After marching steadily higher early in the week, gold and silver saw their biggest one-day losses in more than a month on Friday as hopes for more Fed money printing were dashed after the better-than-expected labor report. Still, both metals maintain impressive gains for 2012 after a disappointing end to 2011 as more attention is focused on precious metals demand in China and actions by central banks, two of the most important price drivers in recent months.
After rising above $1,760 an ounce for the first time since November, the spot gold price ended the week 0.7 percent lower, down from $1,737.30 an ounce to $1,725.90, as the silver price surged past the $34 mark before reversing course, ending the week down 0.9 percent, from $33.99 an ounce to $33.67. The gold price is now up 10.2 percent for the year, but down 10.3 percent from its 2011 high, and silver has risen 20.8 percent in 2012, down 32.0 percent from its peak last spring.
We'll find out soon enough if Friday's sell-off develops into anything more than a one-day event.
Clearly, there have been many good reasons for the price of precious metals to head higher over the last month - demand from China, loosening monetary policy by central banks, and increased gold purchases by central banks topping that list - and many technical analysts have been shocked by the ease which previous resistance levels have so quickly been surpassed and now function as support. Up until Friday, technical factors were unquestionably positive, but, with the late-week reversal, some now argue that the metals have come too far, too fast and the Friday correction will continue.
In this report at MarketWatch, Mark Hulbert noted that short-term gold market timers followed by the Hulbert Financial Digest have quickly turned from bearish to bullish over the last month and, based on previous surveys of this kind going back many years, this is viewed as a contrary, bearish indicator over the near-term. And, last week, CPM Group analyst Rohit Savant reiterated the company's call that there is "nothing new to push prices above the record levels we saw last year".
Well, central bank buying is relatively new and, based on recently released data on their purchases from last year and growing speculation that China added a significant amount to their holdings during the recent price dip (only to tell the world years from now as they did in 2008), there is good reason to think that prices could indeed go much higher.
In this item at BullionVault, Adrian Ash provided the chart below (click to enlarge) to demonstrate how dramatically central banks' views of the metal have changed in recent years.
Collectively, they've gone from net sellers of 300-500 tonnes per year to net buyers of the same amount, a development that, in itself, is a major reason for a rising gold price.
Importantly, it is emerging market nations who are now adding to their gold reserves as detailed here last week and, when combined with European central banks halting their decade long program of gold sales amid a seemingly never-ending sovereign debt crisis, this is an important new source of demand that is likely to continue growing.
China remains the most important source of new demand and the imminent launch of the first yuan denominated gold ETF by Hang Seng Bank should only add to its accessibility and appeal there. Last year, total gold demand in China is believed to have risen to an astounding 900 tonnes, nearly half of which came from domestic production, and this should outpace Indian demand estimated at 870 tonnes, once the world's unquestioned leader in gold consumption.
Increased import duties that now make gold more expensive in India as contrasted with the Chinese government's open encouragement of gold ownership by the public make it likely that Indian demand will not top Chinese demand in the foreseeable future and Chinese demand could be much higher than official statistics indicate. Some analysts believe that both domestic production and imports are much higher than available data indicate and that the People's Bank of China has been surreptitiously adding 100 to 200 tonnes to their reserves each year. As for the public, in the first week of the Dragon year, gold and silver jewelry sales were said to be up nearly 60 percent from a year ago
In the U.S., January gold and silver coin sales by the U.S. Mint rose to their highest level in a year, and, in my view, the interview subject in this Wall Street Journal story typifies the resurgence in gold buying in America:
Lois Hartman, a 56-year-old Iowa-based owner of a small manufacturing company, said she was a first-time gold-coin buyer in December after years of considering entering the market.
"[My husband and I] bought them because of the uncertainty over the future of the dollar, and we plan to purchase more as our finances allow," she said. "We got the one-ounce American Eagles."
That's a good choice - one ounce American Eagles are about the most cost-effective way to buy gold.
But, more importantly, I think you'll see this trend intensify in the year or two ahead - moderately wealthy Americans seeking to diversify their investment portfolios with physical gold or gold ETFs in light of Fed Chief Ben Bernanke's continuing "punishment" of U.S. savers with super-low interest rates that have now been extended out until the end of 2014.
There are likely millions more people out there now thinking the same way as Mr. and Mrs. Hartman.
Disclosure: I am long GLD, SLV. I also own gold and silver bars and coins.
