Gold Capped by Scrap Selling, Silver Rally Unstoppable

By: Adrian_Ash

THE PRICE OF GOLD slipped against a rebounding Dollar in London on Tuesday, briefly losing 1.4% from yesterday's new all-time high as world stock markets extended their losses.

Major government bonds also slipped, while the Dollar knocked almost two cents off the Euro's new four-month high.

That buoyed the gold price in Euros above €33,100 per kilo.

Crude oil sank more than 2% following rumors of an emergency output-hike from the Opec nation cartel.

"We believe Opec spare capacity is much lower than the official data suggests," says a note from Goldman Sachs, and "most of the Saudi spare capacity is heavy crude oil."

The rebel-held Libyan oil port of Ras Lanuf today came under fresh air attack from Colonel Gaddafi's forces. The United Nations now estimates the death-toll at 1,000 in 3 weeks of violence, with 200,000 people fleeing North Africa's largest oil producing state.

"Physical gold demand is weak and we are entering a period where rallies are likely to attract more scrap and other gold selling," says Standard Bank's Walter de Wet in a note.

Even at new record highs in fact, "We believe that resistance in the physical market has assisted in capping rallies in gold the past two weeks," but his view on the gold price remains unchanged, says de Wet, repeating his target $1500 per ounce.

"We now see fundamental support below $1,370."

On a technical analysis, "The two-month support line at 1420.10 has shown us how solid it is," says Axel Rudolph  at Commerzbank.

"Last week's sharp drop ended on it [and then] further strength was seen."

Rudolph's latest note for Commerzbank clients also cites the "support at $1322" from the "long term uptrend" starting when Lehman Brothers failed in late 2008.

Over in silver bullion – which "seemed unstoppable" at one point on Monday, says MKS Finance in Geneva, rising 3.2% to new 31-year highs – the price today bounced higher from last week's finish at $35.60 per ounce.

In nominal dollars, silver prices have only ever been higher on 22 days, all of them amid the "mania" of Jan. and Feb. 1980 which led London auctioneers Phillips to demand that "Silver melting should be halted...[because] many people were selling irreplaceable antique silver items...destroying the national heritage."

Back here in 2011, "The total net long position [in gold futures] is now at its highest since the week ending 4 January," says the latest Precious Metals Weekly for ABN Amro from the VM Group, "but it's some way off November and October levels, implying that prices still have plenty of upside."

Overall last week, trust-fund share positions backed by gold bullion crept higher as a rise in BGI's iShares product "more than offset the fourth successive weekly fall" in the world-leading SPDR Gold fund, says VM.

"The iShares Gold Trust's assets jumped 6.7% last month," writes Olivier Ludwig at Index Universe, "while those of the SPDR Gold Shares fell 1.3%...suggesting IAU's cheaper expense ratio may be giving it the upper hand among some investors."

Market leader the SPDR gold ETF charges 0.40% per year for management. Since last summer, the IAU has charged 0.25%.

World No.1 for outright physical ownership, BullionVault charges less than half that much to customers holding $40,000-worth of gold.

"There have been some wholesale swaps out of GLD and into IAU," reckons Paul Weisbruch at the Street One Financial brokerage in Pennsylvania, quoted by Index Universe.

"Why are they doing it? It's strictly expense-ratio related."

By Adrian Ash
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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