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

Wednesday, February 9, 2011
By Paul Martin

by Tyler Durden

From GoldCore

Strong Physical Demand Leading to Illiquid Conditions

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).

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