Gold “Struggling for Momentum” But “Still Respecting Long Term Uptrend”, Investment Demand Insufficient to Compensate for Current Slow Physical Market

April 3rd, 2012 No Comments   Posted in Gold

SPOT MARKET gold prices jumped to $1669 per ounce ahead of Monday’s US trading, broadly in line with where they ended last week, though they remained below the Asian session peak touched briefly following the release of positive Chinese manufacturing data.

“Gold [is] still respecting the long-term uptrend,” says the latest technical analysis note from bullion bank Scotia Mocatta.

Silver bullion prices hovered around $32.50 per ounce – 0.5% up on Friday’s close – while stocks failed to hold onto early gains.

Commodities were broadly flat and US Treasuries ticked higher.

Physical precious metals markets reported quiet activity Monday morning, with Chinese markets closed until Thursday for the Qingming Festival and Indian jewelry dealers still on strike.

“There is no business in gold and silver,” Kumar Jain, vice president of the Mumbai Jewellers’ Association, which covers ten thousand jewelers, told Reuters.

“The whole value chain has shut.”

Imports of gold bullion by India, the world’s largest gold consumer last year, fell by 55% last month, according to Bombay Bullion Association president Prithviraj Kothari, as jewelers shut their shops following an announcement by India’s government that they were doubling the duty on gold imports and taxing gold jewelry sales.

“Sales have dipped drastically as almost 80 to 90 per cent of the jewelers have joined the protest against duty hike,” says Kothari.

In New York meantime, the net long position of so-called speculative gold futures and options traders on the Comex – measured as the difference between bullish and bearish contracts – rose 15% in the week ended last Tuesday, according to data released at the end of last week’s trading by the Commodity Futures Trading Commission.

Open interest however hit its lowest level this year on a Tuesday – the day of the week for which the CFTC publishes its Commitments of Traders reports. Data from CME Group show it fell further towards the end of last week.

“Gold [lacks] sufficient investment enthusiasm to be able to sideline the physical market as it did earlier in the year,” says a note from Barclays.

“Prices are struggling to gain momentum.”

“Recently prices have been driven strongly by speculative sentiment and it is not surprising to see those pullbacks,” adds Eugen Weinberg, head of commodities research at Commerzbank.

“But in the longer term, we still stay very confident that the upward trend in gold is still very constructive…I think in the longer term, gold will perform even more like a currency, and be less dependent on the jewelry sector.”

Here in Europe, Eurozone finance ministers agreed Friday to allow the roughly €300 billion already committed from the temporary bailout fund, the European Financial Stability Facility, to run alongside the €500 billion European Stability Mechanism, the permanent bailout vehicle due to become operational in July.

However, uncommitted funds from the €440 billion EFSF will not be available once the ESM comes in, capping the amount available for new rescues at €500 billion.

European leaders were told at February’s G20 meeting that they needed to do more to solve the Eurozone crisis before they asked for extra money from the International Monetary Fund.

“Europe has done its part,” said French finance minister Francois Baroin after Friday’s talks. The IMF is due to meet on April 20.

Some European banks meantime are planning to repay loans from the European Central Bank’s longer term refinancing operations two years early to avoid needing to raise money at the same time as many other banks, the Financial Times reports.

Banks borrowed over €1 trillion at the two LTROs in December and February.

Elsewhere in Europe, Eurozone manufacturing activity continued to fall last month – and at a faster rate than February – according to purchasing managers index figures released Monday.

Eurozone manufacturing PMI fell from 49.0 in February to 47.7 in March, with a figure below 50.0 indicating sector contraction. The unemployment rate in the Eurozone meantime rose to 10.8% last month, up from 10.7% in January, official data showed Monday.

In Germany, manufacturing PMI fell from 50.2 in February to 48.4 last month

By contrast, the latest data show the UK’s manufacturing sector continued to grow last month, with March’s PMI reported as 52.1, up from 51.5 in February.

China also reported accelerating growth in its manufacturing sector, with March’s official PMI reading 53.1, up from 51.0 the previous month.

“Keep in mind that in March the official PMI always rises 3 percentage points from its February level,” says Zhang Zhiwei, chief China economist at Nomura.

