Gold News

Gold & Silver Slip But "No Bubble" as Asian & Euro Revaluations Strengthen Gold Investment Demand

The price of Gold fell in lock-step with the Euro currency against the Dollar in London trade on Thursday, sliding together with silver and other commodities despite China reporting its fastest economic growth in more than 3 years.

"If precious metals stall at these levels, they're going to quickly look overbought," says one London dealer in a note, "and we may be in for a sharp correction."

"More likely consolidation and sideways trading will continue," says a Hong Kong broker.

Growing its GDP by 11.9% annually between Jan. and March, China must either raise interest rates or its currency peg with the Dollar, agreed Asian analysts after this morning's data release.

Singapore yesterday allowed its currency to rise freely on the forex market after reporting annualized GDP growth of 32.1%.

The Singapore Dollar added 1.3% on Wednesday and jumped a further 2.0% early Thursday vs. the US currency.

The Malaysian Ringgit, Korean Won and Japanese Yen also rose sharply, knocking the Gold Price in Tokyo 1.5% below last week's 27-year highs.

World stock markets were little changed, meantime, while Western government bonds ticked higher.

"First and foremost, Gold will become cheaper in Yuan terms [if China lets its currency rise], and this should stoke additional interest in the yellow metal," reckons Edel Tully, London-based metals strategist at Swiss bank UBS in a report issued Wednesday.

"If the Yuan revaluation is [also] interpreted as government confirmation that inflation is indeed a problem, this would likely boost gold's appeal."

Comparing the current situation with 5 years ago, when China last revised its Yuan currency-peg with the Dollar, "China's role in the gold market is now much more significant than in 2005," Tully goes on.

"There's little doubt that one of the reasons behind gold's additional popularity in China this year is the inflation hedging angle."

Analysis by BullionVault shows Gold Buying by Chinese Households doubled to 2.0% of saved income in the decade ending 2009.

Last year they bought 14% of global gold off-take, second only to India's private demand.

"Emerging markets have the lowest [official] reserves of gold and also the most money," noted Dr Martin Murenbeeld, chief economist at financial planning and investment advisory DundeeWealth Economics, to the 8th annual Denver Gold Group European Gold Forum in Zurich yesterday.

"The Dollar must decline," Murenbeeld said. "The US has a fiscal deficit as far as the eye can see.

"Gold is not in a bubble."

"The success in bailing out the system [after the DotCom Bust] led to a superbubble, except that in 2008 we used the same methods," said hedge-fund legend George Soros at a meeting of investors hosted by The Economist at the City of London's Haberdashers' Hall last night.

Soros said "Gold is the ultimate bubble" in Feb. this year, even while extending his fund's exposure.

"Unless we learn the lesson that markets are inherently unstable and that stability needs to be the objective of public policy, we are facing a yet larger bubble," he told his audience in London on Wednesday.

"We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount."

Speaking to South Africa's Mineweb this week, "Monetary policy in the ECB and the Federal Reserve is likely to remain loose for a long time, which benefits gold in many ways," says VM Group analyst Matthew Turner – "partly through the inflation fear.

"One commodity or asset that is not going to be affected by Euro devaluation is gold, and so you are seeing a pickup in investment demand from European investors in particular.

"Because it is bleeding into a higher price, we think it will drive up investment demand worldwide."

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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