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  • Chinese gold demand at record highs

    Hong Kong skyline Gold and silver prices logged decent gains yesterday on the back of the on-going crisis in the eurozone. The November Comex gold contract gained $35 (2%) to settle at $1,790.30 per troy ounce, with the equivalent silver contract gaining 2.2% (74 cents) to settle at $34.81 per troy ounce.

    As Trader Dan notes at his blog, irrespective of what hedge fund algorithms are doing on any given trading day, more and more people are looking to acquire physical bullion as a safe haven asset. This is in contrast to speculators, who are only interested in the leveraged gains to be had from playing in the futures market, and are not looking to acquire the actual metal.

    As pointed out in yesterday’s News commentary, there may be days or even weeks when gold and silver are smacked down hard by panic selling in the paper market, with large financial institutions eager to raise capital in the face of difficulties elsewhere on their balance sheets. But this merely offers those interested in holding physical metal more opportunities to buy gold and silver on price corrections. Over time, this process means that more and more metal is transferred to “strong hands” – that is, people who aren’t nearly as likely to sell as those trading paper gold. Higher prices are the inevitable result of this dynamic.

    The Chinese are a great example of these strong hands. As the Financial Times reported yesterday, imports of gold from Hong Kong to mainland China, said to be a proxy for the country’s overall overseas buying, leapt to a record high in September – 56.9 tonnes, which is nearly half the total for the whole of 2010. Janet Kong, managing director of research for CICC, notes that bargain hunters were encouraged to buy in September owing to the price dip that month. She notes that Chinese gold imports will continue to rise during this month and December: “We’ve noted a quite strong seasonality in gold prices, typically prices go up in the months before the Chinese New Year.”

    Chinese buying is being encouraged by persistent (and rising) inflation, as well as fears about economic problems in Europe and America. Aside from purchases by private citizens, along with other central banks in the developing world, the People’s Bank of China remains committed to diversifying out of US dollars and into gold bullion. The problem they face in trying to do this is that buying on a meaningful scale in the physical market would push the price up too high too quickly – further devaluing their vast stash of dollars relative to gold. Thus, they are looking to acquire gold directly from mines in China (which is now the largest producer of gold in the world).

    But with annual mine supply from all of the world’s gold mines just under 2,500 tonnes a year, and gold demand now close to 4,000 tonnes annually, central banks face an uphill battle if they are looking to newly mined gold as a way of increasing their reserves. Thus, if they are serious about selling dollars – and fiat currency reserves generally – in exchange for the yellow metal, they will have to do more buying in the physical market. This will of course lead to greater gains in gold prices.

    Nov 08 7:47 AM | Link | Comment!
  • Italy crisis deepens

    Falling plot line Italy’s borrowing costs have hit new euro-era record highs this morning. 10-year Italian government bonds are now yielding more than 6.6%, with Bloomberg warning that the country is heading down the same path taken by Greece, Portugal and Ireland.

    By way of comparison, Germany is able to borrow for 10 years at 1.76% (a paltry return for investors, given that eurozone inflation is currently running above 3%. But then, traders have made a mad dash for anything that resembles a “calm port” to ride out the storm battering the eurozone). This spread is now at its widest since 1995.

    Rumours are circulating that the European Central Bank is letting Italian yields soar in order to pressure Italian prime minister Silvio Berlusconi into resigning. This theory holds that owing to the problems facing Berlusconi’s government, forcing him out of office would be cheaper for the ECB than continuing to buy Italian bonds (and given that the ECB is leveraged by around 24 times, from a credibility standpoint it can ill-afford to be seen as an indiscriminate buyer of “Club Med” bonds).

    Given the political history of post-war Italy, however – with over 30 prime ministers having ruled the country in the last half-century – and the difficulty faced by those seeking to clamp down on corruption and public sector inefficiencies there, it seems a rather heroic assumption to assume that Berlusconi’s resignation will afford much relief for Italy. At best, it may offer a short window in which yields temporarily stabilise. Only time will tell.

    Gold and silver prices are hanging tough in the face of omni-present uncertainty in equities and commodities. The major risk as far as both these metals are concerned is that the euro crisis will prompt panic selling on the part of banks and hedge funds, as they rush to raise cash in order to shore up their balance sheets. However, this sort of short-term liquidity panic should not – as we never tire of repeating – detract from the longer-term reasons why owning precious metals is a good idea. As pointed out in Friday’s News article on moves by the IMF to increase its issuance of SDRs, monetary authorities are very far from “the end of the road” as far as issuance of paper currency is concerned.

    Nov 07 11:30 AM | Link | Comment!
  • Gold price recoups losses as Italy’s woes grow

    Gold and palladium bars There was further pandemonium in the markets yesterday, as traders came to terms with Greece’s referendum decision, and the fact that Italy appears to be on the brink of a serious financial crisis. The spread between 10-year Italian government debt and equivalent German debt spiked to 459 basis points yesterday, before the European Central Bank intervened – buying Italian bonds with new money in order to stop Italian yields soaring higher still.

    As Ambrose Evans-Pritchard reports in the London Telegraph, “the point of no return” for Italy could come when LCH.Clearnet introduces higher margin requirements for those trading Italian government bonds. The trigger for this would be if Italian yields moved to 450 basis points over a basket of AAA benchmark bonds. Yesterday, the spread reached 388 points. Andrew Roberts from RBS notes that Italy’s debt stress is “dangerously close to a level that could cause pandemonium in financial markets.”

    The effluence appears to be well and truly hitting the fan as far as the eurozone is concerned, with Italy’s woes placing new European Central Bank president Mario Draghi in a tricky position. Draghi, an Italian, cannot be seen to be acting in a partial manner towards Italian debt – yet monetisation of that debt remains essentially the last desperate option open to the eurozone. As one trader wryly notes in Pritchard’s article, Draghi “better find himself a German grandmother fast.”

    The gold price staged a $40 rebound from yesterday’s intraday lows around $1,680 per ounce, and has moved back above $1,730 in trading this morning. Silver has also recovered ground following a move back below $33 per ounce. Gold is holding up better than equities and commodities such as copper and crude oil, with safe-haven buying providing support for the yellow metal. That said, in the short-term, the dash for cash – specifically US dollars – in the face of eurozone problems and concerns about possible bank failures means that gold and silver prices are facing headwinds.

    However, over a longer time frame, a slow-and-steady devaluation of the greenback relative to other currencies remains the US Federal Reserve’s chosen plan for dragging the US back to health. With this objective in mind, speculation has been increasing that the Fed may announce the start of another round of quantitative easing later today, following the conclusion of its latest two-day Federal Open Market Committee meeting.

    This remains unlikely, however, given the rises in consumer and producer prices in the US in recent months, and the increasing political controversy surrounding “quantitative easing”. Expect instead that Bernanke will reiterate the Fed’s attentiveness to the “threat” of deflation, and that it stands ready to engage in further easing should this be warranted.

    Nov 02 1:04 PM | Link | Comment!
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