“Compared to the past, the official average PMI is about 56, whereas this month, it`s only 53. It’s still very much lower.”

Economists at Societe Generale however counter that even adjusting for seasonality, China’s PMI remain above 50, while “the ‘seasonality’ this March was not especially large relative to the same month in previous years,” adds SocGen interest rate strategist Christian Carrillo.

Over in the US, the first three months of 2012 saw the US Mint record its lowest first quarter sales figures for gold coins in four years.

Ben Traynor

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

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.

Gold Climbs Above 200-day Average, Bernanke “Dovish Again” while Eurozone “Still Insolvent”

March 28th, 2012 No Comments   Posted in Gold

London Gold Market Report

THE SPOT MARKET gold price traded just below $1700 an ounce for most of Tuesday morning in London – over 4% up on its low last week – before heading lower just ahead of the US markets open as the US Dollar regained some of the ground it lost on Monday following comments by Federal Reserve chairman Ben Bernanke.

The silver price rose to $33.25 per ounce – a 6.8% gain since its week’s low last Thursday – before it too eased.

The US Dollar Index, which measures the Dollar’s strength against other major currencies, hit its lowest level since the start of the month Tuesday. Longer-dated US Treasuries dipped, while European government bonds gained despite warnings that the sovereign debt crisis has not been resolved.

European stock market gains were relatively muted Tuesday morning, compared to those of the preceding Asian and US sessions, while commodities were broadly flat.

Yesterday saw the gold price move back above its 200-day moving average – which by PM London Fix prices stood at $1682 per ounce Monday afternoon in London – after Bernanke spoke of the need for “continued accommodative policies” and said that the labor market “remains far from normal” despite recent signs of improvement.

“Bernanke was back on solidly dovish ground again,” say Standard Bank currency analysts Steve Barrow and Jeremy Stevens.

“Rightly, or wrongly, the market seems to think that his comments could imply another loosening of [policy] via some form of QE3,” they added, referring to the possibility of a third round of quantitative easing.

“Fed likely to hint at QE3 in April meeting,” said Bill Gross, managing director of world’s largest bond fund Pimco, via the fund’s Twitter account.

Physical gold demand meantime “has shot higher as demand from South-East Asia in particular increased with gold below $1,650 over the past few days, no doubt providing support to the gold price when investor sentiment turned bearish,” says Walter de Wet, commodities strategist at Standard Bank, citing the bank’s Gold Physical Flows Index.

Over in New York, the world’s largest gold ETF, the SPDR Gold Trust (GLD), added 6 tonnes to its gold holdings yesterday.

Also in New York, today sees the expiry of April options on Comex gold futures contracts, with a lot of open interest – both bullish and bearish – clustering around the $1700 an ounce mark. The last options expiry date on 23 February saw gold prices jump to a then 3-month high.

Economic growth meantime “is stalling” in Europe, according to Angel Gurria, secretary-general of the Paris-based Organisation for Economic Co-operation and Development.

“Market confidence in the Euro area is fragile,” says the OECD’s ‘Economic Survey of the Euro Area 2012, published today.

“The outlook for growth is unusually uncertain and depends critically on the resolution of the sovereign debt crisis.”

Eurozone finance ministers are due to meet this Friday where they are expected to agree an increase in the size of the single currency’s so-called ‘firewall’ by combining the existing temporary bailout fund with the new permanent one that launches in July, after Germany dropped its opposition to such a move.

“Everybody knows [the combined fund] is not going to be big enough,” says Robert Crossley, head of European rates strategy at Citi.

“But less inadequate is a good thing.”

“The Eurozone remains insolvent,” adds Jim Leaviss, head of retail fixed income at M&G Investments.

“Growth is still a problem.”

Germany’s Deutsche Bank meantime has overtaken France’s BNP Paribas to become Europe’s largest bank, as a result of adding to its assets while other banks have been shrinking their balance sheets, according to newswire Bloomberg.

The likelihood that the German government would support its largest bank in the event of a crisis was cited by Fitch in December when the ratings agency gave Deutsche a stable outlook.

“We haven’t solved the too-big- to-fail challenge in this country,” says Ralph Brinkhaus, a member of Germany’s finance committee as well as chancellor Angela Merkel’s CDU party.

