Gold and silver's daily review for 26th January 2011

Gold bounced off the low $1,320 while the euro continued to rise.   It stood at $1,3702 earlier today, as confidence is recovered, to some extent, in the currency.   In the euro, gold rose €2 while in the dollar it rose $11.50.   The rise in the dollar gold price was entirely due to the fall of the dollar against the euro.   The gold price was Fixed at $1,335.50 and at €974.32 this morning.   Remarkably, just before the turn in the gold price the U.S. gold market saw a further, almost 32 tonnes of gold, sold out from the U.S. based SPDR gold ETF.

Heavy physical demand is coming into the market from $1,320.   In particular Indian buyers have always favored buying gold ‘on-the-dip’.

Gold – Very Short-term

While support is now being seen, Gold’s downside risk is still there even after the falls of the last three days.   We expect it to tend to consolidate at around these levels today in New York.

Silver – Very Short-term

Silver has recovered from the $26 area and is now sitting on $27 after its peak of $31+.   We expect silver to remain considerably more volatile than gold in the days ahead.   While support is now being seen in the silver market, Silver’s downside risk is still there even after the falls of the last three days.   We expect it to tend to consolidate at around these levels today in New York.

Gold Price Drivers

Yesterday saw a shrinking of U.K. GDP being reported for the last quarter of 2010.   It fell 0.5% while inflation was reported at 3.7%.   It appears likely that the first quarter of 2011 may see more shrinkage of the U.K. GDP.   This would make it a “double-dip” recession there with the experience of “stagflation”, a situation feared by the developed world for the last couple of years.   Austerity measures have yet to really bite there, so growth of not only the U.K. economy but the debt distressed European economies may well have been overestimated.

Yes, Germany is humming along with its exports to the Far East, but it is a category of its own in Europe.   This adds strain between Germany and the rest of the Eurozone’s economies.   Chancellor Angel Merkel may have her commitment to do whatever is necessary to save the euro, fully put to the test.   More troubling is the prospect that, with most developed world nations needing to implement austerity measures to bring their economies back to a healthy level of solvency, other developed nations are headed for a “double-dip” recession too.   In the first recession in 2007 onwards gold fell as investors scrambled to cover margin calls and other obligations, but then recovered when other markets did not.  Should this prospect arise again, we expect any such reaction to be short-lived.

With Asian investors and government agencies piling into the European Financial Stability Facility’s five-year 2.75 percent bonds yields were down at 2.89% in the sale.    Asian investors bought about 38% and government agencies 43% of the offering.   This trend will continue and leave the developed world heavily dependent on Asia going forward.    This has to be gold positive!

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