Continuing Gold & Silver Volatility

The last couple of months have been characterized by volatility in gold and silver. Below is an overview of all daily increases of more than 4% in the gold price since 2001, both in dollar and euro terms. (data from World Gold Council). The interesting fact from an historical point of view is that each time the gold price increased by more than 4% in dollar terms, this has resulted in a strong rally. So keep an eye out for intraday increases that match or exceed this number.

Where has recent gold volatility come from? The increased VIX – the US stock volatility index – is only part of the answer, as the indicator was only significantly higher during the month of May. The explanation lies in the fight that is going on between the physical gold market and the paper gold market. The physical market is clearly being driven by insatiable Asian demand, coming both from private citizens and central banks. Chinese gold imports through Hong Kong have hit historic highs recently, setting the country up as the largest gold consumer in the world. Developing world gold demand continues to stabilize the gold price whenever it looks as though selling on western exchanges is about to overwhelm gold bulls.

While it seems as if most market participants are waiting for massive new capital injections from central banks to boost gold, on Thursday June 7, the London Trader reported during an interview on King World News that supply for the physical metal is getting so tight, that during the trading session of June 7 gold went into backwardation. Now this could be an historic game changer. If the huge increase in physical gold and silver demand coming from the East causes a delivery shortage, then precious metals prices could be about to explode, trapping the Western shorts.

Now interestingly enough, this is happening at a time of declining long interest in gold on the part of retail investors and large speculators. People in the West continue to see gold as a “risk” asset. Many also just look at it as being just another commodity play. So imagine what happens when – owing to developments in on-going financial crises – western psychology changes fundamentally, and gold starts being seen, correctly, as a safe-haven play. Then the gold rush will be well and truly on.