Gold at EUR1,000/oz - Strong Physical Demand Leading To Illiquid Conditions

Tyler Durden's picture

From GoldCore

Strong Physical Demand Leading to Illiquid Conditions

Gold’s fundamentals remain strong with robust demand internationally;
particularly in Asia where inflation is taking hold. Strong demand can
be seen in the premiums being paid for gold bars in various parts of
Asia, especially in India, Vietnam and China.

Indian ex-duty premiums for the London AM and PM fix were $6.81 and
$4.72 respectively yesterday, showing that Indian buyers are active at
these price levels.

Vietnam gold markets were open for the first time since last Tuesday.
Vietnamese gold stood at a premium of $40.49 to world gold of $1,351.15.

Reuters reports that Asian kilo bar premiums remain firm and near 7 year
highs with premiums of $1.50/90 $1.90/3.00 in Singapore and $3.00/$3.00
$3.00/4.00 in Hong Kong. Japanese demand has also picked up of late and
premiums in Tokyo were $1.50/2.00.

While Chinese demand is not expected to be at the record breaking levels
seen in late 2010 and January 2011, it is expected to remain robust due
to inflation and negative real interest rates in China (and most of the
rest of the world).

With the physical gold market remaining very small when compared to the
futures and paper gold market (futures, CFDs etc) there are increasing
concerns of illiquidity due to the scale of demand and lack of supply.
Pertinently, the size of the physical gold and silver bullion markets is
tiny compared to the size of international equity, bond and currency
markets. Not to mention the hard to fathom humongous international
derivatives market (see chart below).


The gold
market remains one of the most liquid markets in the world. The market
is more liquid than many government bond markets in Europe, with daily
trading volumes normally exceeding $100 billion.

Yet, it is important to make the distinction between the gold market
(speculators, hedgers etc. in the paper gold market) and the bullion
market (generally jewelers and passive investment and store of value

UBS wrote about “illiquid conditions” in the gold market this morning.
They did not clarify but they may have meant illiquidity in the physical
gold bullion market.

Gold trading volumes in the financial markets dwarf the size of actual
above ground refined investment grade product (coins and bars).
Investment demand for coins and bars, along with the gradual move to
allocated accounts on behalf of retail investors, hedge funds and
institutions, is leading to a lack of liquidity in the market.

This is a recipe for higher prices in the coming months of 2011.


Gold and silver are marginally lower against most currencies after yesterday’s 1% and 3% rise respectively. Gold rose above €1,000/oz again yesterday and remains just below the €1,000/oz level today despite the euro being stronger versus other currencies. Silver is back above the important $30/oz psychological level and €22/oz.


Despite the gains on Wall Street yesterday, Asian equities were weaker overnight (except for the ASX 200 and NZX 50) and European equities are mixed with small gains being seen in the BE 500 and the Stoxx 50. The sell off in Asia is being attributed to the Chinese interest rate rise but concerns about inflation and the robustness of the global economic recovery may be more pertinent.


European sovereign debt yields are flat after yesterday’s rises which were particularly noticeable in the US where Treasury yields rose sharply, extending their run of losses for seven straight sessions. The 10 year was up 6 bp to 3.69% and is currently trading at 3.72%.


Commodities were weaker yesterday but are slightly stronger today. NYMEX crude is up 0.84% to $87.67 and Brent up 0.78% to $100.70 a barrel.


(AP) -- Gold, Silver Rise on Inflation Worry
PRECIOUS METALS: Gold and silver prices rose after China increased interest rates to curb inflation and slow economic growth. The two precious metals are considered hedges against inflation and slow growth.

INFLATION FEARS: This is the third time China has raised interest rates since October. Government leaders fear a sharp rise in prices for things like food and fuel could trigger unrest. Investors are concerned about inflation rising globally.

MIXED BAG: Wheat and soybeans rose while corn fell. Energy contracts were mixed.

(Bloomberg) -- Gold May Gain as China Rate Increase Stokes Inflation Concerns
Gold may advance for a third day on speculation China’s interest-rate increase will fuel concerns about the pace of inflation, boosting demand for the metal as a store of value.

Gold for immediate delivery was little changed at $1,363.88 an ounce at 1:57 p.m. in Singapore. The People’s Bank of China yesterday raised the one-year lending rate by a quarter point to 6.06 percent and the one-year deposit rate an equivalent amount to 3 percent.

