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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold and Silver Rally as Scrap Sales Dry Up

Commodities / Gold and Silver 2010 Jul 09, 2010 - 07:56 AM GMT

By: Adrian_Ash


SPOT-MARKET PRICES for wholesale gold crept back above $1200 an ounce in London on Friday, recovering half of this week's 2.2% drop as world stock markets pushed higher again.

The US Dollar and Japanese Yen both rose against the Euro and British Pound, while German bunds and UK gilts rose on weak inflation data, nudging yields lower.

Commodity markets held flat, with US crude oil contracts above $75 per barrel.

Silver prices rose above $18 an ounce, adding 0.7% from last Friday's finish.
"The appetite for gold arises partly from the paltry, uncertain returns from more conventional investments," says today's Economist magazine in a special briefing.

"Monetary policy has been keeping official interest rates, and thus the opportunity cost of holding gold, low...The yields on the government bonds investors regard as safest are also thin."

Noting that world stock markets "are weighed down" by poor economic data and that buying property "requires boldness" after the financial crisis, "The looseness of monetary policy has made many investors fear the eventual resurgence of inflation," The Economist adds.

"If you fear strong inflation, one should buy gold irrespective of the current price," says Dr. Martin Hüfner, chief economist at €3.5 billion asset manager Assenagon, writing today for the Frankfurt Stock Exchange.

"One should buy physical gold...not gold mining shares or gold certificates. Don't put your whole portfolio in gold, because it pays no interest. But it is your umbrella if it rains."

This week the People's Bank of China said it had no plans to replace US Treasury bonds with gold bullion as its "main channel" to reserves management.

"Although the Chinese may be happy to hold their reserves in Western fiat money," notes the latest Commodities Weekly from French bank and London bullion dealer Natixis, "other Asian central banks may remain more inclined to continue diversifying their holdings into alternative assets such as gold."
Asian central banks currently hold an average of 3.5% of their foreign-currency reserves in gold bullion. The global average is 15.3%, led by the United States' allocation to gold of more than two-thirds.

"The efficient frontier of a typical developing or emerging-market central bank can be enhanced by adding gold," says a new research report from Natalie Dempster at the World Gold Council, analyzing the "smoothing" effect of gold in a large, well-diversified portfolio.

"How much gold depends on a central bank's risk appetite: an allocation to gold of between 2.4% and 8.5% is optimal for a bank with around a 5% risk tolerance. At a risk tolerance of 8.3%, the allocation to gold increases to 29%."

The WGC also recommends "a tactical overlay to its strategic allocation in order to protect it from a particular set of downside risks it deems likely."

Researchers at the Bank of Korea this week called a Greek debt default "inevitable". The central bank last raised its gold allocation to 0.2% of reserves at the start of 2008. It surprised currency traders today by raising its key interest rate to 2.25%, the first change in 16 months.

The South Korean Won rose on the news, as did Seoul's Kospi stock index, which ended the day 1.4% higher.

China's domestic stock-market jumped more than 2% to recover one-eighth of the last 3 months' near-20% drop.

Back in the spot gold market, meantime, "Now that gold has fallen by almost $50," says Walter de Wet at Standard Bank, "the trend [in wholesale physical dealing] has reversed.

"With gold below $ selling and scrap sales have dried up. We believe that investment demand for gold will remain strong."

Estimating "strong seasonality" in jewelry demand, especially from India, as early as August or September, "We still see gold heading towards $1300 in, or just before, Q4:10," de Wet concludes.

By Adrian Ash

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 , 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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