Despite CME Group (Chicago Mercantile Exchange) lowering margin rates for futures accounts, a stronger trade-weighted dollar spurred by safe haven buying due to Greece's latest sovereign debt troubles sent precious metals prices sharply lower on Friday.
Before the late-week sell-off, the gold price had tested the previous week's multi-month high while silver reached a fresh three-month high as China continues to be the most important story for precious metals markets in 2012, speculation growing about how much gold their central bank is buying and how high retail gold and silver sales will rise this year.
For the week, the gold price fell almost four dollars, from $1,725.90 an ounce to $1,722.10, as the silver price dropped eight cents-- from $33.67 an ounce to $33.59. The yellow metal is now up 9.9 percent for the year, but down 10.4 percent from its 2011 high, and silver has risen 20.6 percent in 2012, down 32.1 percent from its peak last spring.
Despite its "safe haven" reputation, over the short-term, gold continues to move with other risk assets when investors become skittish and seek safety in the U.S. dollar and U.S. Treasuries, almost exclusively. Such was the case on Friday, as elected officials in Greece resigned their posts in protest of austerity measures that they thought went too far, imperiling the next $170 billion in bailout money needed to avoid a debt default next month that would plunge the area into chaos.
Dollar-denominated cash is still king at times like this, and a temporary setback for precious metals should not have been surprising. However, what was a bit surprising was that the silver price held up so well in recent days given its volatile nature.
As indicated below, there has been resurgent interest in the iShares Silver Trust ETF (SLV) as the world's most popular silver ETF added 190 tonnes to the trust in just the last two weeks.
Along with physical buying, there appears to be strong investment demand for silver at current prices. While I wouldn't expect the metal to move too much higher without a similar move higher for gold (as was the case in the spring of last year), there's a good case to be made for the two metals rising together this year.
Last year's wicked sell-offs in early-May and late-September are quickly fading into traders' rear view mirrors. In a world now awash with paper money, any metal that has functioned as money in the past will continue to have strong appeal.
CME Group made it a bit easier for silver prices to rise in the period ahead when they slashed margin requirements late on Thursday for a host of commodities, including gold and silver. Initial and maintenance margins for gold were cut by 12 percent, meaning that a gold contract that used to cost $11,475 now costs only $10,125, and silver margin requirements were reduced by 13 percent. Though the changes won't go into effect until the close of business on Monday, there is normally a psychological impact on prices. However, that was easily trumped by the latest trouble in Greece that made futures traders risk averse.
Regardless of what goes on in U.S. futures markets, China remains the "elephant in the room" as far as the gold market is concerned, and last week the Hong Kong Census and Statistics Department reported that-- while December gold imports from Hong Kong fell sharply from the November record of 103 tonnes to just 39 tonnes-- Chinese gold imports for all of 2011 surged a whopping 259 percent to nearly 428 tonnes.
While some may view the December decline as a negative development, imports have traditionally declined during this month as dealers tend to stock up well in advance of the Lunar New Year in January-- and the tumbling gold price last fall likely pulled many of those purchases forward. UBS precious metals strategist Edel Tully noted that "the real outliers were shipments in October and November, which were greatly in excess of previous months' volumes and while December's activity is the lowest since July, it's still 245 percent higher year on year".
Rising incomes, high inflation, low real interest rates, and a government effort to halt speculation in real estate have all contributed to the surging demand for precious metals by the Chinese public as New Year sales were said to be up 50 percent from a year ago. Caibai, one of the nation's largest retailers, said gold, silver and jewelry sales rose nearly 60 percent.
The Chinese central bank could also have been a buyer of some of the gold imported late last year as they've made no secret about their plans to add to their gold reserves on pullbacks in the price. What they have been secretive about, however, is telling the rest of the world when and how much of the metal they're buying. Recall that in early-2009, much to the surprise of the gold market, the Chinese announced that their gold reserves had increased from 600 tonnes to 1,054 tonnes over the previous five years. Most analysts, including myself, expect a similar announcement sometime in the years ahead.
Lastly, in a report by HSBC, central bank buying was cited as the main reason for gold prices to move higher this year, the bank predicting that the metal will top $2,000 an ounce and average $1,850 in 2012. The report noted, "Two by products of the global financial crisis are declines in investor confidence and eroding trust in the financial system and government policies. The climate is conducive to investors to re-establish and build long positions in the bullion market".
Disclosure: I am long GLD, SLV.
Additional disclosure: I also own gold and silver bars and coins.
