Gold News

Silver "Diverting Money from Gold" as Gold/Silver Ratio Hits 28-Year Low, China Raises Interest Rates

Prices to Buy Gold repeated yesterday's $10 range on Tuesday, slipping in London trade as the central bank in China – home to the world's second-heaviest consumer buyers – raised interest rates for the second time in 2011.

The move takes Chinese borrowing rates to 6.31%, with 1-year bank deposit rates rising to 3.25%.

China's March inflation rate, due for release next week, is expected to breach two-year highs above 5.1% year-on-year, according to analyst forecasts.

Silver had earlier jumped back to Monday's new 31-year highs above $38.80 per ounce, knocking the Gold/Silver Ratio of their relative prices to the lowest level since Set. 1983 at just over 37 times.

"Monetary tightening remains the focus for base metals," says the latest comment from Standard Bank's commodity team, warning again of over-heated copper prices. But "Precious metals shrugged off fears over an earlier monetary tightening in the US, and continued to climb [on Monday]."

"We won't see much movement [in prices to Buy Gold ] until Thursday," reckons Mitsubishi metals strategist Matthew Turner, "when the ECB and the Bank of England will announce their decisions on interest rates."

The Reserve Bank of Australia today held its key rate at 4.75% for the fifth month running, noting that monetary policy "for the global economy overall...remain[s] accommodative."

Brent crude oil today dropped $1 per barrel from near 30-month highs, while copper prices also edged lower as government bond yields rose.

European stock markets slipped to stand 0.5% lower on average. The British Pound jumped following news of the strongest service-sector growth in 12 months.

That knocked the price for UK investors wanting to Buy Gold today some 1.3% lower, nudging 1-week lows at £882 per ounce.

"It's difficult to say [that Silver Prices are justified] but certainly they're well-supported right now," said Commerzbank head of metals research Eugen Weinberg in Frankfurt to Bloomberg yesterday, commenting on silver's new 31-year highs above $38.50 per ounce.

"The proximity of the psychological $40 level is attracting speculative, risk-on money" into Silver Investment, said Weinberg.

"Worldwide industrial demand is also staying strong."

"Silver continues to attract investor attention away from gold, and given current sentiment, $40/oz looks inevitable in the near term," say analysts at Swiss investment bank and London market-maker UBS in a note.

"[But] there is the real danger that Silver Prices have travelled too fast, too soon."

"We see a lot of demand for silver from China," says Natalie Robertson, commodities strategist at ANZ in Melbourne, because "with China focusing more on renewable energy, especially after the nuclear crisis in Japan, they will probably be developing a lot more solar panels."

"Fundamentally, the silver picture looks very strong," she tells Reuters.

Exchange-traded trust funds holding silver to back the value of shareholder positions saw fresh inflows on Monday, with the iShares ETF product swelling to a record 11,162 tonnes.

Gold ETF positions held flat, however – little changed from May 2010 – while in the leveraged Gold Futures market, "activity was less than half the average on Monday, set to be one of the weakest this year," notes Richcomm Global Services DMCC of Dubai.

Meantime in Washington, Treasury secretary Timothy Geithner has written to US lawmakers, urging them to agree a new debt ceiling before Washington's breaks its current legal limit of $14.3 trillion 6 weeks from now.

Geithner ruled out selling US gold reserves as a way of helping finance Washington's spending.

Over in Europe, where the ECB is set to raise its key lending rate at Thursday's policy meeting, a one percentage increase in borrowing costs "would [add] six extra years" to the debt stabilization schedule in Greece, notes Gary Jenkins at Evolution Securities.

Fellow bail-out recipient Ireland would also see "higher rates...slow down debt reduction," notes the FT's Alphaville blog, reviewing the European Commission's own research.

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Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum 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 he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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