Increasing fears of a global recession and possibly even a depression, saw gold rise another 3.2% (silver was up 4.5%) on increasing international safe haven demand. Markets participants are realizing that while sharp deflation is the challenge today, in a few months we may be confronted with an even greater challenge in the form of stagflation and possibly even mild hyperinflation.
The World Gold Council have reported that demand for gold rose 29% in the last year. While jewellery demand has fallen (particularly in the western world), demand for gold coins and bars has increased massively and is up 87%. This is leading to supply issues internationally in the coin and smaller bar market.
The Financial Times reports that sentiment towards gold was also bolstered by reports that Russia’s central bank planned to increase gold holdings within its overall foreign exchange reserves. Russia’s central bank has said it would like to hold 10 per cent of its reserves in gold, which could take its stock up to around 1,200 tonnes from 495.9 tonnes at the end of last year.
While much of this gold may be bought from Russian mines, it is important to note that this Russian produced gold will not make it into the international market and is thus a further constraint on an already tight global supply demand equation.
Demand for gold and platinum bullion is rising sharply in Japan also as their economy slows dramatically. Japanese bullion dealers have been cleared out of stock of platinum bullion coins and bars as investors buy bullion due to dwindling faith in the government’s ability to handle the economic crisis. It had been believed that the Japanese demand for precious metals had been more subdued in recent months compared with the huge demand in the US and EU but this is not the case. The World Gold Council’s latest figures suggest that total Japanese gold bullion sales for investment purposes soared by 61 per cent last year.
While gold’s looks very strong both technically and fundamentally, it may have become overbought in the short term as it is up some 15% in a month (this is in dollar terms – it is up by even more in other currencies).
Profit taking, correction and consolidation may take place prior to challenging the resistance at $1,030/oz. Once there is a weekly close above $1,000/oz we could very quickly move up to $1,200/oz prior to a further correction which would then see $1,000/oz become support.