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February 20, 2011

Surging Metal Demand a ‘Global Phenomenon’

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Israeli comments led to dollar weakness and gold, silver and oil rallying yesterday. The Israeli government described the Iranian warships move into the Suez canal as a “provocation” and hinted at a possible response.

An example, if one was needed, about how precarious the geopolitical situation in the Middle East is and how markets continue to underestimate the risk of military conflict.

Besides the very strong fundamentals, gold is looking better and better technically. After a four month period of correction and consolidation gold remains below levels seen last October (see chart below).

Gold in USD – 10 Day (Tick)

Gold bounced off support seen at the 150-day moving average and is now above the 100-day moving average. It is only 3.5% below the nominal record high of $1,423.75/oz seen in early December 2010.

Gold in USD – 1 Year (Daily) and 150 Day Moving Average

Even more important is the significant increase in demand seen in India, China and globally as people buy gold to protect themselves from macroeconomic risk and deepening inflation.

The World Gold Council reports that the increase in investment demand is a “global phenomenon,” reporting a 19% year-on-year rise across the world in its most recent report this morning.

In China alone, gold investment demand jumped 70% last year as Chinese people bought gold as a store of value. Demand is projected to grow a further 40% to 50% this year and jewelry demand will expand by 8% to 10% this year.

Gold imports by India, the largest buyer of gold in the world, climbed to a record of 918 metric tonnes in 2010, driven by a surge in jewelry demand with Indians continuing to buy jewelry as a store of value.

Reuters quoted a leading Chinese executive from Industrial and Commercial Bank of China (ICBC), the world’s largest bank by market value, as saying that demand for gold was growing at a voracious pace due to surging inflation.

Zhou said that the huge increase in Chinese demand seen last year would happen again in 2011 due to a “choppy stock market” and concerns about how rising interest rates will affect property markets.

Perhaps most importantly and rarely mentioned in the western media is the fact that the Chinese government is encouraging their citizens to buy physical gold and silver bullion having banned gold ownership from 1950 to 2003 (see video).

“Unlike the property market, investment in the gold sector is something the government is encouraging,” Zhou said.

Zhou said there was also voracious demand for silver, with ICBC bank alone selling about 13 tonnes of physical silver in January alone, compared with 33 tonnes in the whole of 2010. Were that demand to continue then demand for silver from ICBC alone could be as high as 156 tonnes this year. This would be a 370% increase on 2010.

Given the degree of demand for silver in China and internationally the forecast that silver could reach $36 an ounce this year, by Bloomberg analysts, is looking very conservative.

Those continuing to call gold and silver “bubbles” continue to ignore the facts and the many, many extremely important developments in the gold and silver bullion markets.

Gold

Gold is trading at $1,377.75/oz, €1,017.01/oz and £854.68/oz

Silver

Silver is trading at $30.59/oz, €22.58/oz and £18.98/oz.

Platinum Group Metals

Platinum is trading at $1,825.50/oz, palladium at $835.00/oz and rhodium at $2,400/oz.

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