“The interest-rate hike does reflect a certain degree of fear over inflationary pressure, which is a key factor attracting investor interest in gold,” Yingxi Yu, Singapore- based commodity analyst with Barclays Capital, said by phone today. “We do believe that there’s further upside for gold in the next few months.”

China joined India, Indonesia, Thailand and South Korea in boosting interest rates this year as Asian policy makers sought to cool the economies leading a global rebound. A report in China is forecast to show inflation in the country expanded at the fastest pace in 30 months. World food prices rose to a record in January and probably will remain elevated, the United Nations said last week.

Bullion, which has dropped 4.7 percent since climbing to an all-time high of $1,431.25 on Dec. 7, will rebound on investor demand, Alan Heap, a commodity analyst with Citigroup Inc., said today in an interview with Bloomberg UTV.

(Bloomberg) -- Citigroup Is ‘Still Wary’ of Saying That Gold Rally Has Ended
Citigroup Inc. said it’s “still wary” of calling gold’s decade-long rally over, even after figures showed holdings of bullion in exchange-traded funds fell in January. “We think that there are enough problems out there (including with the U.S. fiscal/debt situation) to ensure that gold will remain well bid for some time yet,” the bank said in a report dated yesterday.

(PTI) -- Reliance MF launches Gold Savings Fund
Anil Ambani group firm Reliance Mutual Fund today launched a new Gold Savings Fund, a first-of -its-kind investment scheme focused on gold, to tap a market that it expects to become bigger than even equity mutual funds.

The new fund, which is different from gold ETFs (Exchange Traded Funds) that require subscribers to have a demat account, will also offer investors the option to invest as little as Rs 100 per month, the company said here.

The company said that its Reliance Gold Savings Fund will enable investments in gold without any locker or demat account -- a first in the country.

Announcing the launch of the New Fund Offer -- which will be open from February 14-28 -- Reliance Capital Asset Management CEO Sundeep Sikka said: "We expect this gold investment industry to surpass equity MFs in the next three years."

Sikka said the gold investment opportunity in India was not optimally tapped and the new product will offer a simple, affordable and investor-friendly solution for investing in gold to the masses.

"Indians are known for their love for gold. However, with low demat penetration in India, a lot of investors have not been able to participate in this safe mode of investment.

"This product will create a new avenue for pure gold investments for the retail investor without the need of having a demat account or a locker," he added.

The scheme's performance will be benchmarked against the price of physical gold.

The company said the new fund will enable investors to avail long-term taxation benefits from the first year itself, unlike physical gold, wherein long-term taxation can only be availed after three years.

The investors will not be charged any entry load on the fund, though there would be a 2 per cent exit load if redeemed before completion of the first year.

A part of Anil Ambani group's financial services arm Reliance Capital, Reliance Capital Asset Management is the country's largest fund house and manages assets worth USD 24 billion across mutual funds, pension funds, managed accounts and hedge funds.

(Wall Street Journal) -- Silver Streak: Poor Man’s Gold Keeps Surging
Hi-yo Silver, away!* Old Yeller’s less precious cousin is continuing its recent tear, with Silver for February delivery surging more than 3% on the Comex to close at $30.27/oz. Silver has gained about 13% since Jan. 25 and its close above $30 is considered technically promising. Silver has been up four straight sessions and seven of the last eight. Meanwhile, the barbarous relic has had a tougher time of late. Gold for February delivery did manage to gain 1.2% on the Comex to close at $1363.40, snapping a two-session win streak. As noted yesterday, silver continues to outperform gold. Over the past 52 weeks, gold is up an impressive 26.6%. Silver is up an eye-watering 96.2% over that same period. Precious metals are benefiting from rising inflation fears and increased concerns about weakening currencies. Gold has gotten too dear for some, leading to greater interest in so-called “poor man’s gold.” Silver does have more industrial uses than gold, but it still has a strong hold on those who are deeply concerned about the future and want to have a dependable store of value. The U.S. Mint’s silver coin selling program reflects the rising interest in silver. In January, the Mint said it sold 6.4 million American Eagle one-ounce silver bullion coins – about 50% higher than any prior month of sales, according to Mineweb.

*I always thought it was Hi-Ho Silver, Away, but the fan sites and other historical outlets insist that it is Hi-Yo.

