Gold & Silver Prices Halve Their Drop But Shanghai Premium "Crashes" as China Re-Opens, ECB Cuts Interest Rate

SPOT GOLD and silver prices ticked higher in London trade Thursday morning, recovering half of yesterday's sharp drop as world stock markets held flat but commodities also bounced.

Priced in the Euro however both gold and silver were little changed as the single currency bounced back towards yesterday's 2-month highs on the European Central Bank's decision – widely expected – to cut its key interest rate to a new all-time low of 0.5%.

Eurozone government bonds rose in price, nudging yields lower except on Greek and Portuguese debt.

Interest rates on 2-year French and Italian bonds both fell to record lows.

Asked if they would support using Italy's gold reserves – the world's 3rd largest national hoard – as collateral for new bonds at cheaper rates, 52% of the public and 61% of business leaders said yes, according to a survey conducted for the World Gold Council.

"Truth is," says a London bullion bank dealer in an email, "the hedge fund world has been busy placing barriers [for the gold price] at around $1490," with portfolio managers using the week's earlier rally to exit positions in exchange-traded trust funds.

Estimating that a further 124 tonnes of exchange-traded trust fund holdings are still showing a loss for investors, "As long as those gold bars at stake are not cleaned out we will face a bearish bias," he adds.

"It's the end of an era," Bloomberg quotes Michael Haigh, New York's head of commodities analysis for Société Générale.

"ETF flows and hedge fund flows have gold changing direction for the first time in a long, long time. Prices are going to be dropping."

In contrast to Western money managers however, private investors worldwide took April's price crash – the sharpest monthly drop since August 2008 – as a cue to buy gold and silver.

Sales of newly-produced American Eagle gold coins last month hit a 3-year high the US Mint said Wednesday.

The Austrian Mint says it sold 10 times as many gold Philharmonic coins as it did in April last year.

Consumer spending on gold and jewelry in Shanghai more than doubled last weekend from the same Labor Day holiday in 2012, according to the Commission of Commerce.

Hong Kong retailers report being "swamped" by gold-buying tourists from the Chinese mainland – now the world's 2nd largest gold consumer nation – seeking to enjoy the city's lower premiums above international wholesale prices.

"The Chinese market opened again overnight, but little in the way of gold buying was seen," says dealer Marex Spectron in a note.

Shanghai premiums "crashed out to $10" above London benchmark prices according to another trading house, "having opened today at $25, down from a recent high of $65" per ounce.

"[This] certainly sends a signal that physical buying has seen some kind of peak, and the price may need to lower to re-kindle demand."

Meantime on the data front, both Eurozone manufacturing and UK construction activity slowed their contractions in April, new PMI numbers from Markit said.

Ahead of tomorrow's key US non-farm payrolls data, the private-sector ADP report came in below expectations, while US central bank the Federal Reserve left its key interest-rate at 0.25% and kept its quantitative easing program at $85 billion per month.

"Household spending and business fixed investment advanced," the Fed's policy statement said, "and the housing sector has strengthened further, but fiscal policy is restraining economic growth" – an escalation of its previous calls for more deficit spending by the government.

"While for the moment," says a report from the fund managers at Blackrock Gold & General – now celebrating its 25th year – "the recovery in the US, the associated strengthening of the Dollar and the lack of imminent inflation are taking centre stage, we believe gold’s journey is far from over."

Amongst other factors, says Blackrock, "the risk of rising inflationary pressures in the medium term, and the regular reminders of the structural imbalances within the financial system...should continue to drive the gold price in the coming years."