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Gold "Goes Quiet" as US Futures' Position Hits18-Month Low

Commodities / Gold and Silver 2011 Feb 07, 2011 - 07:51 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleWHOLESALE PRICES to buy gold and physical silver bullion were unchanged on Monday morning in London, holding steady with commodity prices as global stock markets rose.

With the US Treasury slated to sell $72 billion in new debt this week, major-economy government bond prices slipped, pushing 10-year UK gilt yields up to  a 9-month high ahead of Thursday's Bank of England decision on interest rates.

The Bank of England last changed its key "Bank Rate" in March 2009, cutting the cost of loans to commercial banks to a record low of 0.5%.

Since then, prices to buy gold have risen by more than one-quarter against the Pound Sterling, rising 17% in real, inflation-adjusted terms.

Cash held in UK bank-deposit accounts has meantime lost 6.5% of its real purchasing power.

"Gold is going quiet," Bloomberg today quotes Pete Sorrentino, a manager at the $13.8 billion Huntington Asset Advisors fund group in Cincinnati, Ohio.

"It's good and healthy and characteristic of gold's stair-step rally."

Gold prices "ought to be supported by safe-haven buying in regards to the tensions in the Middle East," says MKS Finance in Geneva, "while the high oil prices will surely be lending a hand" to demand, too.

The central bank in India – the world's No.1 consumer market for buying gold – warned on Monday that ongoing unrest in Egypt and across the Middle East threatens to send oil prices higher still.

"We also expect physical demand to come back from the Far East soon," says MKS, "when [the Chinese New Year] holidays will be over."

Hong Kong dealers returned to work on Monday, but with mainland China not back until Wednesday, trade was "very slow" said one, with gold prices on the electronic Globex platform starting the day $5 per ounce below last week's New York close of $1347.60.

"A two-and-a-half-year trend line support comes in...near $1295," says Scotia Mocatta's latest technical analysis.

"This $1300 area also represents the 50% pullback of our last up leg from $1158 [in July 2010] to $1430 [in Dec.]"

New data, released after Friday's close in New York, show the total amount of open interest in US gold futures and options shrinking last week at the fastest pace since at least 2005, down by 19% to a 10-month low.

Speculative, non-industry players cut their "net long" position of bullish minus bearish bets by 1% to the equivalent of 668 tonnes – the lowest level since July 2009.

In Comex silver futures – where open interest remained flat in the week-ending last Tuesday – the price of current-month metal has risen above future-month contracts, a rare situation known as "backwardation".

In contrast to the usual "contango", this means near-term delivery is priced more richly than the storage and interest-rate costs involved in delaying settlement.

"In just one month and one week," noted Gene Arensberg in his GotGoldReport on Sunday – "we have gone from the highest entire-spread contango in 26 months to essentially a zero-contango, backwardated market for silver.

"That speaks of extraordinary demand on the front end of the futures strip, and confirms heavy physical demand we believe."

Physical delivery times for wholesale silver bars in London – heart of the world's physical bullion markets – have improved. But major dealers continue to offer three-day settlement or longer, compared with the more normal two-day terms.

"A global liquidity super-cycle continues to overshadow the world economy," writes Steve Barrow, chief currency strategist at Standard Bank.

"Excessive liquidity has already led to asset price inflation...But rather than inflate house prices and other assets, as it did before's commodity prices – and hence goods inflation – that are [now] taking much of the strain."

Noting the oil-price spike of mid-2008, "the credit crunch and deep recessions soon put paid to this pressure," says Barrow. "Our concern is that there's no such brake now."

By Adrian Ash

Gold price chart, no delay   |   Buy gold online at live prices

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 2011

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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