(Financial Times) -- Long-term investors shun Treasuries sale
US Treasury yields rose sharply on Tuesday, extending their run of losses for seven straight sessions, after a substantial drop in demand from long-term investors for the sale of new three-year paper. Treasury dealers were left holding 62.3 per cent of the $32bn three-year sale, their highest stake since January 2009, as investors, including foreign central banks, backed away from buying. Long-term investors bought 27.6 per cent of the auction, their lowest take since May 2007 and down from the average share of 37 per cent for the past six sales. (as reported first on Zero Hedge yesterday)

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Bigger Dickus's picture

Tyler, you really gotta stop hyping gold. The gold bugs index chart is hurting for a squirtin. and by that I mean a big correction.

anvILL's picture

Why do you think it's due for a big correction? Near the 50DMA, there is a good chance for a correction.
However I don't see any good reason why we should be so concerned of a big correction. I am definitely not denying the possibility of a big correction, but I would like to know why you are so concerned by it.

tmosley's picture

You mean like the one that just ended three days ago?

william the bastard's picture

Like the whopper that's coming when QE ends.

EscapeKey's picture

Well, given that you don't short Gold yourself, who the hell cares about your advice?

william the bastard's picture

Alan Blinder just said on Bloomberg "odds are strongly against QE3".


malikai's picture

Sounds like an excellent indicator of a looming squeeze in PMs.

EscapeKey's picture

Well, then you are a FOOL not to short, right?

And yet, you don't.

Sean7k's picture

QE2 is open ended. The FED never put an upward limit. The US is still creating debt in excess of it's revenues and has zero plans to change this policy. Consequently, the US must continue to sell more debt. What part of that is hard to understand? Blinder is a moron.

Just Observing's picture

The US will continue to TRY to sell it's debt, but as noted above, 62% of the 3 year notes didn't sell.  And how many of the 38% that did sell went to those mystry buyers in the Carribean banks ?  Yeah....wonder who THEY are ?


This shit gets funnier all the time.

Sean7k's picture

Sure they sold. The PD's bought 'em, will sell back in POMO and then the FED will be nice enough to hold them on their balance sheet- until they dump them onto the Taxpayer. Sarc.

The history of Ponzi schemes is well known and yet, the sell and buy your own debt to pay off old debt still plays on. 

tmosley's picture

That's what they said about QE2.

High Plains Drifter's picture

QE will never end.  You don't get it do you?

trav7777's picture

Japan is still in QE/ZIRP after what, 20 years?

they may certainly give this tightening or austerity thing a try but the wheels will come right the fuck off overnight if they do.

QE was a response to the conditions of total financial collapse in 2008; none of the underlying problems (that of unsustainable debt) have been resolved.

EscapeKey's picture

Oh, I don't know about that. A lot of insiders managed to get out.

Hephasteus's picture

Yup. Seems to be what they want us to believe. Thanks for parroting the rumor.

ColonelCooper's picture

Yeah, it worked so well the first time it ended.

jus_lite_reading's picture

QE ended when the "recession ended in June 2009"... right?

Why is anyone even considering QE 3 when the recession is OVER 2 years ago!

william the bastard's picture

There is a significant argument for ended QE2 ahead of schedule.

ColonelCooper's picture

Whats the argument? That if we don't end it early, our computers won't be able to factor that many zeroes?

william the bastard's picture

Isn't this the point in the thread where you call me a homo or is that your next post?

tickhound's picture

"There is significant argument to end "ed" QE2 ahead of schedule"

So now Bernanke wants to crash the stock market? The Fed has the ability to cause inflation, but they can't direct it to a specific asset class. That works both ways. Junior, when I get home I'm gonna smack your momma.

ColonelCooper's picture

You have a three toed sloth at home?

gmrpeabody's picture

You mean when QE ends in 5 to 7 years, when the dollar reaches it's end. That whopper?

gwar5's picture

I was thinking the same thing about the Dow....

The cliffhanger with gold and silver right now is the decoupling of paper and physical.

That event may happen anytime and must not be missed by serious persons.

That would be truly world changing. It would be the stake in the heart to the USD WRC

Cracks are appearing.... stayed tuned to ZH at all times.

malikai's picture

I wonder. Could a serious decoupling or a squeeze in any one PM lead to a cascade and eventual run on treasuries? My thoughts are yes, but how would it play out? CP risk would probably kill anyone who jumped in on the paper markets. In the physical markets, controls are assured to follow, especially if there's any semblance of a gold/silver/wheat/oil currency standard. I hold the metal in my hand but wonder how it would actually play out.

hamurobby's picture

Well, there seems to be less and less gold for sale on ebay. Kruggerands and $50 Eagles are going for about $100 over spot on a per coin basis. Double eagles are $1400+, I saw a 2010 ungraded Eagle sell for $1586 last night, (item #160541441624). Wtf is so special about that coin?  

