Physical Demand “Will Determine Support for Gold” while Selloff was “Driven by Euro Weakness”
WHOLESALE MARKETgold bullion prices rose to $1607 an ounce Monday lunchtime in London – 0.5% up from last Friday’s close – while European stocks and commodities were broadly flat and government bond prices eased.
Silver bullion meantime rose to $29.36 per ounce just ahead of New York’s open – 1.2% down on last week’s close.
Earlier on Monday Asian stock markets sold off following news of North Korean leader Kim Jong Il’s death. South Korea’s Kospi index fell 3.4%, while on the currency markets the South Korean Won sold off while the Dollar strengthened.
Gold bullion will fall below $1500 per ounce during the next three months, according to a poll of 20 hedge fund managers, economists and traders conducted by news agency Reuters.
“You’re looking at Euro weakness, rather than anything else, as the driving force behind the sell-off [in gold bullion last week],” reckons David Jollie, analyst at Mitsui Precious Metals, adding that many traders will be reluctant to buy gold so close to the end of the calendar year.
“Whatever your [longer-term] view, you have to ask what the chances are of making money by the end of the year…that says to a lot of people that this is not a market to get longer in.”
Over in New York, the difference between the number of bullish and bearish contracts held by noncommercial gold futures and options traders on the Comex exchange – the so-called speculative net long – fell 10.6% in the week ended last Tuesday, the latest data from the Commodity Futures Trading Commission show.
“The key factors that will determine how supported the gold market is on the downside will be whether the ‘sticky’ ETP [exchange-traded product] holdings remain relatively stable and whether physical demand responds to much lower prices,” says a research note from Barclays Capital.
The volume of gold bullion held to back shares in the world’s largest gold ETF – the SPDR Gold Trust – has fallen 1.4% since the end of last month to just under 1280 tonnes. Over the same period, gold bullion prices have dropped around 8%.
European finance ministers are meeting Monday in an effort to meet a self-imposed deadline for arranging €200 billion of loans promised to the International Monetary Fund at the European Union summit earlier this month. Ministers also hope to make progress on drawing up new budget rules for national governments.
“They’ll try to get as much done as they can before Christmas,” says CarstenBrzeski, Brussels-based senior economist at ING Group.
“But it’s doubtful they’ll put markets in a Christmas mood…there is still so much uncertainty.”
Ratings agency Fitch warned on Friday that it may downgrade Belgium, Cyprus, France, Ireland, Italy, Slovenia and Spain. Fellow ratings agency Moody’s meantime announced that it has cut Belgium’s rating by two notches to Aa3.
“A ‘comprehensive solution’ to the Eurozone crisis is technically and politically beyond reach,” said a statement from Fitch.
“Of particular concern is the absence of a credible financial backstop. In Fitch’s opinion this requires more active and explicit commitment from the [European Central Bank] to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent Euro Area Member States.”
ECB president Mario Draghi however says his organization will not step up its program of buying government bonds on the open market – said to be capped at €20 billion per week.
“People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations,” Draghi says anan interview in today’s Financial Times.
“The important thing is to restore the trust of the people – citizens as well as investors – in our continent. We won’t achieve that by destroying the credibility of the ECB.”
Fitch’s warning follows a similar move by Standard & Poor’s earlier this month, which saw S&P put every Eurozone member on CreditWatch negative.
Back in August, S&P cut its rating on US sovereign debt. Newswire Bloomberg today suggests that downgrade has proved to be “absurd”, since US Treasury bond prices have since gained more than 4%.
“It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e. a (credit) risk- free asset for hold-to-maturity investors,” points out ElgaBartsch, London-based chief European economist at Morgan Stanley in London, in a recent client note.
Here in the UK, chancellor George Osborne is expected to give his full backing to the Independent Commission on Banking and promise to pass legislation by 2015 that will separate investment and retail banking.
UK house prices meantime have fallen 2.7% over the last 12 months, according to figures published today by Rightmove.
“It looks like no nation, no market, no investor is free from this negative outlook. And gold is no exception,” says a note from Swiss gold bullion refiner MKS.
“Gold appears to be playing a difficult role at the moment,” adds the latest note from German precious metals group Heraeus.
