February 28th, 2011
By: Mark O’Byrne
The paper-driven sell off in the gold market seen in January has been trumped by continuing robust physical demand in January and February. This has resulted in gold rising nearly 6% in February and silver’s strong industrial and investment demand leading to a 19% rise to new nominal 30-year highs.
Political, and more importantly socioeconomic, revolutions in the Middle East and North Africa are leading to a degree of geopolitical instability and risk not seen in many years. This is leading to concerns about oil supplies from the region and hence the 14% jump in US crude oil just last week and deepening inflation concerns.
Hopes that the feudal Saudi regime will contain the situation by increasing production and exporting more oil are misplaced as the Saudis are already producing oil at maximum capacity and indeed are likely to have been overstating their oil reserves for some years, possibly considerably.
With all eyes on the Middle East and North Africa, there has been less focus on the continuing European sovereign debt crisis. However, the crisis continues and recent days and weeks have seen government bonds in Greece and Ireland again come under pressure.
The yield on Greek bonds (10-year) have risen to over 11.6% in recent days and the yield on Ireland’s 10-year reached a new record high of 9.40% this morning after the Irish electorate “liquidated” the Fianna Fail/Green government over the weekend. While the new government is likely to be a centrist Fine Gael and Labour one, there has been a swing to the left with Sinn Fein, the Workers Party and many left leaning independents elected.
The majority of Irish people are seeking that the massive debts of the Irish and European banking systems, incurred against them, be restructured or defaulted. Therefore, the new government will be under pressure to negotiate a fairer, more equitable settlement with the European Commission and the ECB with possible ramifications for the many European banks who lent irresponsibly to Irish banks.
Political and economic instability in Europe is set to continue and while the Irish used the ballot box, citizens in some EU countries may not be as peaceful or passive. While the euro has bounced against the beleaguered US dollar recently (the dollar looks very vulnerable to breaking down technically (see chart above), gold above EUR 1,000/oz (€1,020/oz this morning) is a sign that the euro’s troubles are far from over and further euro weakness in the coming months will see gold rise above the EUR 1,072/oz high seen at the end of 2010 (Dec. 28).
The move by the popular Egyptian Front for Reclaiming the People’s Wealth to ban the export of gold in order to preserve the wealth of the impoverished Egyptian people is a prudent one. The move may be emulated in other countries in the coming months leading to a further decline in scrap supply from emerging markets.
Conversely, mooted proposals by the Vietnamese Central Bank to ban “gold bullion trading” (see news below) are somewhat bizarre. If true this would be a very important development as the Vietnamese are some of the largest buyers of gold bullion in the world. It is unclear whether the proposed ban is simply to prevent “trading” or speculative short term buying and selling, or actually a move to ban the buying of gold bullion ingots and jewelry by Vietnamese households. If it is the latter, it will be unworkable as buying will simply move to the black market or Vietnamese will buy from overseas from bullion dealers.
Gold is trading at $1,410.50/oz, €1,020.11/oz and £868.59/oz.
Silver is trading at $33.43/oz, €24.18/oz and £20.59/oz.