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Gold Consolidates in All Currencies While Silver Breaks Out

Commodities / Gold and Silver 2010 Jun 16, 2010 - 06:11 AM GMT

By: GoldCore

Commodities

Best Financial Markets Analysis ArticleGold added 1.1 percent yesterday, the most in a week and is up marginally today and trading within 1.3 percent of its record nominal high of last week. Gold appears to be consolidating above $1,200/oz and a this may be the pause that refreshes prior to new record highs. Gold has also risen in other currencies and is back above €1,000/oz as concerns about sovereign debt issues and economic growth in the eurozone continue.


Gold priced in sterling appears to be consolidating above £800/oz and the challenging fiscal and economic situation facing the new government will likely weigh on sterling. Gold is currently trading at $1,235/oz and in euro, GBP, CHF, and JPY terms, gold is trading at €1,006/oz, £835/oz, CHF 1,397/oz, JPY 113,221/oz respectively.

Oil is trading higher and near $77 a barrel and there are growing concerns about how the massive oil spill may affect the US economy and how it might affect the future of oil production. European investors and pensioners are concerned that the sharp fall in the value of BP and the risk posed to the substantial dividend payments will affect their portfolios.

Gold in GBP - 30 Day (Tick). Click on image to view full size.

Markets await important housing and industrial data from the US, while the UK will release unemployment data and the eurozone will release CPI for May.

Silver

Silver is currently trading at $18.59/oz, €15.12/oz and £12.56/oz. Silver has risen 0.3% today in USD and by much more in other currencies (see Cross Currency Table) and appears to have broken out and is again looking well technically with it having broken above $18.50/oz and showing a mini reverse head and shoulders pattern. Whether this is another false breakout remains to be seen but silver's fundamentals remain sound and the belief that it will begin to catch up with gold seems sound.

Platinum Group Metals

Platinum is trading at $1,585/oz and palladium is currently trading at $477/oz. Rhodium is at $2,425/oz.

News

In his latest Letter, Dennis Gartman discusses yesterday's attempt for gold to rally based on the Greek debt downgrade by Moody's. Not only did physical gold peter out but so did gold-related stocks. That got people talking about a so-called "gold bubble," and whether it's deflating. Gartman: We find it interesting that amidst the talk of a "Bubble" in gold, Market Vane's bullish consensus figures are... and have been... hovering at 70%. Bubbles occur when the bullish consensus gets to 90% and above, and even then it must be there and stay there for several weeks before corrections of consequence develop. Bubbles don't occur at 70%. 70% bullish enthusiasm for gold is really quite normal. Certainly it is not "Bubble-y" (Business Insider).

To reflect its position as the "city of gold", Dubai has launched a new edition of the "Visions of Dubai" gold coin series here. The 24-karat gold coins have been launched by Dubai Multi Commodities Centre (DMCC) and the World Gold Council (WGC) and feature an image of the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, on one side and the iconic landmark Palm Jumeirah on the other. The unique collectibles have been especially designed to represent Dubai and reflect the emirate's position as an important hub for gold in the Middle East region "The Visions of Dubai - Palm edition gold coins have been created to commemorate the innovative spirit of Dubai, and the world-class landmarks that have been established. It is a true celebration of Dubai s status as the 'City of Gold'," Executive Chairman of DMCC Ahmed bin Sulayem said. It will be available in various sizes at the Dubai Duty Free outlets and leading gold retailers here."We consistently strive to create enduring value for all stakeholders, and through our collaboration with the DMCC and the launch of this gold coin, consumers are provided with a practical, long-term investment opportunity," MD, WGC India, Middle East and Turkey Ajay Mitra said. The coins come in 34 g, 17 g, 8.5 g and 1/10 oz (3.4 g) and are produced by Emirates Gold Refinery DMCC (PTI).

Bill Gross, manager of the world's biggest bond fund, opted to insure debt from developed countries rather than buy it earlier this year. Gross's Pimco Total Return Fund increased the credit- default swaps it sold on bonds from Group of Seven nations such as the U.S. and the U.K. to more than $3 billion in the first quarter, according to a June 7 regulatory filing. The $228 billion fund was insuring debt from six of the G-7 countries as of March 31, while no longer holding a $30 million contract on Italian bonds. The credit swaps enable Pimco Total Return to earn premiums without taking the risk, frequently cited by Gross, that rising G-7 budget deficits will fuel inflation, pushing up interest rates and driving down bond values. Pimco said the chance of a default by countries such as the U.S. and U.K. is diminished because they control individual currencies with which to pay creditors, unlike Greece and other euro-zone nations (Bloomberg).

