Worries about Italian politics arising from the larger-than-expected budget deficit and the related warnings from the European Union spilled over into the gold and silver markets yesterday.

Unimpressed by a stronger U.S. dollar, prices rose as much as 1.6 percent for gold and 3 percent for silver during the day.

Rather than genuine safe-haven demand, we believe that short covering in the futures market lifted prices. Speculative traders such as hedge funds still hold close to record-high short positions in both gold and silver futures.

While ongoing political turmoil around Italy could trigger more short covering and provide support to prices, we do not see this as a revival of the eurozone debt crisis. Any parallels drawn by European politicians should rather be seen as negotiation tactics.

Independent of the woes in Italy, we maintain a constructive view on both gold and silver. Following initial support from a normalisation of futures market positioning, we see further upside to prices next year as the US dollar should weaken.

Beyond that, i.e. around the turn of the decade, the expected slowdown of the economy should revive the demand for gold as a safe haven. Silver lacks gold’s safe haven characteristics due to its industrial applications and hence, it is unlikely to follow suit.

Any opinions expressed here are the author’s own.

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