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Gold Rises, Physical Demand Due to Inflation and Low Interest Rates, Not Middle East Crisis

Commodities / Gold and Silver 2011 Feb 17, 2011 - 12:46 PM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD continued rising for US investors on Thursday, finishing the day in London at a five-week high of $1383 per ounce as world stock markets held flat and the Dollar slipped on the currency market.

Developed-world government bonds ticked higher, as did crude oil prices, as Libya became the latest Middle Eastern country to see protests against its government on Wednesday, joining Algeria, Iran, Jordan and Morocco, as well as Tunisia and Egypt, which have already seen their long-time regimes fall.


"Support for metals will continue to come from tensions in the Middle East," reckons precious-metals analyst Tom Pawlicki at brokers MF Global in Chicago.

State TV in Bahrain reported today that the military will "take every measure necessary to preserve security" after 3 more anti-government protestors were killed.

"If things continue the way they are [in Russia], I think the probability of the Egyptian scenario will grow," said former Soviet president Mikhail Gorbachev in a widely-reported radio interview on Thursday.

"I'm ashamed for us and for the country," Gorbachev also told the Novaya Gazeta newspaper, accusing the "ruling class" of being "rich and dissolute".

Thursday's geo-political news left gold prices little changed outside the US Dollar, however, holding flat near yesterday's 1-month highs for Euro, Sterling and Japanese Yen buyers.

Official data today showed US consumer-price inflation rising to analyst forecasts of 1.6% year-on-year in Jan., forcing real interest rates paid to cash savers further below zero.

"Private investors, not only in the USA but also in Asia and Europe, clearly have a different point-of-view on the actual global economic and financial situation [from] institutional market-participants," writes Wolfgang Wrzesniok-Rossbach, head of sales at German refinery Heraeus, in his latest market report.

Private individuals "are still very much on the buying side, be it due to fear of inflation or worries about distortions in the international currency markets," says Wrzesniok-Rossbach.

"However this group is not going for exchange traded products like ETFs or certificates, but for physical metal directly."

Latest data from market-development and research group the World Gold Council shows a marked drop in new ETF trust-fund and "unallocated" gold account demand in 2010, both down 45% from 2009's record peaks.

"Demand for gold bars...maintained an impressive rate of growth in the fourth quarter," says the WGC's new Gold Demand Trends report, "gaining 63% year-on-year.

"The annual comparison was scarcely less impressive, 56% up on 2009 levels at 713.2 tonnes...Growth in this sector was dominated by China, where investors continued to clamour for gold bars and coins."

Overall, the WGC's new Gold Demand Trends says, total global gold demand in 2010 rose 9% by volume to its highest level since 2000, back when the gold price was just 22% of last year's average level.

Global copper supplies meantime shrank from a 410,000-tonne excess of supply over demand to a 20,000-tonne surplus in 2010, according to the World Bureau of Metal Statistics.

Slipping back from this week's new record highs on Thursday, copper prices "need to fall 20%" reckons New York hedge fund Red Kite, if China – the world's No.1 buyer – is to grow its demand substantially in 2011.

"While we do not view Chinese monetary policy as a long-term threat to rising demand for commodity prices, it does increase short-term price risks," says Standard Bank's daily commodity email.

Noting that "the real deposit [interest] rate in China is still negative and remains very accommodative," the opportunity cost of holding real assets – and "especially gold – remains low," says Standard.

"However, we do view credit rationing (fewer loans) and a substantial rise in the reserve requirement ratio of banks as a greater immediate negative impact to commodity prices."

By Adrian Ash
BullionVault.com

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 www.BullionVault.com , 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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