The metal’s strength was supported by the weaker US dollar, which makes dollar-priced gold cheaper for holders of other currencies. The dollar’sloss of ground was partially due to the worries that central banks might shift their foreign exchange reserves away from the currency. The yellow metal also drew strength from the speculation that China might buy it for the foreign currency reserves. Following an active morning the PM Far East session was very dull and ended with a wave of selling, but spot sustained the pressure losing only a dollar to settle just above the $631 level. The Tocom closing price marked the high for our time zone as soon as the precious metal started a gradual descent in London and pared overnight gains. Spot fixed at $628.50 on the AM fix, down 3.75 dollars from the one on Friday. The metal’s weakness was backed up by Brent crude falling one percent today following an early rally towards $60 per barrel. After having already dropped 2.6 percent on Friday oil continues to be affected by an expectation of a moderate Northeast weather.

OPEC might be implementing another cut that could be decided upon when ministers meet in December, but meanwhile the group’s credibility is undermined as Kuwait is expected to supply full volumes to their Asian customers during the current and next months with the same being true for Saudi Arabia. Saudi Arabia will ship even more oil to some refineries in its main Far East market in the month of December. The fact that the stockpiles in top consumer nations filled at biggest rate in the third quarter since 1991 and the demand growth being more slow than anticipated also does not act in favor of the crude oilmarket. Subsequently the yellow metal tumbled down to $620.50 after the opening of the Comex division of the New York Mercantile Exchange and failed to rebound to the morning highs. The prices fixed three dollars above the low on the second London fix and spent the rest of the NY session boringly hovering in a narrow range below the 625 dollar mark. We expect gold to continue to be influenced by the movements in the US dollar, oil and seasonal physical demand as we are approaching the year end. Analysts expect the physical demand to increase ahead of the Christmas festival season while on the other hand Turkey’s gold jewellery exports for example, were curbed by the volatile prices this year. They fell 26.45 percent year-on-year in the first ten months of 2006. The chances of revisiting the 26-year peak of $730 reached in mid May before the end of 2006 will depend on investor’s confidence in the metal, which seemed to have been restored after the last week’s rally. The performance of the US economy is likely to be closely watched though for clues in the dollar direction.

China’s State Information Center said today that the country should diversify its $1 trillion foreign exchange reserves by building up strategic reserves in oil, metals and bulk commodities. This news comes after the announcement by the People’s Bank of China on Friday that   to diversify its reserves, which sent the US dollar to a two and a half month low verses the euro. Even if China will not go into diversifying into gold, it would still be diversifying away from the US dollar and so would lead to a weaker US currency and in tern provide a support for the yellow metal. The share of gold in the China’s total reserves is only around one percent compared to the world’s biggest holder of the precious metal, the United States, which holds around 64 percent of its reserves in gold.

The yellow metal continues to be made attractive by the worries about the Iranian nuclear program, North Korean nuclear ambitions and the war in Iraq. British Prime Minister Tony Blaire called today for Syria and Iran to be engaged in efforts to stem violence in Iraq. This idea was previously rejected by the United States when Washington accused Iran of helping the uprising and stocking sectarian strife in Iraq. Iran said today that it was ready to consider any official US request to hold talks. President George W. Bush also stated on Monday that Iran must face “economic isolation” if it continues uranium enrichment despite international pressure.

Silver managed to sustain the $13 level overnight, but weakened in line with gold during the European hours. The white metal was weighed by the continuing softening of the base metals, copper in particular. Copper extended its four-month lows reached on Friday as stocks rise and the demand slows. Meanwhile concerns increase about a possibility of a significant short term price correction in base metals. Silver dropped down to $12.70 during the NY trading hours and failed to recover back above $13 per ounce. We believe that the grey metal will remain volatile in a wide $12.50-13.10 range in the short term.

MKS Gold & Silver, Daily Report
by Lidia Nazarova

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