05 April 2011

Silver "Diverts Attention from Gold"

Chinese Hike Puts Global Interest Rates "In Focus"

WHOLESALE PRICES to buy gold repeated yesterday's $10 range on Tuesday, briefly slipping in London beneath $1431 per ounce after the central bank in China – home to the world's No.2 consumer market – raised interest rates for the second time in 2011.

The People's Bank's move took Chinese borrowing rates to 6.31%, with one-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% according to analyst forecasts.

"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."

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.

The Reserve Bank of Australia meantime held its key rate at 4.75% for the fifth month running on Tuesday, 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 traveled 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.

Adrian Ash
BullionVault

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 World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees. (c) BullionVault 2011 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.

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