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Gold Testing $1500, Silver Extends Worst Plunge in 24 Years

Commodities / Gold and Silver 2011 May 05, 2011 - 08:15 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticlePRICES in LONDON's wholesale spot gold market briefly dipped beneath $1500 per ounce the first time in a week on Thursday in London, bouncing to $1509 – and recovering faster vs. the Euro and Sterling – as both the UK and Eurozone central banks held their interest rates unchanged, significantly below the rate of inflation.

The Euro lost 1¢ to the Dollar on the news, helping the gold price in Euros reverse one-third of this week's 4.4% drop.

Spot gold priced in Sterling rose to £916 per ounce, less than 3% off Monday morning's sudden spike a record high above £940.

"The underlying pace of monetary expansion remains moderate," said ECB president Jean-Claude Trichet today, failing to repeat April's 0.25% hike.

"We have solid anchoring of inflation expectations."

"The [Bank of England] may not do anything until November," reckons former central-bank official David Tinsley at National Australia Bank in London, quoted by Bloomberg.

"The risks are potentially that they may be on hold for longer than that."

Trading 5% below Monday's short-lived spike to record highs above $1576, the spot gold price had earlier slipped on Thursday morning as Asian and European stock markets extended Wednesday's fall, taking the FTSE100 here in London down to a two-week low.

Commodity prices fell once again meantime, and silver bullion sank for the fourth day in succession, losing 22.5% against the Dollar since Thursday last week – the sharpest plunge since April 1987.

"If [other] commodities go down by 20%, we expect it to be short-lived," said Walter de Wet of Standard Bank to Bloomberg in London on Wednesday.

"Because this is not the end of the commodities boom, and we're not at the end of the cycle.

"Monetary policy in general still remains very, very accommodative and real interest rates very low, even in countries like China, where inflation is much higher than the deposit rate.

"That really favors precious metals," said de Wet to the newswire.

Over in Asia on Thursday, where the Tokyo stock and futures exchanges remained closed for the Golden Week holiday, "the level of activity is even less than yesterday," one Hong Kong spot gold dealer, noting that "exchanges around the world have been rolling out various measures to control their operational risk" in the face of huge volatility.

From Monday next week, the Shanghai Gold Exchange will raise the initial margin paid on new positions in its popular gold and silver futures to 18% of contract value.

A futher hike in margin requirements by the United States' CME will see speculators in US silver futures charged $21,600 per contract – up by 84% from a fortnight ago.

"Silver investors dump futures as Comex boosts speculator trading costs," says a headline at Bloomberg.

Yet the total number of outstanding silver contracts now open, however, has actually risen over the last week, swelling by 6.2% from Thurs 28 April.

Daily trading volume has gone the other way, standing one-fifth lower on Wednesday from a week before.

"India is already set to double its [private] silver purchases to 1,500 tonnes this year," reckons Mumbai analyst Harminder Baweja, quoted by MineWeb.

"There are reports that [corporate] reserve managers in China are [also] using gold to diversify their exposure to the Dollar. All these point to higher imports in both the countries."

Here in London, the volume of silver bullion held in trust at J.P.Morgan's vaults for shareholders in the New York-listed iShares ETF fell again on Wednesday, shrinking by more than 12% from this time a month ago to 10,387 tonnes.

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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