“That problem becomes all the more a matter of concern the bigger the bank is…and in the case of Deutsche Bank, is becoming.”

A Morgan Stanley co-authored report has suggested that banks worldwide will look to reduce the size of their balance sheets by $1 trillion over the next two years.

Here in the UK, Abu Dhabi’s ruling family is in talks with the British government about buying a stake in the 83%-taxpayer-owned Royal Bank of Scotland, news agency Reuters reports.

The gold price could “peak at well over $2000″ an ounce, Mark Cutifani, chief executive of gold mining firm AngloGold Ashanti said Tuesday.

Turkey’s central bank today raised the proportion of domestic currency reserves Turkish banks can hold as gold from 10% to 20%, while simultaneously lowering the proportion for foreign exchange reserves from 10% to zero.

Turkey is one of a number of countries facing current account deficits and exchange rate problems that have recently turned their attention to gold.

Ben Traynor

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

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.

Gold “Remains Vulnerable” while “Silver Support Threatened” by Downtrend, UK Deficit “Surprises” Ahead of Budget

March 22nd, 2012 No Comments   Posted in Gold

London Gold Market Report

WHOLESALE MARKET gold prices rose to $1660 an ounce Wednesday morning London time – more or less where they ended last week – before easing ahead of US markets open, while stock, commodity and government bond prices held broadly steady following news that the UK government deficit rose sharply last year.

Silver prices meantime dipped below $32 per ounce around lunchtime – a 1.8% drop on the week so far.

“Silver is in a short-term downtrend and is likely to breach support…at $31.81,” says the latest technical analysis note from bullion bank Scotia Mocatta, who add that the next target would be $30.48.

Over in India, the strike by Gold Dealers in protest at last week’s gold import duty hike entered its fifth day Wednesday.

“We harbor little doubt that gold remains vulnerable,” says a note from UBS precious metals analyst Edel Tully.

“Upside drivers are lacking and physical markets have yet to show a convincing response to lower prices.”

Here in the UK, the latest Bank of England Monetary Policy Committee minutes published on Wednesday show that two of the nine MPC members voted in favor of expanding the Bank’s quantitative easing program by £25 billion when the MPC met earlier this month. The majority voted to maintain the size of the program at £325 billion.

The decision to leave interest rates at 0.5%, where they have been since March 2009, was unanimous.

The MPC minutes noted significant risks to economic activity that might result in inflation falling materially below the [MPC's 2%] target in the medium term”.

MPC member Spencer Dale however, who voted to six times for a rate increase in 2011 – said in a speech Tuesday that in his view “inflation is just as likely to be above as below the inflation target in the medium term”.

The UK government deficit meantime rose to £12.9 billion last month – more than double consensus estimates – figures published hours before Wednesday’s Budget show.

Lower tax receipts contributed to the deficit growth, the Financial Times reports, with HM Revenue & Customs data showing an 8% fall in self-assessment tax revenues compared to February last year.

The news “provides a very uncomfortable background for the budget,” says Investec economist Philip Shaw.

“The fact there has been a worsening on this scale is a big surprise.”

Britain is expected to issue the second largest amount of government debt – known as gilts – on record this coming fiscal year, according to a Bloomberg survey of primary bond dealers.

“The government has a tough balancing act,” says John Wraith, London-based fixed-income strategist at Bank of America Merrill Lynch.

“Growth is going to be at best anemic, and it’s going to take a long time to reduce gilt issuance. They need to reduce debt, but if they stick rigidly to their fiscal consolidation plan, they risk killing growth.”

The FT argued this week that UK policymakers are engaged in financial repression, holding interest rates below inflation and creating a captive market for government bonds in an effort to lower the real value of national debt.

Federal Reserve chairman Ben Bernanke will warn of the US financial system’s exposure to Europe when he appears before the House Oversight Committee today.

“US financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree as the European situation has evolved, but the risks of contagion remain a concern for both these institutions and their supervisors and regulators,” Bernanke will say, in prepared remarks published ahead of the testimony.

