2011-01-22

The threat of further monetary tightening in China continues to overwhelm precious metals

The threat of further monetary tightening in China continues to overwhelm precious metals markets, with gold and silver the hardest hit. Given their high correlation with global liquidity this is to be expected. Encouraging data flow has bolstered confidence in the US economy, adding to gold and silver’s woes as safe-haven demand falls.

Margin requirements for COMEX gold and silver contracts have been raised. This is contributing further to the bearish mood on these markets. Gold initial margins are raised from $6,075 to $6,751, and maintenance margins from $4,500 to $5,001. Silver initial margins will increase from $10.463 to $11.138, and maintenance margins $7.750 to $8.250. The new margin requirements will be effective from close of business today.

Physical demand for gold is strong and we expect it to rise even more should gold fall further.
China's platinum imports for 2010 was up 40% y/y, with much of the imports moving into China during the first half of 2010. While auto sales have pushed higher, we believe jewellery demand has been equally strong. That said, the picture painted by Swiss import/export data indicates demand for platinum from China has been tailing of in recent months—some indication that
consumers of platinum may be well stocked. As a result, while we remain bullish on the metal, we believe demand from China may fade if the platinum price rise to fast in Q1:2011.

Gold support is at $1,344 and $1,343. Resistance is at $1,349 and $1,352.

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