As global liquidity dries up, gold and silver prices remain under downward pressure from investors selling off positions to go to cash and head for safety in the US dollar.
At a time when you’d expect both metals to be prospering as ‘haven’ for nervy investors, both are weak and going nowhere.
But apart from the odd sharp fall once every couple of weeks, there’s no sign of a mass liquidation like there was in 2008 when the last GFC hit hard.
But still prices do come under pressure, for example, last week, gold fell 3.5%, while silver declined 6.5%.
This week both metals continue to ease as liquidity evaporates in Europe and the charge into the US dollar strengthens.
Deutsche Bank points out show that "gold has become more vulnerable to environments where the US dollar is strengthening,"
Despite this, the bank believes that public and private sector demand for the precious metal is likely to remain high as long as real interest rates remain negative and the risk premium on US equities remains high.
In Europe, bank funding stress hit its highest level since May 2009 this week and on Wednesday investors sent a big signal to Germany that they wouldn’t support a key bond auction by avoiding the issue.
Both are a signal that credit markets are slowly freezing, with nothing in sight to unlock them, not even another rate cut by the European Central Bank next week.
Regulators in the US and Europe are running stress tests on big banks, which in turn are cutting lending, selling off assets and shrinking their balance sheets to make themselves stronger and improve their capital positions.
Other commodities are also weakening as the bankruptcy of MF Global, the commodities and futures firm rattles confidence and liquidity levels.
In short the outlook is pretty mediocre for gold at the moment.
But for both metals, the fundamentals remain solid, backed by rising demand from China and still strong support from the other big buyer, India.
In gold, central banks stepped up their purchases in the third quarter and there seems to be more of that to come.
Europe’s woes are having a positive impact, but not when things turn ugly and stress levels rise, as they have done these past 10 days.
The World Gold Council (WGC) says gold demand rose 6% in the September quarter from the same three months in 2010, thanks to the deepening debt crisis in Europe.
Gold climbed to a record price of $US1,921 an ounce in London on September 6 and is heading for its 11th consecutive annual increase.
The quarterly average price rose 39% from year earlier levels to US$1,702.12 an ounce.
It closed at $US1695.90 an ounce in New York on Wednesday, a fall of nearly 12% from the September high.
The WGC says global demand reached 1,053 tonnes, worth a record $US57 billion in the third quarter.
Total central-bank gold purchases in the third quarter more than doubled from the second quarter and were almost seven times higher than a year earlier.
The banks bought a total of 148.4 tonnes, the highest since the second quarter of 2009.
The Russian central bank purchased 15 tonnes in the third quarter, while Thailand increased its gold reserves by 25 tonnes.
While demand from the technology sector was steady at 120.2 tonnes, a strong rise in investment demand was responsible for the overall rise in demand.
Gold investment demand, which includes demand for gold bars, coins, and Exchange Traded Funds (ETFs), reached 468.1 tonnes in the third quarter.
That was up 33% from the same quarter of 2010. But ETFs and similar products only accounted for 77.6 tonnes of the total investment demand.
This means 390.5 tonnes of investment demand came from individual investors buying some form of physical gold, such as coins, bars of varying sizes or jewellery.
Investment demand in Europe reached a record quarterly value of €4.6 billion, equating to 118.1 tonnes – a year-on-year increase of 135%.
The increase in overall investment demand was all the more impressive given the sharp gold price correction in September, which encouraged a wave of profit taking among bar and coin investors. Virtually all markets saw strong double-digit growth in demand for gold bars and coins.
The WGC points out buyers of physical gold are less likely to be speculators, and this provides a counterweight to the claims that the current strong demand and high prices is a bubble of sorts.
Gold supply was 1,034.4 tonnes in the third quarter of 2011, 2% higher than year-earlier levels of 1,013.0 tonnes.
Mine production increased by 5% to 746.2 tonnes from 710.9 tonnes during the third quarter of 2010.
Looking at supply, the WGC says no single country supplies more than 14% of global gold production.
While South Africa once dominated in producing gold, the country now accounts for only 8% of the global supply.
In 2010, China was the largest single country producer with a 13% share, followed by Australia (10%), United States (9%) and Russia (8%).
That ranking is unlikely to change for 2011 and 2012, according to mining analysts.
Meanwhile, gold supply from recycled gold continues to be modest.
Although the quarterly average price of gold increased 39%, recycling activity only increased 13% to 426.5 tonnes in the third quarter.
The WGC report explains, "Despite new record prices, the supply of recycled gold was still well below the quarterly high of 609.8 tonnes from Q1 2009, at a time when average prices were still below $US1,000 per
