London Gold Market Report
from Ben Traynor
BullionVault
Monday 25 June 2012, 08:30 EDT
WHOLESALE MARKET gold bullion prices dropped below $1570 an ounce during Monday morning’s London session, though they remain broadly in line with where they ended last week, with markets focused on this week’s European leaders’ summit.
Gold bullion is now at levels similar to those seen in the second week in May, when gold fell through $1600 for the first time in 2012.
“Gold has essentially been in a sideways range for the past seven weeks,” says the latest technical analysis note from bullion bank Scotia Mocatta.
“We will need to see a break through the low at $1526 to get a bigger directional move.”
Silver bullion hovered around $26.80 an ounce – a slight dip on last week’s close – while other commodities were also broadly flat, with the exception of oil which ticked lower.
US Treasury bond prices gained meantime, along with other major governments bonds, while the Dollar also strengthened.
By contrast, European stock markets sold off this morning – with Germany’s DAX down 1.8% by lunchtime –as many analysts focused on the European Union summit that takes place this Thursday and Friday in Brussels.
“The stakes are quite high [at this summit],” says Standard Chartered economist Thomas Costerg in London.
“There are very high risks building in the system, borrowing costs are rising, there are stresses in asset classes and growth is falling very rapidly.”
The leaders of Germany, France, Italy and Spain, who met in Rome last Friday, announced they will put forward a growth package worth up to €130 billion at this week’s summit, although no other details were provided. There was also agreement on the creation of a banking union, for which draft proposals are being drawn up ahead of this week’s summit, according to newswire Reuters.
Ahead of the meeting, Italian prime minister Mario Monti proposed that money from Eurozone rescue funds be used to buy the government bonds of distressed Eurozone sovereigns directly on the open market. There was however no sign at Friday’s press conference that German chancellor Angela Merkel favors such a plan.
“Monti’s proposal amounts to state financing via the central bank printing press,” said Bundesbank president Jens Weidmann over the weekend.
“[This] is forbidden by EU treaties…monetary policy should be restrained from limiting the financing costs of member states and from going a long way to shutting down market mechanisms,” added Weidmann, who sits on the European Central Bank’s Governing Council.
In May 2010, the ECB itself announced it would intervene in debt markets, and extended its Securities Markets Programme last year by buying Spanish and Italian government bonds.
“The main problem with bond buying,” says Citigroup strategist Jamie Searle, “is that it gives investors an opportunity to reduce holdings, but it doesn’t convince others to add.”
The German government meantime has agreed to underwrite the debt of German states, which from next year will be able to issue debt for which they and the federal government are jointly liable. The decision is part of a deal with opposition parties in return for support in ratifying the fiscal treaty, on which the Bundestag is still to vote, according to newswire Bloomberg.
European leaders should create a European Fiscal Authority to buy the debt of Eurozone governments in return for fiscal reforms – financing the purchases by issuing debt for which Euro area governments are jointly and severally liable – billionaire investor George Soros argues in today’s Financial Times.
“We have to fight the causes [of the crisis],” countered German finance minister Wolfgang Schaeuble in a television interview Sunday.
“Money alone or bailouts or any other solutions, or monetary policy at the ECB…that will never resolve the problem.”
Schaeuble added that US president Barack Obama “should focus on reducing the American deficit” rather than exhorting European leaders to do more.
“People are always ready to give others advice quickly. Our argument is ‘we’re ready’. We want more Europe.”
On the currency markets, the Euro fell below $1.25 for the first time in two weeks this morning.
“The weaker Euro is keeping a lid on precious metals,” says Monday’s note from commodity strategists at Standard Bank.
“Physical demand out of India is being hampered by a weak Rupee, although Far East buying is still relatively robust.”
Spain meantime has formally requested a bailout to fund restructuring of its banking sector, two weeks after Eurozone leaders announced they would agree a credit line for up to €100 billion.
Over in New York, the difference between bullish and bearish contracts held by noncommercial gold futures and Options traders on the Comex – the so-called speculative net long – rose 3.8% to the equivalent of 429 tonnes of gold bullion in the week ended last Tuesday.
In the same period, the volume of gold held by the world’s largest gold ETF, the SPDR Gold Trust (GLD), rose 0.6% to 1281.6 tonnes, though GLD volumes have been flat since last Tuesday.
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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.
(c) BullionVault 2011
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