The sovereign-debt crisis engulfing Greece risks spreading to Britain and the U.S. unless decisive steps are taken to rein in their budget deficits, said former Bank of England policy maker DeAnne Julius. "We're living in a world economy where there are massive pools of liquidity and the tides shift and they usually shift to target the weakest link," Julius said in a Bloomberg Television interview in London today. "At the moment that's been Greece. They're now looking around to see where else in Europe and the euro area it might be, and indeed I think the risk that this economy and the U.S. faces is that unless we get control of our debt burden we could be in line at some point as well."

Bill Gross, manager of the world's biggest bond fund, has grouped the U.S. and the U.K. with Greece, Spain, Ireland and Italy in a "ring of fire," comprised of countries with the potential for public debt to exceed 90 percent of their gross domestic product within a few years (Bloomberg).

Buying 500 Vietnamese taels of gold, a large but not exceptional purchase equivalent to a little under 19 kilogrammes, takes more than 2.5 times that weight in local bank notes. For purchases of that size, Bao Tin Minh Chau, a Hanoi gold dealer, offers complimentary armoured car service and home deliveries.

Per dollar of income, the Vietnamese consume more gold on average than anyone else on earth: in 2009, more than twice as much as Indians, 10 times as much as Chinese and 44 times as much as Americans, according to World Gold Council data. This heavy habit is creating concerns in the corridors of power by contributing to the country's chronic trade deficit, as most gold is imported. This in turn adds to pressure on the dong, Vietnam's currency.

The World Gold Council estimates that Vietnam's net imports of gold were worth $2.3bn last year, or more than 20 per cent of the country's current account deficit. At the official exchange rate, the dong has lost almost 11 per cent of its value against the dollar since the beginning of last year, although it has become more stable over the past couple of months and the black market rate indicates that it would fall still further if the currency was allowed to float freely. "People want to invest in gold because they believe that the dong is overvalued," says Do Xuan Quynh, a manager at Bao Tin Minh Chau.

Gold demand dropped by 37 per cent in 2009, partly as a result of the global slowdown and as investors sold off holdings into a rising market. But Mr Do believes that as the economy recovers, gold consumption could grow as much as 50 per cent this year.

"Demand is still growing because people don't believe in any other channel of investment," Mr Do says.

Speculative and largely unregulated margin trading in gold grew so rapidly - trading volumes fluctuated between $1bn and $1.5bn a day late last year, as opposed to $200m-$500m a day on the dollar foreign exchange market - that the government stepped in at the end of last year and ordered gold trading floors to close.

The feeding frenzy on the trading floors is symptomatic of a country where gold holds a unique emotional and economic significance.

Houses are frequently priced in gold, jewellers have illuminated signs displaying buy and sell rates on their walls - bangles and chains are sold by weight, with little if any premium for the jewellers art - and there are an astonishing number of streetside shops in Hanoi and Ho Chi Minh City selling safes.

In the run up to Tet, the Vietnamese new year which fell in February and is a time of traditional spending, Saigon Jewellery, the state-owned goldsmith that controls 40 per cent of the market, released 30,000 taels of gold a day (1,120kg) to satisfy demand.

Gold is effectively a parallel currency, says Scott Robertson, a senior economist with Dragon Capital in Ho Chi Minh. "It is a form of savings, people transact in it and it earns interest on deposit," he says.

Many Vietnamese banks were offering 4.5 per cent interest by weight on gold deposits last year, 300 basis points above the rate they were offering for dollar deposits, and banks took in some $3bn worth of gold deposits in 2009, more than double what they held the previous year.

There are no accurate surveys as to how much gold Vietnamese hold, but Mr Robertson estimates that "street gold", sums held outside the banking system, amounts to about $30bn, or 29 per cent of gross domestic product, and more than triple the volume of "street dollars".

The wars and vast political upheavals that have ripped across Vietnamese society over the past six decades created a disposition toward assets that are liquid, portable and hold their value independent of bureaucrats, Mr Robertson says.

But he also says that Vietnamese investors have become expert hedgers of their currency and of equity risks. He points out that there was a huge spike in gold imports in mid-2008, just before the world stumbled into the financial crisis, although he declines to say whether he thought the move was driven by good luck or good judgment.

Dollars are popular, but have a number of shortcomings. Many Vietnamese have lingering memories of January 1996, when the US Treasury introduced new $100 bills and local currency dealers began refusing to accept older bills at par.
That is not the only problem. "Dollars fall apart in a highly humid environment. They go off," says Mr Robertson (FT).

This update can be found on the GoldCore blog here.

Mark O'Byrne
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