London Gold Market Report
from Ben Traynor
BullionVault
Friday 3 August 2012, 07:00 EDT
U.S. DOLLAR prices quoted for gold bullion on the wholesale market rose to $1596 an ounce during Friday morning’s London trading, recovering some ground following three days of losses, as stock markets also rebounded ahead of the release of US nonfarm payrolls data later today.
Silver bullion climbed back above $27.30 per ounce, in line with where it closed two weeks ago, while other industrial commodities also edged higher.
Heading into the weekend, gold bullion looked set for a 1.7% weekly loss by Friday lunchtime in London. Gold prices fell sharply on Wednesday following a better-than-expected ADP Employment report, a privately-produced precursor to today’s official nonfarms figure.
Gold then fell again Thursday along with the Euro, after the European Central Bank opted to leave interest rates on hold and, like the Federal Reserve a day earlier, announced no new stimulus measures.
“While this week’s price behavior highlights that investors are rather quick to get out, it’s important to remember that gold is back to levels it was trading at just last week,” says a note from UBS.
“Our more positive outlook…still stands, especially with the potential for central banks to act remaining elevated.”
The European Central Bank voted to leave interest rates on hold at a record low of 0.75% Thursday. ECB president Mario Draghi said last week that his institution would do “whatever it takes to preserve the Euro” – comments widely-taken to mean the ECB could intervene in sovereign bond markets with the aim of reducing borrowing costs.
At Thursday’s press conference however few specifics were given as to what actions the ECB might take.
“Various committees will now review the various non-standard policy options,” Draghi told reporters.
“Policymakers in the Euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination.”
Draghi acknowledged that “implementation [of such measures] takes time and financial markets often only adjust once success becomes clearly visible”, adding that governments need to “stand ready to activate [Eurozone bailout funds] the EFSF/ESM in the bond market”.
The ECB chief expressed surprise when asked whether the European Stability Mechanism, the permanent bailout fund being phased in to replace the European Financial Stability Facility, should be granted a banking license to enable it to borrow from the ECB and this leverage the planned €500 billion lending capacity the ESM will eventually have.
“I have said at least twice,” replied Draghi, “that the current design of the ESM does not allow it to be recognized as a suitable counterparty [for the ECB].”
Responding to a question about ECB Governing Council member Jens Weidmann, president of Germany’s Bundesbank, Draghi agreed that Weidmann and the Bundesbank “have their reservations about programs that envisage buying bonds”.
“Although [Governing Council members] are here in a personal capacity and we should never forget that,” he added.
“The ECB can’t just take random measures against the Bundesbank’s will,” says Alexander Krueger, chief economist at Bankhaus Lampe in Dusseldorf.
“That’s why investors are disappointed…the country with the largest economy needs to be part of any package.”
“[The Bundesbank] can talk, scream and yell, but there is not much they can do,” counters Charles Wyplosz, professor of international economics at the University of Geneva.
“Germany’s hegemony is not what it seems,” agrees Ambrose Evans-Pritchard in the Telegraph.
“The Germans are holding a gun to the head of the Latins, but the Latins are also holding a gun to German heads…they can call Germany’s strategic bluff by mobilizing their majority power on the ECB council to force reflation over a German veto.”
Benchmark 10-Year yields on Spanish bonds rose back above 7% yesterday, while 10-Year Italian yields rose back above 6% and stock markets fell.
“Draghi’s comments yesterday didn’t help investors to gauge the market’s direction,” says Zurich-based hedge fund manager Trung-Tin Nguyen.
“Hence US data are in focus today, with investors hoping to weigh whether or not further action by the Fed can be expected soon in case of worse-than-expected numbers, or, as a silver lining, to see if the US economy is recovering.”
The US Bureau of Labor Statistics is due to publish the latest Employment Situation report later today, which includes July’s nonfarm payrolls number showing how many private sector nonagricultural jobs the economy added last month.
Elsewhere in the US, “the federal government has been quietly completing an audit of US gold stored at the New York Fed,” the LA Times reports.
The Treasury Department says the results will be announced by the end of the year.
Derivatives exchange operator CME Group meantime has said it will cut its margins for silver futures contracts for the third time since February, newswire Reuters reports.
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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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