Gold at $1,400 Again, Silver at 31-Year High – Where Next?

LONDON – After the early January sharp setbacks, which had many observers yet again shouting ‘the bubble is bursting’, gold and silver have made strong recoveries with the gold price again touching $1400 (at the time of writing) and silver breaching a new 31-year high.  Other precious metals have been benefitting too with palladium hitting a new 10-year high and platinum trading up also.

The gold price advance will have been helped by the unrest in Arab states in the Middle East and North Africa which is creating huge uncertainty in the region, as well as creating global nervousness.  Certainly gold purchases have been on the increase in the Middle Eastern souks, but it is probably continuing high Asian demand, particularly in India and China which is the true driver of the market at the moment.  This is particularly relevant given there has been substantial disinvestment from the world’s biggest gold ETF, SPDR Gold Trust (GLD), where gold holdings have fallen to a nine-month low, although still very substantial at 1,223 tonnes.  Investment in silver ETFs per contra seem to be rising.  However the SPDR Gold Trust sell-off seems to be stabilising and as steadier heads prevail may start to pick up again once the implications of current global developments really begin to sink in.

Much of the SPDR Gold Trust disinvestment appears to be because investors in the West feel the general stock market will continue to offer better returns, although the Arab situation should be beginning to engender a note of caution here.  If the flow of Middle Eastern oil is interrupted, or oil prices rise substantially, this could have a devastating effect on markets, despite their being buoyed up by governmental/central bank, Quantitative Easing programmes.  Remember the OPEC oil crisis of 1973/74 and the corresponding market crash!  The possible change to more hostile-to-the-West governments among the major oil producers in the region should ring a few warning bells.

Meanwhile buying of gold and silver bullion in the East currently seems to be soaking up any metal which may be being sold off by investors in the West, which is underpinning the precious metals markets at the moment.  Silver in particular seems to be in a short squeeze with backwardation (when futures prices are lower than current ones) still in evidence.  Indeed some observers caution on silver reckoning it may be overbought, but if the squeeze continues there could yet be further gains to be seen.

The gold silver ratio at the time of writing is 41.95, down from over 60 only a few months ago.  This gives a little more credence to those predicting a $50 silver price, although for this observer this would seem unlikely without a further substantial rise in gold (which could be on the cards if momentum picks up further).  $1400 gold is a bit of a tester here – if gold can move through this level  and stay above it, then a new high in the mid-$1400s  may not be too far away.

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