods are becoming mor competitive with Chinese-made goods because of the appreciating yuan and because the U.S. is pushing automation of factories to new levels.

What does this have to do with gold? One way or another, China will have to stimulate its economy. We believe that the stimulus they said they were initiating last year is nothing more than a "paper tiger" to borrow a term from Maoists. Now that China is in the rat race with all the big economic players, it can't expect to sit on the sidelines during times of crisis. So, China's potential stim measures will help in raising worldwide inflation. The only players not stimulating yet are Brazil, Russia, and Chile. 

Back to a question we asked ourselves earlier this year: is there an equities bubble? Our best answer is, "not yet." All those dollars that the Fed has created through a variety of programs are languishing in (mostly) banks. The one outflow from the 2-trillion pool of capital on the sidelines has been from the banks to borrowers who then play the stock market. 

One has to wonder why, for other than speculative reasons, banks would lend money to investors to invest in stocks in an economy growing by 1.5% per year. If the Fed (and Congress) were serious about getting the economy moving lickety-split, it would charge banks negative interest rates so it cost them money to hold dollars in the reserve banks and direct investment projects - such as infrastructure and high-speed Internet initiatives - would be financed. 

It's good to see stocks gaining, but on what basis? We, as gold bulls, don't like seeing the equities drain money from gold-buying.