Gold and silver prices rebounded from the declines of the week before on signs that Western central banks are preparing to print more money to aid ailing economies and support financial markets. Meanwhile, in moves prompted at least in part by the liberal use of the printing press by Western central banks, there were new reports of emerging market central banks purchasing impressive amounts of gold bullion to be held as reserves, this group now being one of the most important sources of demand in the gold market today.
For the week, gold notched its first six-day winning streak in almost ten months as the spot gold price rose 2.0 percent, from $1,594.70 an ounce to $1,626.70, and the silver price gained 0.8 percent, from $28.53 an ounce to $28.74. Gold is now up 3.8 percent so far this year, down 15.4 percent from its 2011 high, and silver is now 3.2 percent higher in 2012, down 41.9 percent from its peak last year.
Following an International Monetary Fund report late last month of big gold purchases by the central banks of Mexico, Russia, Turkey, South Korea, the Philippines, and Ukraine, last week, the National Bank of Kazakhstan's said that it plans to further boost its share of gold from 15 percent to 20 percent of its total reserves, further displacing the euro as their debt crisis deepens. After having already purchased 10 tonnes of gold so far this year, the bank said it plans to purchase a total of 25 tonnes in 2012 and as much as much as 70 tonnes per year in 2013 and beyond.
This is just one more account of how emerging market central banks, as a group, are dramatically changing gold market dynamics with steady demand of 10 percent or more of global gold supply. After being net sellers for decades, central banks turned into net buyers in 2010 and, last year, purchased an impressive 455 tonnes of the metal in the largest single year addition to gold reserves since 1964.
Understandably, Asian central bankers have grown increasingly concerned about the value and sustainability of fiat money and about the relatively high holdings of euros and dollars within their foreign exchange reserves.
This feeling intensified after the 2008-2009 financial crisis and again when the European sovereign debt crisis began two-and-a-half years ago, all of which leads to the conclusion that emerging market central banks should be an important source of gold demand for some time to come.
The silver price received a good boost from the rising gold price and, in recent weeks, there has been growing interest in silver amongst investors as evidenced by the recent increases in the silver holdings for the iShares Silver Trust (SLV) as shown below via data from the iShares website.
Since early-May, there have been outflows of 196 tonnes from the trust versus inflows of over 400 tonnes for a net addition of 207 tonnes, highlighted by a 48 tonne gain on Friday.
Also, premiums for the Sprott Physical Silver Trust (PSLV) have risen steadily in recent weeks from below five percent to about seven percent as of Friday according to data at the Sprott website. After having risen to almost 30 percent in early-2011 when the silver price approached $50 an ounce, premiums are still a far cry from the "bubble" levels of 14 months ago, but it may have reached a bottom.
Last week, Goldman Sachs and CPM Group both published forecasts of just $30 an ounce for the metal, however, should the gold price rise later this year, look for "the poor man's gold" to tag along as it did in February when it surged as high as $37 an ounce.
The Chinese will no doubt play a key role in pushing the gold price higher and, last week, the Industrial and Commercial Bank of China said it expects investment demand for gold to rise 10 percent this year as China surpasses India as the world's biggest source of demand for the metal, likely topping the psychologically important 1,000 tonne mark. Also the world's largest gold producer, China saw gold production rise to 110 tonnes during the first quarter, up 6 percent from a year ago, as growing imports will be required to close the supply-demand gap.
As detailed in the Mineweb report China's growing middle class continues to dip itself in gold, it is the rise of the middle class in China that is a key component in the increased gold demand in both investment and jewelry form and that trend is not likely to change for the foreseeable future.
Additional disclosure: I have no position in PSLV but I also own gold and silver coins and bars.