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Gold and Silver Rise vs. Falling U.S. Dollar

Commodities / Gold and Silver 2010 Jul 15, 2010 - 08:25 AM GMT

By: Adrian_Ash

Commodities

Gold & Silver Rise vs. Falling Dollar as Chinese "Take Refuge" in Precious Metals, World Faces "Shortage of Safe Assets"

THE PRICE OF wholesale gold bullion and silver rose against the US Dollar on Thursday, nearing new highs for July at $12.15 and $18.50 an ounce respectively, but slipping in terms of other currencies as government bonds fell and commodities gained.


Asian stock markets closed lower – and Eurozone equities held flat – despite investment-bank J.P.Morgan following chip-maker Intel and metals giant Alcoa with stronger than expected quarterly results amid the current US earnings season.

Sterling hit a new 11-week high against the falling Dollar, squashing the gold price in British Pounds back below £790 an ounce.

The Euro rose to $1.28, its best level since early May.

That offered Eurozone investors wanting to buy gold today a retreat towards €30,400 per kilo, almost 10% below gold's all-time high of last month.

"Primary resistance" in the Dollar gold price "remains at the 50-day moving average, $1220 today," says a note from one London dealer.

"It will likely need the Euro to convincingly take out barriers at $1.28 if it is going break higher."

Noting today's weaker-than-expected Chinese economic growth figures – down from 11.9% annually to 10.3% between April and end-June – "China's GDP figure is still relatively good," says Ong Yi Ling at Phillip Futures in Singapore, quoted by Reuters.

"That could prompt the Chinese to buy some amount of gold. I see an uptrend in the gold-friendly country."

Chinese households are now the world's second-largest gold consumers, growing their first-quarter demand by almost one-fifth on the GFMS consultancy's latest estimates, and very nearly matching private demand from the Middle East, Western Europe and the United States combined.

Total demand from Chinese consumers buying gold still lagged India's private demand by one-third, however.

"Chinese investors that would previously have sought refuge in either equity or real-estate markets have become significant buyers of precious metal instead," says the latest Commodities Weekly from French bank Natixis, noting to Beijing's attempts to curb bank lending for speculation in stocks and housing.

During the first-half of 2010, Natixis reports, gold trading volumes on the Shanghai Gold Exchange rose by 49%, and silver trading rose five-fold.

Gold bar and coin sales from China National Gold Group rose by 40% compared with the first-half of last year.

"[But] What will happen to these private Chinese holdings of gold once we see a bottoming of equity or real-estate markets in China?" the bullion dealer asks.

Short-term, "Gold seems to be reverting back to its [inverse] relationship with the Dollar," reckons Standard Chartered analyst Dan Smith, speaking to Bloomberg today. "There is also an argument that the sell-off in gold from its [early June] high was overdone.

"In the next few weeks, the safe-haven part for [Gold Investment] demand will be the most important thing to watch."

"Gold is the ultimate backstop to the sovereign crisis," agrees Bank of America-Merrill Lynch commodity research chief Francisco Blanch, speaking to Forbes and predicting a jump in gold prices to $1500 an ounce by end-2011.

"The key point to keep in mind is that there is very little gold held by emerging economies. The rest of [their] money sits in European government bonds and in US government bonds."

Writing in today's Financial Times, "The world suffers from a shortage of safe assets," says Mike Story, economist at investment manager Legg Mason's Western Asset subsidiary.

The yields offered by US Treasuries, German Bunds and UK gilts "can [therefore] remain low," Story believes – rather than spiking upwards as Western debt swells – because their relative scarcity means "the premium on safety and liquidity should remain high."

Emerging economies worldwide have expanded their local bond markets by some $5 trillion over the last decade, according to Story's math. But emerging-economy savings flows – their demand for lower-risk assets – rose by $10 trillion in 2009 alone.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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