Gold And Silver Shoot Up On Fresh Inflows

Gold and silver are undergoing a much needed consolidation at much higher prices, before moving even further higher up. Gold and silver quickly popped higher following remarks from the Chicago Federal Reserve president Charles Evans, who made dovish remarks on U.S. monetary policy. He suggested U.S. monetary policy could remain very accommodative for some time to come.

Technical buying and bargain hunting also kicked in on the first day of the new quarter, as the gold and silver markets are in solidly bullish near-term technical postures. Gold and silver backed down from their day’s highs, following a stronger-than-expected reading on the U.S. manufacturing sector. That report pushed the US Dollar Index up from its daily low and pulled gold and silver down. Potential geopolitical flare-ups in the Middle East could push up crude oil prices, leading to further rise in Inflation. Gold and silver would benefit from this also as they are generally used as a hedge against Inflation.

Gold’s uptrend remains intact as a new wave of money came into the market on the first day of the fourth quarter and dips in gold will continue to be bought. The US dollar is lower across the board, and that is giving a bit of a tailwind to Base Metals also, though fundamentally not supported. Copper and Base Metals trading may remain constrained this week due to a week-long holiday in China.

For the sixth straight week, speculators added to their bullish Gold Futures and options contracts traded on the Comex division of the New York Mercantile Exchange and bumped up their bullish positioning in most other Comex and Nymex precious and Base Metals, according to U.S. government data released Friday.

Gross Gold Futures longs are now at their highest level in a year while gross shorts are only at their lowest since May this year. Rising net-long positions in gold and silver followed by Base Metals is not worrisome at this particular juncture given the open-ended nature of the Fed’s QE3 and the overall accommodative bias which is expected to remain in place for quite a while.

Chinese economic data released yesterday was again downbeat, showing a weak manufacturing sector via its PMI index. China is on holiday this week, celebrating Golden Week. A major Japanese economic report was also released yesterday and it also showed Japanese companies are pessimistic regarding their business prospects. In Europe, there was some better-than-expected eurozone manufacturing data issued yesterday, which helped to lift European stock markets. Spanish and Italian bond yields edged down yesterday.

Physical Demand Increases for Gold and Silver:
Higher gold and silver prices will require broader participation by the world’s two biggest gold buyers -China and India. New demand drivers that are likely to develop in the period ahead include renewed jewelry and investment demand in both China and India along with what, in my view, could be the biggest price driver of all: a tumbling US dollar should the U.S. “fiscal cliff” fail to be resolved in a way that bolsters confidence in the currency as detailed here back in July.

Last week, the International Monetary Fund reported that Turkey added 45 tonnes to its reserves in July, Russia added almost 19 tonnes, South Korea increased its tiny gold reserves by almost one-third with an addition of 16 tonnes, and Paraguay went from, basically, zero to over 8 tonnes. Emerging market central banks have added more than 250 tonnes to their gold reserves in 2012, and expectations are that last year’s multi-decade high of almost 450 tonnes will be exceeded.

Gold Price Rise in India remains Limited:
Comex Gold Futures for December delivery shot up to $1794.4 yesterday but MCX Gold December Futures saw sharp falls to Rs. 31,331 on the back of a sharply rising INR – Indian Rupee, as repeatedly alerted several times earlier. MCX Gold December Futures have dipped from a high of Rs. 32,783 in September to Rs. 31,331 yesterday, a fall of Rs. 1,452 or equivalent to a fall of around $140.

Comex Gold Futures will continue rising on the back of a weakening US dollar but at the same time in India, MCX Gold will remain weak on the back of a rising INR against the falling US dollar. Physical gold demand in India is expected to rise on the combination of falling gold prices in India and the incoming festive months where buying and gifting gold bullion or jewelry is considered auspicious.

Highest Rise in Gold ETF Holdings:
Investments in commodity markets saw a total net inflow of $5.3 billion across all sectors in August, with more than 80% of that money going into Gold ETF holdings. Energy saw $600 million in inflows, agricultural saw $300 million and base metals received $200 million. Assets under management rose by almost $7 billion and are at $143 billion, the highest since February. Worldwide Gold-backed ETF holdings rose to a record 2,500+ tonnes, most of this owned by the popular SPDR Gold Shares ETF (GLD) that is now worth an astonishing $75+ billion.

Though there were outflows of 120 tonnes on Friday, late-summer additions of more than 350 tonnes to the iShares Silver Trust (SLV) and a rising silver price combined to push this ETF’s holdings to over $11 billion. Investment banks have become more bullish on gold and silver in recent weeks, with Barclays Capital raising its fourth quarter gold forecast to $1,810 an ounce, Deutsche Bank putting the price at $2,200 next year, Citibank saying it could go as high as $2,500 in six months, Bank of America laying out its case for a $3,000 gold price just last week, and Sharps Pixley Chief Ross Norman saying the price could go as high as $4,000 based on an expanding Fed balance sheet.