Gold Strong Demand from India, China and Middle East

By: Mark_OByrne

Gold's recent sell off continued and gold was down $18.30  to $886.60 per ounce in trading in New York yesterday and silver was down 42 cents to $16.31 per ounce. Gold traded sideways to slightly up in Asia and early trading in Europe and is up to $890. Silver has also fallen and is down to $16.56 per ounce.

Gold was stronger in the other major currencies .The London AM Fix at 1030 GMT this morning was at $892  (up from $889.75 yesterday). Gold fixed at £455.61 (up from £452.06  yesterday) and €610.88  (up from €605.60 yesterday).

Gold's weakness has continued with the dollar strengthening and oil weakening but the sharply weakening US economy, strong inflationary pressures (wheat surged to new record highs yesterday) and negative real interest rates will create safe haven demand for gold. Yesterday's services sector data was extremely bad. It was the weakest ISM reading since October 2001 (immediately after 9/11) and this in conjunction with the raft of other negative data (including the very poor jobs number of Friday) would suggest that the US is already in a recession.

The question continues to be not whether there is a recession but rather how deep is the recession and what from does it take. Given the massive imbalances facing the US economy and the unprecedented property, credit and soon to be solvency crisis, this recession will not be a shallow and benign one as experienced in recent history. Rather it is more likely to resemble that of the stagflationary 1970's or of the Japan's lost decade of deflation in the 1990's. Weimar Germany's hyperinflation is unlikely at the moment but if ‘Helicopter Bernanke' continues to rain paper dollars on the US economy in order to prevent a 1930's style deflationary depression, a virulent form of inflationary recession could take hold.

Physical Demand from India, Middle East and Asia
There has been a continual refrain from the bears that the decline in demand from India was negative for gold. This was claimed when gold reached $500, $600, $700, $800 and now $900. We have pointed out that this is extremely simplistic. India is a price sensitive gold buyer and thus will support the market on any sell off in gold's price. Just yesterday there were indications that Indian buyers were buying physical below $900.

More importantly, there is now extremely strong physical demand globally and in particular from China, wider Asia and the Middle East.

Turkey's gold imports in January, according to the Istanbul Gold Exchange, jumped 69.4% above December's to 18.55 metric tonnes. This was also 16.1% above January '07. January's weighted average $US price, according to the Exchange, was 10.4% above December's and a startling 41.2% above January '07. Presumably much of the buying was done in the brief break below $890 January 17-23rd.

China gold futures were recently launched on the Shanghai Futures Exchange (SFE). "The launch of gold futures is very welcome as investors are eagerly looking for new investment tools given the stock market's high valuation and volatility, and the property market is under severe control," Hu Yanyan, a gold futures analyst with Shanghai Jiuheng Futures Brokerage, said.

Bloomberg reported that the start of trading in Shanghai was "the biggest event in the gold market since the launch of the gold exchange-traded funds over the past few years,'' John Reade, analyst at UBS Ltd. in London wrote in a report. "Futures will allow leveraged investment in gold from Chinese investors and speculators.''

"Chinese investors obviously have enthusiasm for gold and the futures provide them with a leveraged, low-cost exposure to bullion,'' Zhu Bin, head of research at Nanhua Futures Co., said by phone from Hangzhou. "Given the wobbly equities market and gold's continuous climb in the past seven years, everyone seems to think that gold is a good investment.''


Support and Resistance
Support is now at $850 to $860 and this should provide strong support and make a good buying opportunity for those with a medium to long term outlook.

FX
As the Wall Street sell off continued across Asian and further into Europe this morning, the FX markets turned risk averse. The biggest gainer in this was the Japanese Yen, with most high yielding currencies being sold aggressively against the Yen.

The Euro continued its sell off prompted by weaker than expected Eurozone PMI figures released yesterday morning. The Euro fell across the board almost erasing the previous two days gains against Sterling and the Dollar. The uptrend still remains intact however while the Euro remains above 1.4300 against the Greenback and above .7390 against Sterling. A close this weak below 154.00 for EUR/JPY could trigger the next downward leg for this currency pair.

A combination of lower commodity prices and risk aversion saw the commodity currencies fall against the dollar.

Silver
Silver is trading at $16.40/45 at 1200GMT.

PGMs
Platinum has sold off from new record highs and is trading at $1795/1805 (1200GMT).

Palladium has also sold off and was trading at $413/418 an ounce (1200GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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