Gold and silver rose slightly Friday (gold closed at $881.20 up $6.80 while silver closed at $13.38 up 19 cents). They were thus higher (gold by 2% and silver by 8%) for a second consecutive week which is very bullish from a technical basis and with momentum and the trend now up it looks like the sell off is over and we should reach $1,000/oz in the coming weeks.

Gold has come under pressure overnight in Asia and early European trading as the dollar has once again very counter intuitively rallied sharply for no fundamental reason whatsoever (from over 1.45 to EUR to nearly 1.43) and oil fell a further 3%. However, stock markets in Europe are plummeting again this morning and this will likely see a safe haven bid re-emerge today.

Both technically and fundamentally gold is looking as good as it has ever done and prices are set to surge in the coming months. Informed speculation is that once the election is over on November 4th we will see fireworks in these markets and a price surge akin to that seen in the late 1970s. In the four years after the election of Jimmy Carter, gold surged by more than 700% and given the confluence of even more bullish factors in this election year, we are likely to see a similar price surge.

It appears we are witnessing a broad based flight to safety internationally with increasing retail, hedge fund, institutional and even central bank buying of gold. The price would appear to be artificially capped at the $900/oz level for the moment but given the extent of the growing demand, any short term manipulations will be just that as the long term fundamentals will see markedly higher prices.

Institutional and Retail Demand to Create "Perfect Storm" for Gold

Reuters reports that 'Private banks rethinking gold, seen next big buyers.' "Private banks could be the next big buyers in the global gold market, helping drive prices higher as they consider restocking bullion bars that were sold off in calmer times, the top HSBC gold trader said on Monday.

Jeremy Charles, chairman of the London Bullion Market Association and global head of precious metals trade at HSBC Bank, also said he expected central banks around the world to put the brakes on their plans to sell down gold reserves as they see other assets deteriorate, lending further support to prices."

"I think the institutional investors and private banks in particular will all be reconsidering their strategy. My belief is they are likely to want to own some gold again, "he told Reuters on the sidelines of the LBMA's annual conference. The current generation of private bankers destocked their gold holdings in the 1980s and 1990s to pursue higher-return investments in recent years, but are now seeing the wisdom of the previous generation's gold holdings, he said.

Wisdom has been uncommon in the financial markets in recent years but that is liable to change rapidly in the coming months as deleveraging, risk reversion and the merits of a prudent allocation to the safe haven asset are realised once again.

Barclay's Capital See "Perfect Storm" for Higher Gold Prices

A near "perfect storm" has reformed in the gold market that should drive bullion to new record highs within the next six months, fuelled by a mix of anxious uncertainty and a weaker dollar outlook, a Barclays Capital official said on Monday. A reconsideration of gold's merits should propel it beyond the March record of $1,030.80 an ounce, says Jonathan Spall, a director in BarCap's commodities division. "We should be in a perfect storm for gold."

"I was always very sceptical of the argument of gold as a safe haven, but that has changed dramatically for me and for others - now it's financial institutions themselves that are under threat," he said.

$1,000 is an extremely conservative estimate and hardly a perfect storm. A perfect storm is indeed increasingly likely and would involve gold at thousands of dollars per ounce.

Institutions are Becoming Increasingly Bullish on Gold

Goldman Sachs has in recent months and days been reducing its short position on the Tokyo Commodity Exchange (TOCOM). The TOCOM is one of the few exchanges where institutional investors positions must be declared and there is transparency. Gold on the TOCOM now has the lowest net short position that Goldman Sachs has ever held in the 33 months (see chart) and informed speculation is that they may soon be net long. Interestingly and not surprisingly, GS tends to time the market well and short term lows in their short position have often coincided with short term lows in the gold price. 

Citigroup are also extremely bullish due to obvious macroeconomic and systemic risk but also fears regarding a possible derivative meltdown, concerns regarding monetisation of debt and the impact that would have on the dollar and the likelihood of competitive currency devaluations. The analysts are surprised gold has not reached $2,000/oz yet and say they believe it will in the coming months.

Retail Demand Update - Bullion Premiums to Surge Further

Some of the largest wholesalers in the US and in the world are out of all bullion product except for exchange bullion product - 100 ozt and 400 ozt gold bars and 1,000 ozt silver bars.

They cannot supply South African Krugerrands, American Eagles and Buffalos, Canadian Maples, Austrian Philharmonics, Chinese Pandas, Australian Nuggets (all 1 ozt). They cannot supply 1 oz or 10 oz gold bars or 1, 10 and 100 oz silver bars and 90% and 40% silver bags. And I have confirmed they cannot sell any European or world gold coins such as British sovereigns, francs, marcs, Mexican pesos etc. etc.

Three large wholesalers have confirmed that there is little or no physical supply forthcoming from the primary marketplace - large refiners and government mints. Worryingly they are being informed that this is not a temporary problem and there are no supply side commitments and there is nothing in the pipeline for the foreseeable future due to excessive and unprecedented demand.

Secondary supply from the public and retailers is nearly nonexistent as there are nearly no sellers and nearly all are buyers.

It appears that the demand is so large for bullion internationally and increasingly from institutions that the precious metals refineries are using all their resources to create larger gold bars (used by jewellery manufacturers, high net worth individuals, institutions and central banks and thus they have greatly curtailed their production of gold and silver bars in the smaller retail investor formats (gold 1 and 10 ozt and silver 1, 10 and 100 ozt).

Thus, gold and silver prices will have to rise dramatically in the coming weeks and months in order for sellers to be incentivised to come back into the secondary marketplace in order to fill the void caused by the failure of the primary marketplace (refiners and government mints) to be able to supply the unprecedented demand.

Already premiums on bullion coins and smaller bars have increased dramatically (from low single digits to double digits) and we may be witnessing a new pricing structure whereby gold and particularly silver bullion in smaller formats always attracts a higher premium than does gold and silver bullion in large bar format.

In the same way that jewellers have massive mark-ups of hundreds of percent on their jewellery products (often only 9 and 14 carat purity), gold and silver bullion coins (22-24 carat) may soon attract a far higher premium to both buyers and sellers.