Greg Weldon continues:

“This was particularly evident in May and June.  We had said that central banks were on the buy side, supporting the metals markets, in order to diversify.  The World Gold Council just reported that with gold demand we just saw the largest single quarter of gold buying by central banks.

I would also point out some very interesting facts about the silver market.  The silver inventories are declining in the exchange warehouse.  This is deliverable silver from futures contracts.  So we have seen a reverse in the buildup in COMEX warehouse stocks.

Silver inventories are now below the six month average and the  six month average has turned to the downside....

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“We can equate those events to changes in price. So changes in warehouse inventories have been a good indicator of changes in price.  I don’t think it’s coincidental that the low of $26.07 in silver was set the very same week we saw the peak in COMEX inventories.

Now silver inventories have declined and silver starts to look a little more technically positive.  Twice now the silver bears have failed to follow through on the downside. 

Something important to keep in mind as well, the area around which we’ve created this triple-low in silver, is right in line with the 50% retracement of the entire bull move from 2001 to the $50 high.  A move now above $29 would be bullish from a technical perspective, and that’s something we’re looking for.

After $29, the next major resistance for silver is $37.50.  This is a situation where silver has a pretty decent upside move in front of it once $29 falls.”

Weldon had this to say regarding gold: “Gold does have a little more dynamic here.  You have more upside room.  You just immediately gravitate toward $1,800.  We’re talking about a move of more than $150 once gold begins to lift.

I would add that to power gold through $1,950 is going to take additional liquidity from all of the central banks, even Japan.  The question is:  Are central banks going to have the will to expand balance sheets again to the degree to which they have in the past?  They may disappoint and do a little less than the market anticipates.

There will be action, it’s just a question of when and how aggressive it is.  If the Fed wants to remain consistent, it would require the next round of QE to total $1.2 trillion.  This is the reality if they want the same increase in the money supply. 

So the same mathematical formula for the Fed to be consistent with QE1 and QE2 would total $1.2 trillion.  For the ECB, the number would be at least $600 billion.  I just don’t know if they have the will to pump $1.2 trillion from the Fed and $600 billion more from the ECB.  That’s a very high hurdle for them.

If they were to come with those new packages, we would certainly be looking at new highs in gold.”

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Eric King

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