Blindweb's picture

a big correction back to the several thousand year old trend line

hampsterwheel's picture

People are going to need a massive mindset change soon - we left normal trading some time ago.

Historically in the early phases of massive inflation people sell when they achieved their normal expected returns - 10%, 15%, even 20% - not realizing that this was just the beginning. Even in Wiemar Germany those that sold at 300% return found several months later that they lost a great deal of stored wealth selling so cheaply.

You have to get out ahead of the trend - and that means getting out of your normalcy bias - based on the massive fiat debt, the Chinese tightening, the Fed's commitment to cheap dollars you'd have to be pretty dense to be selling physical gold... if you want to trade gold isnt the vehicle during the times we live in....



bronzie's picture

"based on the massive fiat debt, the Chinese tightening, the Fed's commitment to cheap dollars you'd have to be pretty dense to be selling physical gold"

the primary trend (up) in the precious metals will continue at least until the economy is fixed

'fixed' means: real interest rates are positive (Volker needed double-digit interest rates to accomplish this back in the late 70's), the multi-trillion dollar annual US deficit has been mostly eliminated (and not just by accounting hanky-panky), several hundred trillion dollars worth of derivative positions are unwound, the massive unfunded US liabilities are reduced or funded, etc

on top of all these issues that need to be fixed, the world is probably going to replace the US dollar as reserve currency

until the economy is fixed the precious metals bull market continues ...

DoChenRollingBearing's picture

And I see no sign that the economy will get fixed anytime soon.

Bigger Dickus's picture

Can you spell I-N-E-P-T  L-O-S-E-R? Well, no need to anyway. Just look yourself in the mirror and take a good look at what PMs are doing.

Bay of Pigs's picture

Really? Obvious from your post above you didn't read the article.

Nice try chump.

Gold over $1360  +284.30  26% YOY

Silver over $30    +14.74    95% YOY 

Bigger Dickus's picture

Dude, look at recent performance.

DoChenRollingBearing's picture

Recent performance matters little unless you are a trader.

I am a holder.  I am very happy hanging on to my PMs to give them to my kid (or maybe grandchildren if/when that time comes).

Bigger Dickus's picture

Dude you gotta stop rationalising every loss you make otherwise you will never be uber rich. Deal with your losses and NEVER double down on non-revenue generating assets.

trav7777's picture

so unless something always goes up every single day, it should be sold?

JonNadler's picture

sell your gold! Bernanke will raise rates soon, he will raise rates to 20% before May, I have it on good authority! Never mind that the interest on the debt will explode or that the economy will implode, he will raise rates, caus a dick told me......Bigger Dickus that is 

Hephasteus's picture

Recent performance is a paper lie. These markets will be put in massive backwardation.

The dollars dead. No exceptions.

JonNadler's picture

Bigger Dickus is not me and am not Bigger Dickus, although I, JonAdler are a big d......

lawrence1's picture

It's his site, he can and should do anything he likes, we're consenting adults, so fuck off.

sudzee's picture

Cental bank vaults are empty except for skids of paper. For the last 10-12 years the connected and the "little guy" have been buying the shiny stuff that the the paper ponzi was built upon.

Central banks and gov'ts running on thin air. The only possible supply of gold to keep kicking the can down the road is the PM etf's. Expect a massive selldown in these etf's as a grab for the last real wealth available.


financeguru500's picture

Sudzee you are so far off. Yes people that come on zerohedge are most likely buying gold but the "little guys" are not the ones buying up all the gold. Non-Western Central banks are buying up gold and the rich are buying up gold. Both are doing so as hedges to the dollar. Don't count on the "little guys" having more than maybe a 5% share of the entire amount of gold that is out there.

sudzee's picture

So much hoopla has been raised about China's increase of 650 tonnes of gold added to reserves over a period of 3 years. India inports last year were 650 tonnes officially. Import taxes on gold has created a black market in gold for years. Possible importation of a few hundred tonnes to skirt the tax. Indian official central bank reserves of gold have barely increased over the last 10 years. The little guy has been stashing gold for a good many years.