247Bull.com Editor: What long-term gold investors need to remember is that in the short-term the paper gold market (COMEX gold futures) controls the price. On Friday 12 of April for example, 1,100 tonnes of paper gold were traded – equivalent to around 45% of total annual gold production. As the selloff continued on Monday 15th 2,300 tonnes of paper gold were traded – equivalent to more than 80% of total annual gold production. On that Monday 750,000 contracts were traded – the largest number ever recorded, and surpassing the previous record by 54%. Over the long-term however, it is the fundamentals of physical supply and demand that control the price of gold, and the fundamentals have never looked better.
The U.S. dollar gold price drifted back down towards $1420 per ounce Wednesday morning in London, around 1.3% up on the week so far, amid ongoing reports of strong demand for physical gold bullion.
“The bounce in price-sensitive physical demand, especially in the emerging world, is impressive and has lifted prices,” says HSBC Securities analyst Howard Wen.
Local reports from India, China and the Middle East said today that gold bar premiums remain at multi-year highs as private demand surges following last week’s price slump.
Several major bullion-bank analysts have cut their 2013 price forecasts since last week’s crash. Many, however, are now targeting prices close to current levels at $1425-1450 per ounce.
The US Mint meantime has suspended sales of its smallest American Eagle bullion gold coin, weighing one tenth of an ounce, Reuters reports Wednesday.
“While the one ounce gold bullion coins remain the most popular, demand for the one-tenth ounce coins has remained strong too, with year-to-date demand for these coins up over 118% compared to the same period last year,” says a statement issued to dealers Monday.
“Accordingly, the United States Mint has temporarily suspended sales of its one-tenth ounce gold bullion coins while inventories can be replenished.”
The Mint produced American Eagle bullion coins specifically for investment purposes, selling them to authorized purchasers such as coin dealers rather than direct to the public.
Yesterday saw gold exchange traded funds continue to reduce their bullion holdings, with ETFs tracked by Bloomberg seeing total outflows of 22.5 tonnes.
The world’s biggest gold ETF SPDR Gold Trust (ticker: GLD) accounted for 7.5 tonnes of this, taking its total holdings below 1100 tonnes for the first time since October 2009.
Silver meantime dropped back to $23 an ounce by lunchtime in London, a 1.2% drop on the week. Most other commodities were up on the day, as were most European stock markets, while US Treasuries were little-changed.
The gold-silver ratio, which measures the Dollar price of an ounce of gold divided by the price of an ounce of silver, has risen above 60 for the first time since September 2010.
“[Silver] has so far not been able to achieve any significant price recovery following last week’s slump – in contrast to gold,” says this morning’s commodities note from Commerzbank.
“The relative weakness of the silver price…is thus more likely attributable to weaker industrial demand, which accounts for more than 50% of fabrication demand.”
Over in Europe, economic confidence in Germany has fallen in April, according to the monthly IFO indices published Wednesday. Provisional purchasing managers’ index data released a day earlier meantime indicate German manufacturing has continued to contract this month, and at an accelerated rate, while its services sector has now also started to see worsening conditions.
“The fact that even in the most robust core [Eurozone] country, Germany, the surveys are disappointing lately should have implications for ECB policy,” says Gizem Kara, European economist at BNP Paribas in London, referring to the European Central Bank whose policymakers meet next week in Bratislava.
“The Eurozone economy is so weak and deflationary pressure remains such a force that the region has moved beyond the need for lower rates,” argues Steve Barrow, currency analyst at Standard Bank.
“In spite of thinking that [interest] rates will be cut [next week] we also believe that, whatever the ECB does with rates, it won’t be enough… perhaps the most controversial move we might expect is a cut in the Bank’s deposit rate, for this would take it into negative territory; something that most central banks have avoided.”
Barrow also suggests the ECB should consider quantitative easing measures as well as policies aimed at supplying more credit to small businesses.
Here in the UK, the Bank of England today extended its Funding for Lending scheme, which offers favorable borrowing rates to banks conditional on their lending to “small and medium-sized enterprises”, to January 2015.
In Italy meantime Enrico Letta, former deputy leader of the Democratic Party (PD), has been given a mandate to form a government by the country’s president Giorgio Napolitano, who days earlier became the first president to be re-elected by parliament.
The PD’s former leader Pier Luigi Bersani resigned last Friday. Italy has been without a government since the general elections two months ago.
Ben Traynor | BullionVault