With so much uncertainty, why is gold not trading higher? - China Aluminum Sliding Doors

And, he points out, the falls seen recently aren't actually toobad, especially when viewed in yen and euro terms. "People tend to look at gold as a dollar based instrument and yesthey say it hasn't really done what it is supposed to do," he says,but, "It's off 15%, that's a perfectly healthy correction in astrong bull market that we've seen." Williams is also quick to point out that when most people refer tothe gold market they are referring to the futures traded on theComex rather than the actual physical commodity. "What we are seeing on the physical market, particularly here inAsia, is tremendous demand particularly out of China. If you lookat the Chinese imports from Hong Kong, they are up tenfold somemonths..

when you've got someone like China increasing theirpurchases tenfold and now currently buying about 35% of global mineproduction and the price is going down that's unsustainable in aphysical commodity. If demand increases, by that much, supply staysthe same, the price cannot go down, certainly not in the longterm." For Williams, it is this disconnect between paper gold and physicalgold that is the key to understanding the gold market at themoment. "The physical commodity, cannot be printed, it cannot be fashionedout of thin air by central governments who want to manufacture moreand ultimately it will have its say." And, he adds, "Now that day, I think, is rapidly approaching anddon't forget it's not the case that the dollar and gold cannot cometogether. Yes the dollar has caught a bit recently because of thetrouble the Euro's had and people tend to sell futures in the goldmarket when the dollar is strengthening but all we are seeing inAsia are premiums increasing on the physical underlying." For French bank Natixis, while a Greek exit has the potential toboost the gold price, there are other factors in the short termthat have a bigger say. In a recent note, the bank writes, "We would suggest that theremight need to be two hurdles to overcome before the European crisismight become positive for gold prices once again.

First, thedifficulties would need to be perceived as a risk to Europe as awhole, and not just a problem for Greece. Second, there would needto be question marks over the dollar's continuing role as asafe-haven. For a European fiscal crisis to precipitate asignificant rally in gold prices, this would therefore need to beaccompanied by some risk of a US crisis as well. This could be afiscal crisis similar to Europe's problems, or an economic one thatprompts the Fed to embark on a third round of QE. If Williams' view is accurate, a Greek exit without a largerEuropean crisis is nigh impossible.

"The dominos in this particular space are extremely close togetherand as soon as one starts to fall a lot of them could fall, butthere is no way Greece can reasonably stay in the Euro. I think nowit's a case of the Greeks wanting to leave but they want to take asmuch money as they can before they leave and I think they realiseit's inevitable. I think the rest of Europe realises that it is abad policy to keep them in but until they can ring-fence their ownbanking systems it's kind of better the devil you know." A UBS comment on the other hand is less certain of a Greek exitbut, equally sure that confusion will stay the order of the day. "As uncertainty mounts leading up to the June 17 Greek elections,we're more inclined to bet on a higher gold price but a Greek exit,while most likely fuelling considerable physical gold demand inEurope, could spark a sizeable deleveraging and dis-investment infinancial markets. The paper gold market would not be immune tothis selling," it says.

Adding, "Should a Greek exit not materialise - which is the UBSview - this doesn't mean calm will automatically be restored as aGreek debt restructuring is highly likely and this should supportgold. The only thing that we can be certain of ahead isuncertainty." ipad version: Gold bars are displayed at a gold jewellery shop inthe northern Indian city of Chandigarh: REUTERS/Ajay Verma SUBSCRIBE to Mineweb.com's free daily newsletter now.

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