By: Adrian Ash, BullionVault
London Gold Market Report
THE PRICE OF GOLD AND SILVER recovered early in London on Wednesday following sharp overnight falls sparked by a 30% hike in the margin down-payments required for leveraged traders in US silver futures contracts.
Major-economy government bonds slipped further after the Bank of England forecast above-target inflation throughout 2011, and losses on Irish government bonds pushed 10-year yields to a fresh post-Euro record of 8%.
Commodity prices held flat. World stock markets extended Tuesday’s drop on Wall Street, with the Shanghai index losing 0.7% after Chinese banks were ordered again to raise the ratio of depositors’ money kept back in reserve.
Last night’s sharp fall in gold and silver prices marked the “clearing-out of intraday froth” reckons UBS strategist Edel Tully, who doesn’t see “the surge and setback as the beginning of a material correction in precious metals.”
Silver lost 9.7% top-to-bottom on Tuesday, hitting a 3-session low at $26.50 per ounce in late US trade before rallying in Asian and early London dealing today.
Gold prices lost 2.7% meantime, dropping to $1385 per ounce before recovering the $1400 level on what Hong Kong dealers called “bargain hunting” by Chinese traders.
The Chicago Mercantile Exchange’s 30% hike in silver margins affects both “commercial” industry players and “speculative” traders, and also covers all CME silver products, including the increasingly popular miNY contract, targeted at retail investors.
Silver’s all-time peak of $50 an ounce – hit on 21 Jan. 1980 – saw the New York Commodities Exchange halt all trading in silver derivatives except liquidation of existing positions, while tripling the margin requirements on gold futures.
That same day, the Frankfurt authorities also capped precious metals exposure at West German banks.
Just ahead of a then multi-year peak, and following a near 60% rise inside four months, US silver margins were hiked in April 2006. Margins on both silver and gold were hiked in Dec. 2009 – again, just ahead of significant highs for their bull market to date, and following a near-50% rise inside four months.
At yesterday’s peak, the silver price stood 61% higher from 16 weeks earlier.
“To the degree that the silver rally may be retail-[investor] led, we may see further liquidation,” says James Steel, precious metals strategist in New York for bullion market-maker HSBC bank.
Although the higher margin requirements are unlikely to change the underlying direction in silver prices, says Steel, further investor withdrawals from the silver market “would almost certainly spill over to the other precious metals.”
Trying to stop “speculative money flowing into China” in the words of one economist, Beijing today raised bank-reserve ratios raised by 0.50% according to industry sources.
The odds a further rise in the People’s Bank’s main interest rate “might [now] be lower” for a couple of weeks, says Lu Ting at Bank of America- Merrill Lynch.
The world’s No.1 gold mining nation – and its No.2 gold consumer – China today beat analyst forecasts with a $27 billion trade surplus for Oct.
“Domestic [gold mining] production is unlikely to grow much next year, so we’ll probably see a lot more imports,” believes Zhu Yilin, head of research at Jingyi Futures in Shanghai.
“They will accumulate a massive amount of gold…by opening up imports and making sure there is heck a lot of gold swishing around in the domestic market,” says Mark Pervan at ANZ, also speaking to Reuters today about the gold-import licenses now being arranged with 10 of China’s largest banks.
Unlike world No.1 gold consumer India, China is a net exporter of silver each year, according to research published by GFMS for Washington’s Silver Institute.
“Investors are looking for any signs of China buying gold on the world market” for its central-bank reserves, says commodities-analyst Pervan at ANZ.
Ahead of this week’s G20 summit of political leaders in Seoul – likely to be dominated by arguments over currencies and trade balances – he told the Reuters newswire that “If Beijing said it was buying 100 tonnes, gold prices would leap, not because of this 100 tonnes, but because of the 300 tonnes the market would expect to follow.”
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2010
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.