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

Gold Core [1]
Wednesday, February 9, 2011

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).

GoldCore [2]

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 buyers).

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.

GoldCore [3]

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.

GoldCore [4]

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%.

GoldCore [5]

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.