Gold

Gold was down 1% ($9.50 to $918.10) but silver remained firm and closed marginally lower (down $0.06 to $17.92) and profit taking on oil’s weakness was seen by many as the primary cause of yesterday’s sell off. Gold traded sideways in Asia but has rallied in early trade in Europe.

With increasing doubts about the sustainablity of the recent rebound of the dollar and of global stock markets, safe haven demand for gold is likely to reaccelerate in the coming weeks.

The dollar has not shown any direction this morning and oil has rebounded somewhat after yesterday’s sharp sell off and this is leading to a lack of direction in the gold market in trading in London.

Today’s Data and Influences

Today, the focus will return to the U.S. housing market with existing home sales for April due for release this afternoon. The data is expected to confirm continuing serious difficulties in the U.S. housing market which is likely to lead to a continuing contraction in GDP growth with obvious implications for the dollar and U.S. economy.

China Gold Demand Surges as Chinese Investors Diversify

While the World Gold Council confirmed an expected decline in demand for gold in the first quarter after the huge price increase (from $840 at the start of the year to over $1000 by mid March or a 19% increase in less than 3 months) demand remained remarkably robust (especially investment demand) and shows that there is a floor under the market supporting prices at these levels.

While jewellery demand declined expectedly, it is investment demand that is assuming increasing importance especially in light of the deteriorating global macroeconomic and financial fundamentals.

Resource Investor reported that "in marked contrast to India, demand in China grew by 15% to 101.7 tonnes, with both jewellery and investment demand increasing during the first quarter as continued economic strength allowed consumers to increase their purchases regardless of the rising price. Jewellery demand rose 9% to 86.6 tonnes and investment demand surged 63% to 15.1 tonnes."

China is assuming increasing importance in the global economy and in the gold markets and will continue to do so and Chinese demand is likely to increase towards the huge levels seen in India which will result in a markedly higher gold price in the coming years.

Gold ownership for Chinese citizens was legalised in 2004. A system for selling bullion to the largest population in the world (some 1.3 billion) is now in operation. And the effect on global gold demand is likely to be staggering. The Chinese Central Bank is also diversifying out of U.S. dollars and into gold. In March 2006, the National Development & Reform Commission of China said that “China intends to more than double its gold reserves to 1,270 tonnes this year.”

Another important development in China is that the Shanghai Gold Exchange (SGE) has allowed tangible gold trading by individual investors. The new gold trading allows investors to receive tangible investment grade (0.9999) gold on delivery. It is an additional investment alternative and will likely lead to diversification amidst increasing uncertainties in the stock market. The Chinese stock market has been very volatile of late and is down 43% in the last 6 months (from over 6,000 to 3,500).

China’s appetite for gold continues to increase and according to the China Gold Association, China became the third biggest consumer of gold in the world earlier this year.

In an interesting and important article (http://www.chinadaily.com.cn/bizchina/2007-07/04/content_909536.htm) in the China Daily: " . . . Chinese analysts noted that trading of tangible physical gold itself would attract many more individual investors. "Compared with the previously traded products for individual investors on the SGE, paper gold for example, the trading enables investors to deliver tangible physical gold and would hence attract many investors," said Tang Mingrong, an analyst with Ling Rui Gold Investment Co. "The increasing need of hedging risks by individual investors spurs the launch of physical gold trading," Tang said. Buying gold is widely seen as an effective way to reduce risks in an investment portfolio, as gold prices remain relatively more stable in times of economic and market uncertainties. Concerns about worldwide inflation also add to the charm of investing in gold. "The further opening of the gold market to individual investors would provide them more investing channels and alleviate the excess liquidity in the nation’s financial market," said Wang Lixin, general manager of World Gold Council, Greater China. "

With the recent huge volatility in the Chinese stock market and increasing signs of rampant speculation in stocks, it seems likely that there will be further diversification into gold by Chinese investors resulting in sharply higher prices in the medium and long term.

Silver

Silver is trading at $18.05/18.10 per ounce at 1100 GMT.

PGMs

Platinum is trading at $2175/2185 per ounce (1100 GMT).
Palladium is trading at $453/458 per ounce (1100 GMT).