Gold, attempting to test the all-time high of 1441 made last Wednesday, remains firm in European session as fighting in Libya deepens while riots appear to have spilt to Saudi Arabia, the world's largest oil producer. Currently trading at 1439, the benchmark Comex contract is prone to make a fresh record high soon. Silver also strengthened with the benchmark contract surging to a new 31-year high of 36.55 today. The gold/silver ratio fell below 40 for the first time since the 80's. Oil prices rallied further with the front-month WTI and Brent crude oil contracts rising to 106 and 117 respectively.

Things appear to be getting worse in the MENA region. According to Human Rights Watch, websites have called for a 'Day of Rage' in Saudi Arabia on March 11 and March 20, with nationwide demonstrations. Protesters demanded the government to free Sheikh Tawfiq al-Aamer, a Shiite cleric arrested on Sunday, as well as other detainees. Oil prices will spike higher if protests in Saudi is not under control. According to the OPEC, Saudi's oil production was 8.43M bpd, or 31.2% of total production by OPEC -11, in January. Oil export revenues have accounted for 80-90% of national revenues and over 40% of the country's GDP. Saudi Arabia has helped replace oil lost in Libya during the current unrest.

While both gold and silver prices are rising, silver has outperformed gold as indicated by the falling gold/silver ratio. While the metals are close substitutes in investment and jewelry application, silver has more industrial uses than gold. Therefore, the white metal has benefited more from strong demand from emerging markets. Indeed, silver tends to outperform gold when commodity prices are rallying and the financial markets are in a 'risk-on' mode. Conversely, gold usually performs better when risk appetite dims and investors seek safe-haven investments. That said, we may not see gold/silver return to levels previously seen as silver has been an increasingly popular investment instrument during turmoil and uncertainties.

China will remain a strong growth driver in gold demand. According to the Ministry of Industry and Information Technology, China's total gold output soared +8.27% y/y to a record of 340.88 metric tons in 2010. Meanwhile, the country's gold imports have remained strong. In January and February, China imported around 200 metric tons of gold as a means to fight against inflation. Investment demand in China has been robust. According to the World Gold Council, gold investment in China may gain 40-50% this year. Lion Fund Management has launched the first gold ETF in China. The company raised $483M for the fund, using up almost all the $500M initial quota granted by the SAFE. The latest news is that the SAFE approved another $500M for overseas investment. The success in the fund signals the huge demand from Chinese investors.