QE2, Sovereign Debt and Chinese Demand Projected to Double in a Decade

Gold

Gold and silver rose again yesterday with silver reaching a new nominal 30 year high. Both are higher in trading today as markets await concrete data regarding the scale of the second phase of quantitative easing. QE2 may already be priced into the markets but a smaller than expected figure could see money come off the table. A higher than expected figure could see further gains in all markets and further increase the risk of asset bubbles.

Gold is currently trading at $1,355.40/oz, €966.42/oz, £841.65/oz.

As expected, the US elections did not have any material impact on the precious metal markets. However, with all eyes on the US elections and the forthcoming QE2 announcement, little attention is being paid to the renewed risk of a sovereign debt crisis and sovereign default in the eurozone. Eurozone peripheral debt is surging again and the extra yield that investors demand to hold Irish debt over German bunds rose to a record and the spreads on Greek and Portuguese debt widened.

Irish Government Bonds – 10 Years (Weekly). Click on image to view full size.

These sovereign risks have not seen the euro come under pressure yet but will likely do so in the coming weeks which should see euro gold resume its upward trend once again.

Gold in Euros – 180 Days (Daily). Click on image to view full size.

Sterling gold is consolidating near record nominal highs at £863.13/oz and with the housing market weakening again and inflation remaining stubbornly high in the UK. While the incoming Conservative and  Liberal Democrat government has taken preliminary steps to tackle the UK’s massive fiscal challenges, they remain very significant which should see gold in sterling remain robust for the foreseeable future.

Gold in British Pounds – 180 Days (Daily). Click on image to view full size.

This is especially the case due to the very favourable supply and demand backdrop with global mine supply decreasing, central bank supply turning into demand and significant investment demand internationally, particularly in Asia.

A conference in Shanghai has heard that China’s gold market may double in the next decade as retail investment and jewellery demand gain. Wang Lixin, the World Gold Council’s Greater China general manager, said consumption may gain from 800 metric tons to 900 tons in the next ten years. "It probably will be achieved earlier than that."  He said that demand for gold jewellery in China may gain by 8 percent to 10 percent annually.

Silver

Silver has surged to over $25/oz this morning as jewellery buyers and investors internationally and particularly in Asia switch from record high gold to silver which remains half of its 1980 nominal high.

Indian demand has increased with significant buying seen for the Indian festival of Dhanterus today. The upcoming Diwali is also likely to lead to a rise in the silver coin prices in India and to higher demand for silver in India.

Silver is currently trading at $24.82 /oz, €17.70/oz and £15.41/oz.

Platinum Group Metals

Platinum is trading at $1,707.25/oz, palladium is at $643/oz and rhodium is at $2,175/oz.

Mark OByrne

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