The Gold Economy

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Cross-Currency Markets

Gold and silver have fallen marginally this morning. It is too early to tell whether the paper-driven sell off is over and some western buyers will wait for a higher weekly close. This is not the case in much of Asia where physical demand remains very robust and jewelers and investors are buying the dip. In India, this was seen in the strong Indian ex-duty premiums (AM $.5.36, PM $2.77) for gold yesterday.

The scale of Chinese demand continues to surprise some analysts and dealers. Growing Chinese demand over a period of years and China supplanting India as the largest importer of gold in the world, is what we have said was likely to happen for some time. Data shows China importing 209 tonnes of gold the first 10 months of last year, versus 333 tonnes for India for the whole year.

Many market participants tend to focus on the daily fluctuations and “noise” of the market and not see the ‘big picture’ major change in the fundamental supply and demand situation in the gold and silver markets – particularly due to investment and central bank demand from China and Asia.

The Financial Times reports that precious metals traders in London and Hong Kong were stunned by the strength of Chinese buying in the past month. “The demand is unbelievable. The size of the orders is enormous,” said one senior banker, who estimated that China had imported about 200 tonnes in three months.

The important fact that the Chinese people were banned from owning gold from 1950 to 2003, means that the per capita consumption of over 1.3 billion people is rising from a tiny base, is not realised by most. While the increase in Chinese demand has been very significant, it is likely to continue and the demand is sustainable due to Chairman’s Mao’s half-century gold ownership ban.

Should the Chinese economy crash, as some predict, demand could fall. However, sharp declines in Chinese equity and property markets and problems with the yuan would likely lead to significant safe haven demand.

UBS reports that “many refiners report a backlog of Chinese orders to fill, which suggests that the January buying was not solely for the festive season…the prospect of renewed impressive demand once China returns, should continue to support gold.” UBS also reports that while speculative shorts on the COMEX are at a 5 and half year high, there remains “elevated physical demand” and this “usually signals an impending bottom in price.”

Also of note is that “gold forward rates have tightened across the curve, with one-year borrowing rates 12bp lower since last Thursday. This is due to a steep increase in physical demand, and to less lending in the market.”

The physical gold bullion market is becoming less liquid, strongly suggesting that we could be close to the bottom in this sell off.

Gold

Gold is trading at $1,336.15/oz, €966.50/oz and £820.78/oz.

Silver

Silver is trading at $28.25/oz, €20.53/oz and £17.43/oz.

Platinum Group Metals

Platinum is trading at $1,825.50/oz, palladium at $804.50/oz and rhodium at $2,450/oz.