Gold price moves slightly lower as the Eurozone's worse-than-expected GDP reading in 1Q09 pressured euro against the dollar. Government data showed that economy contracted -2.5% qoq in 1Q09, worse than forecast of -2% and -1.6% in the previous quarter. Although ECB has already mentioned in its monthly bulletin that economic contraction in the first 3 months of 2009 came in worse than previously anticipated, the outcome, which is the sharpest decline in 13 years, still exceeded market expectation. Both German and Italian economies saw huge declines, by -3.8% qoq and -2.4% qoq respectively as unemployment surged and production activities contracted. Against the euro, the dollar rises to 1.354 while the dollar index climbs to 82.69, paring the drop yesterday.

Crude oil price also slide below 58 after the GDP data as stocks reverse earlier gains. In Germany, DAX index lost 0.2% to 4730 while France's CAC 40 Index erases the entire rise to 3190 in the morning. Oil price may record modest drop this week and we expect more correction in coming weeks as recent rally was over-extended as was driven by robust sentiment.

Comex silver price continues to hover around 14 level after failure to break the 14.6 resistance (Feb 23), the highest level since August 2008. The directionless movement in gold undoubtedly weighed on silver price. The World Silver Survey 2009 released May 13 indicated that silver production in 2008 was largely unchanged from that in 2007 while industrial demand was reduced, thus generating a surplus. We believe the strong performance in the white metal in 2009 was, and will continue to be, driven by investment demand.

As of May 14, futures price for silver has rallied 24%, compared with the annual 24% decline in 2008. In 2007, the correlation between silver and copper was higher than the correlation between silver and gold, indicating investors' view on silver as an industrial metal. This sounds reasonable as over 50% of the demand in silver was on industrial activities. However, in recent months, the situation reversed and the white metal has started to share more characteristics as a precious metal.

The chart below illustrates silver's 'dual characteristics'. In the first chart, silver experienced massive selloff shortly after the sub-prime problem burst and its movement derailed from gold in a greater extent after Lehman Brothers collapsed and some more banks were on the verge of bankruptcy. Investors probably thought that demand for silver would be greatly affected and economic crisis should signal contraction in industrial activities and hence demand of industrial metals. Moreover, silver's lower liquidity compared with gold also made the white metal drift lower.

However, investors seemed to have forgotten silver's 'industrial background' as market situation stabilized. Taking a look at chart 2, we can see that silver has moved in tandem with gold since 2009 and has outperformed the yellow metal.

For both gold and silver, surge in investment demand should resume in the medium term as global economy, while seeing tentative signs of improvement, remains weak. Moreover, we anticipate some governments will employ further fiscal and monetary measures which will create the risk of high inflation in the future. Also, cost of carry for precious metals has been greatly reduced as global interest rates will remain low for some time.