Gold and Silver Recover from Earlier Plunge on Fresh U.S. Dollar Weakness

Commodities / Gold and Silver 2010 Jan 13, 2010 - 08:14 AM

By: Adrian_Ash

THE PRICE OF GOLD regained a third of yesterday's 2.5% plunge in London dealing on Wednesday, bouncing as the US Dollar eased back and Wall Street futures pointed higher from Tuesday's 1.0% drop.

By the time New York traders reached their desks, gold priced in Dollars stood little changed from last week's close at $1137 an ounce.

US crude oil contracts meantime dropped below $80 per barrel as Asian stock markets closed sharply lower, catching up with Tuesday's late announcement from the Chinese central bank that it's raising the amount of cash commercial banks must keep in reserve to 16% of deposits.

Domestic lending in China – now the world's No.1 private consumer of physical gold – grew 32% in 2009. Local reports, quoted by the London Times, say an extra $86bn was lent in the first 5 days of this month.

"The central bank has to keep running to stand still," reckons UBS economist Tao Wang, because surging exports are sucking more money into China's economy.

Tuesday's move doesn't signal "any sort of serious monetary tightening" overall, he's quoted by Australia's FNArena.

In the global gold market, "The news from China's central bank triggered a wave of selling," says Tokyo fund manager Tetsu Emori at Astmax Co., speaking to Reuters.

"But the market still looks a bit overbought after active gold buying by index funds, especially at the start of the year."

Virtual Metals' new Precious Metal Investment Weekly for Fortis Nederland Bank shows a net increase of almost 0.2% in bullish gold investment on developed-world exchanges for the first week of Jan.

Speculation in US and Japanese derivatives contracts outweighing a slight pullback in gold ETF trusts.

New York's SPDR Gold Trust – the world's largest gold ETF – shed another four tonnes of metal to back its shares on Tuesday, reducing the fund's hoard to its lowest level since mid-Nov. beneath 1116 tonnes.

Silver investment positions also grew by 0.2% last week, the VM Group consultancy says in its new weekly report, as institutional futures trading added to a 20-tonne increase in silver ETF trust-fund holdings.

"With gold pushing lower we are seeing very good physical demand coming through," says Walter de Wet at Standard Bank in London today.

"As a result we expect the metal to remain well supported around the $1114-$1120 level, but we are also seeing good selling above $1130."

Ahead of India's spring wedding season, culminating with the Hindu calendar's third most auspicious festival – Akshaya Thritiya, falling this year in mid-May – "relatively low prices could prove a good buying opportunity" for jewelers needing to restock their inventory, says one wholesale dealer.

Gold imports to India, formerly the world's largest private consumer market, fell 18% in 2009 the Bombay Bullion Association said today.

Down to 343 tonnes from an already depressed 420 tonnes in 2008, gold imports rose sharply in December, the BBA notes – up from three to 34 tonnes as 2009 ended.

"Indians are slowly getting used to high gold prices, and that should sustain demand," says Angel Commodities Broking's Amar Singh to Bloomberg from Mumbai.

"There's a consensus that gold will stay high because of inflationary pressures and a weakness in the Dollar."

Both the Euro and British Pound rose to their best levels vs. the Dollar in four weeks, despite news of a worse-than-expected drop in UK manufacturing output and a full 5.0% contraction in Germany's economy during 2009.

French, German and Italian investors now Ready to Buy Gold saw the price trade below €778 an ounce – more than 3.0% beneath Monday's assault on last month's all-time highs.

The gold price in Sterling dropped 3.5% from Tuesday's five-week high, hitting a 6-session low beneath £700 an ounce.

Silver priced in Dollars meantime rose 20¢ per ounce to stand little changed for the week-so-far at $18.43.

UK investors wanting to buy silver saw the price drop 4.5% from this week's three-decade high.

Western government bonds meantime ticked lower as European stock-markets held flat after yesterday's drop, pushing 10-year US Treasury yields up to 3.74%.

The Obama White House said today that last year's $787bn stimulus helped save two million US jobs.

The House of Representatives last month approved an additional $155 billion package for government jobs creation.

Federal Reserve bank presidents Charles Plosser and Richard Fisher – neither of whom now vote on US monetary policy – said in separate speeches last night that unemployment will not decline until late 2010, but the central bank must still beware the "inflationary pressures" of leaving interest rates at zero.

In an interview with The Guardian published today, Bank of England policy-maker Andrew Sentance notes that although "there will be quite a lot of spare capacity and slack to take up" in the UK economy, "that is not the only influence on inflation."

"Inflation didn't fall as sharply as people expected last year, and in the short term it is going to go above its [2.0%] target," says Sentance, calling the UK's £200bn ($320bn) Quantitative Easing a Success.

UK inflation was last pegged at 1.9% per year on the Consumer Price Index. It hit 2.7% annually on the Retail Price measure ex-mortgage repayments.

Base Rate has been held at 0.5% since March last year. The gold price in Sterling has risen 9.0% since then, hitting a series of all-time record peaks above £700 an ounce.

By Adrian Ash
BullionVault.com