Gold, Silver Surge Higher On China Inflation Data

After an impressive performance yesterday thanks to a weaker dollar and some safe haven buying, the price of gold futures surged higher this morning, as did silver.

Yesterday’s weak dollar came on the back of some profit taking as the US dollar index soared to a 3-year high on Friday. Yesterday’s selling helped the gold price, but the overall US dollar sentiment is bullish which is, in turn, bearish for precious metals.

This morning’s strength in gold and silver comes thanks to China’s inflation data which was higher than expected thanks to soaring food costs.

Many will now be looking ahead to tomorrow’s release of the Fed minutes, hoping for some kind of hint over tapering plans. Despite gold’s quick recovery on Friday following the NFP, there still appears to be a bearish mentality when it comes to buying gold. Therefore should the words ‘slowdown’, ‘taper or ‘reduce’ appear then expect to see some selling.

Thanks to a weak yen and rising inflation, Japan’s largest bullion backed ETF has increased by 10% (on volume) this year, to 6 tonnes. This is near to the all-time high seen in October last year. The success of the Japanese gold ETF is in stark contrast to overall global bullion backed ETFs whose holdings are at a record low. Holdings in the SPDR Trust fell by 15 tonnes yesterday.

Speaking of such products, ETF Securities said yesterday that they expect China to become the world’s largest gold consumer, taking over from India who have seen a decline in imports thanks to import duties. They expect to see the annual gold imports into China exceed last year when they accounted for 18% of global demand.

Whilst India’s gold imports were down last month, 31.5 tonnes compared to 162 in May, this is not expected to be a long term trend, particularly as the country approaches its key autumn buying season. Currently we are between the traditional wedding seasons in the country, therefore demand would usually be expected to be lower (however, not this low).

PGMs performed well yesterday after news of a walkout by 5000 workers at an Amplats South African mine. The walkout affects two platinum and palladium mines. Both metals have recently stumbled on the back of gold’s poor performance, however supply issues, depleting Russian palladium supplies and the catalyst sector are all reasons to stay bullish about the PGMs.

In a weekly commodities report Deutsche Bank have said that they expect gold’s correction to be over for a while. “Lessons from history suggest that although gold price losses have been extreme, the extent of the price correction…is still some way short of the percentage declines that occurred in 1980-1,” before going onto say, “However, we would classify events over 30 years as significantly different since at that time U.S. short-term interest rates rose to 20% with real interest rates also rising rapidly. As a result, while we still view Fed policy as a strong headwind to gold returns, it is possible that the major part of the gold price correction has now already occurred.” Deutsche Bank predict $1,350 gold in Q3 $1,300 in Q4 before returning to $1,350 in Q1 2014.