Central Bank Gold Demand Surging

Just when some of the bruised-and-bloodied euro longs thought they might be out of the woods following the Spanish bailout deal, along comes the Greek election rerun. Daily withdrawals from the biggest Greek banks have reached €500m and €800m over the last few days, while former prime minister George Papendreou has warned that the government has just a few weeks until it runs out of money. However, markets will have been cheered by comments from radical left leader Alexis Tsipras, who stated in a press conference yesterday that he remains committed to Greek membership of the euro.

Precious metals had a solid day yesterday, with front-month Comex gold, silver and platinum contracts all closing higher for the day – though palladium for September delivery slipped 0.1%. The gains were not as strong as those seen on June 1, but gold nonetheless recaptured the $1,600 mark. The catalyst for this move was as ever more boring “will she, won’t she” speculation about QE3, with Chicago Fed President Charles Evans voicing support for more money printing in an interview with Bloomberg. The Dollar Index lost 0.11%, settling at 82.42, continuing its bad run since the start of June.

The gold market may appear relatively subdued at the moment, at least in comparison with the fireworks we saw last August. But as a recent Barron’s article notes, the strength of central bank gold buying is setting the stage of the next leg up in the gold price: “Central banks increased their gold hoards by 400 metric tons —each equal to almost 2,205 pounds — in the 12 months through March 31, up from 156 tons during the prior year, according to recent World Gold Council data… This stands in stark contrast to large-scale [central bank] selling from 1966 through 2007.”

Barron’s summary? "Big changes are afoot in the gold market. The short take: The new environment will favor long-term investors who buy and hold for years over speculators who try to trade day-to-day gyrations."

As James Turk remarks in his latest King World News interview: “Continue to accumulate gold and silver on a regular cost-averaging program as your savings. Everybody needs savings, but it doesn't make sense to save in fiat currency because the low interest rate available does not compensate you for the risk.”