Thursday, September 29, 2011

Jump in Asia's Gold & Silver Demand Sparks

London Gold Market Report
from Adrian Ash
Thurs, 29 Sept 2011

Jump in Asia's Gold & Silver Demand Sparks "Logistical Blockage" as Berlin Approves Extra €88Bn in Euro Support

WHOLESALE PRICES for silver and gold gave back an early rally in London trade Thursday morning, trading at $1615 and $30.15 per ounce respectively as Eurozone stock markets rose after the German parliament approved extra financial support for weaker member states.

Both German and Greek government bond prices rose – as did the Euro – offering new buyers respective yields of 1.99% and 22.88% per year.

Commodity markets were mixed, as industrial metals slipped but Europe's benchmark Brent crude oil contract rose moe than 1% to $105 per barrel.

"The Double Top formation in gold remain our main technical focus," says the latest chart analysis from bullion-bank Scotia Mocatta.

"Only a close back above $1704 would remove the bearish outlook," it reckons, targeting a "measured move objective" off this summer's peaks above $1900 down at $1488 per ounce.

The last week's 8% and 17% drops in gold and silver prices continue to jar, however, with the surge in physical investment demand reported by retail bar-and-coin dealers in both Europe and North America, as well as with extended delivery times in London's wholesale bullion markets.

"The blockage is logistical," said a senior precious-metals trader in London to BullionVault this morning, pointing to strong shipping demand from Swiss refineries wanting 400-oz London gold bars to convert into kilo-bars for European and especially Asian buyers.

Advanced bookings for silver shipments to China ahead of the New Year are also rising, he said.

"Current [gold] buying momentum is much stronger than the respective comparable period in 2009 and 2010," agrees today's note from Standard Bank's commodities team, "matching levels last seen in August 2010 and February 2011."

This surge in demand "is broad-based throughout Asia," says Standard, and "particularly strong" from India – where next month's Diwali festival is traditionally associated with strong gold jewelry demand – while sales of gold scrap from existing owners "have been sporadic rather than consistent."

On the US gold futures market, in contrast – where derivative contracts are typically settled in cash rather than metal – "We expect [this week] will show another and sharper decline in net speculative [demand]," says the latest Precious Metals Weekly from London's VM Group for ABN Amro.

The falling silver price saw a 10% drop in speculators' "net long" position (of bullish minus bearish bets) even before last week's sell-off, according to VM's data, while as a proportion of all Comex gold futures contracts, the "net long" held by non-industry players fell from 40% at the start of August to barely 26% last week.

Yesterday saw the gross tonnage held to back shares in the SPDR Gold Trust – the world's largest gold ETF – end unchanged at 1242 tonnes, down 0.8% from a week ago and 6% below its peak of June 2010. By value, however, the SPDR Gold Trust's holdings have swelled by more than 22% since then to reach some $64.5 billion today.

"The German parliament is voting for too little, too late," said Fredrik Erixon of the European Centre for International Political Economy in Brussels today, as the vote in Berlin saw strong parliamentary approval for an extra €88 billion in German support – some $118bn – for the European Financial Stability Fund.

Germany will now guarantee up to €211bn ($287bn) in so-called "bail out" loans to weaker member states. Some 40% of respondents to Bloomberg News' latest quarterly survey see at least one member state quitting the 17-nation currency bloc in the next year, and more than 1-in-3 respondents foresee a global recession sparked by the Eurozone's debt crisis.

"You suddenly have a crisis of confidence and trust that's impacting markets and could hurt economies," says one respondent, chief investment officer at Halkin Investments in London, Jean-Yves Chereau.

"Politicians need to move ahead pretty quickly."

Lack of political leadership is a key factor driving gold investment, said HSBC precious metals analyst James Steel last week at the London Bullion Market Association's conference in Montreal.

Gold's 10-year rise to date "shows that the political and financial systems the world lives by aren't working," agreed another LBMA Conference speaker, John Fallon of Peer Capital Management.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen's Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.