“On one side it is the stability anchor in times of economic and financial crisis, on the other hand there are increasing signs…that gold is in wake of the equity and interest markets.”
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
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Dollar Rally sees Gold Fall, Merkel calls for “More Europe”, Chinese Gold Demand hits “New Levels”
U.S. DOLLAR gold bullion prices dropped to $1775 an ounce Monday morning London time – a 0.7% drop from Friday’s close.
“We see very light volume today,” says one Hong Kong gold bullion dealer.
“Gold could test $1800 soon, while the $1750 level provides good support.”
On the currency markets, the Dollar gained along with UK and German government bond prices, while European stock markets fell.
Silver bullion fell to $34.20 per ounce – a 1.5% drop from the end of last week – while other industrial commodities were mixed.
Over in Leipzig, German chancellor Angela Merkel repeated calls on Monday for a “new Europe” with greater “political union”.
Merkel – who this weekend described as “shameful” a series of murders that have been linked to a group calling itself the National Socialist Underground – said today that Europe is facing its biggest crisis since the end of World War Two.
The solution is “more Europe and not less Europe” Merkel told her CDU party’s annual conference.
“The Euro is a failed project that has costs barrels full of money,” reckons Dutch politician Geert Wilders. Wilders, whose Party for Freedom is known for its anti-Islam stance, has said he is looking at the implications of the Netherlands returning to the Guilder – the currency it had before joining the Euro.
Spain’s Socialist government meantime is set to lose Sunday’s general election, according to latest opinion polls, which predict a win for the center-right Popular Party.
Yields on Spanish 10-Year government bonds this morning breached 6% for the first time since the European Central Bank began buying Italian and Spanish debt in early August.
Over in Athens, Greece formally appointed Lucas Papademos as prime minister on Friday, while in Italy Mario Monti – former European Competition Commissioner and adviser to Goldman Sachs – was asked last night to form a new government, following the resignation of Silvio Berlusconi.
“Monti’s appointment is clearly a positive for markets,” reckons EmmanueleVizzini, chief investment officer at Milan-based asset management firm InvestitoriSgr.
Italy’s Treasury successfully sold €3 billion in 5-Year government bonds on Monday. The average yield was 6.29% – up from 5.32% for last month’s 5-Year auction.
The ECB stepped up its buying of Italian debt towards the end of last week, according to newswire Reuters. During the crisis it has intervened on the open market to buy government bonds of troubled sovereigns – including Greece, Italy and Spain.
The ECB “must stick to [its] mandate” Jens Weidmann, president of the Bundesbank and a member of the ECB Governing Council, says in an interview published in today’s Financial Times.
“[It] must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty” – which prohibits central banks directly funding governments.
“[Europe is having] an absurd debate in which we are telling institutions: don’t care about the law…if we now overstep [our] mandate, we call into question our own independence.”
The Euro fell nearly 1% against the Dollar on Monday morning, hitting $1.34. The Euro gold bullion price rose to €1304 per ounce – 0.2% up on Friday’s close.
“Doubts and uncertainty over the Eurozone are sure to resurface which could see renewed interest in precious metals, especially gold and silver,” says Marc Ground, commodities strategist at Standard Bank.
“However, we continue to warn that should the Eurozone debt crisis result in a severe drying up of money markets in Europe, we could see all commodities fall rapidly, even gold.”
China meantime should “operate by the same rules as everyone else,” US president Barack Obama told reporters Sunday – referring to the alleged undervaluation of the Yuan against the Dollar.
“Enough is enough.”
“[It depends] whose rules we are talking about,” responded Pang Sen, deputy director general at China’s Foreign Ministry.
“If the rules are made collectively through agreement and China is a part of it, then China will abide by them. If rules are decided by one or even several countries, China does not have the obligation to abide by that.”
Chinese gold bullion demand meantime continues to show signs of strength.
“There’s a lot of material going into China, and New Year demand hasn’t even started yet,” said a senior executive in the secure logistics industry toBullionVault today from Switzerland.
“This is new, regular and additional traffic [in gold and silver] – levels we haven’t seen before.”
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