On Tuesday, Bernanke gave the first in a series of four college lectures on the Fed’s role in the economy, in which he described a gold standard as a “waste of resources” and a “far from perfect monetary system”.

“Since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy…Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity—so that’s the reverse of what a central bank would normally do today.”

Congressman Ron Paul last year asked Bernanke if he though gold was money, to which the Fed chairman replied ‘No’. Last month, Paul held up a silver coin while questioning Bernanke, saying that it “is what the market has always said should be money”.

Russia’s central bank gold holdings 3.1 tonnes of gold last month, equivalent to 0.35% of its official reserves, data published Tuesday show.

Over in the US meantime, holdings in the world’s largest gold ETF, the SPDR Gold Trust (GLD), fell 3 tonnes to 1290.2 tonnes yesterday, having held steady for one week. Silver bullion holdings in the iShares Silver Trust (SLV), the world’s biggest silver ETF, remained steady at 9752.7 tonnes.

Ben Traynor

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

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.

Physical Activity “Brisk” as Gold Falls to 6-Week Low, Spain Makes “Sovereign Decision” to Ignore EU, “Large Spending” Russia Warned by Fitch Ratings

March 6th, 2012 No Comments   Posted in Gold

London Gold Market Report

from Ben Traynor

BullionVault

Tuesday 6 March 2012, 08:45 EST

Physical Activity “Brisk” as Gold Falls to 6-Week Low, Spain Makes “Sovereign Decision” to Ignore EU, “Large Spending” Russia Warned by Fitch Ratings

SPOT MARKET prices for gold bullion hit a six-week low of $1682 an ounce Tuesday lunchtime in London – a fall of 1.8% from last week’s close – as stocks, commodities and the Euro continued their recent slide and uncertainty hung over recent European agreements.

Silver bullion dropped to $33.14 per ounce this morning – a 4.8% loss since the start of the week.

“We remain bearish so long as we remain below…the breached uptrend, currently at $1768,” says the latest note from technical analysts at gold bullion dealing bank Scotia Mocatta.

“A lot of gold investors are still affected by the large sell-off last week,” says Lynette Tan, analyst at Phillip Futures in Singapore, though she adds that gold is “very strongly supported at the 200-day moving average.”

Based on PM London Fix prices, gold’s 200 day moving average on Monday stood at $1672.57 per ounce.

“In the gold physical market, activity is brisk,” says Standard Bank commodities strategist Marc Ground.

“Customers are happy to buy at the current level,” adds one physical dealer in Singapore.

“Although things have slowed down a bit. I guess they could buy more if prices fall further.”

Major holders of Greek bonds came out in support of the Greek bond swap on Monday. Private sector bondholders have until Thursday evening to state whether they will take part in the arrangement, which involves losses estimated at some 70%.

“Whoever thinks that they will hold out and be paid in full, is mistaken,” Greek finance minister Evangelos Venizelos said Monday, adding that Greece is prepared to activate collective action clauses – inserted into contracts retroactively – that would force reluctant bondholders to take part in the deal.

A disorderly Greek default would have “some very important and damaging ramifications”, according to a memo circulated last month to staff at the Institute of International Finance, the body which negotiated with Greece on behalf of private sector creditors.

“It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion.”

The Dutch Freedom Party has called for the Netherlands to leave the Euro and return to the Guilder.

“The Euro is not in the interests of the Dutch people,” says the party’s leader Geert Wilders.

“We want to be the master of our own house and our own country, so we say yes to the Guilder. Bring it on.”

Wilders’s party is not a member of the Dutch governing coalition. The minority government does however depend on its support to pass legislation.

European Council president Herman van Rompuy urged the Dutch government on Sunday to cut its budget deficit from a projected 4.5% of gross domestic product next year to the 3% limit agreed by European leaders last Friday.

Spain’s prime minister meantime has said he will ignore the European Union’s deficit target of 4.4% of GDP this year. Mariano Rajoy has set his own target of 5.8% in what he called a “sovereign decision”. Last year Spain’s deficit was 8.5% of GDP, Britain’s Telegraph newspaper reports.

Overall Eurozone GDP meantime contracted in the fourth quarter of last year, recording a 0.3% quarter-on-quarter fall, according to official data published this morning.

Ratings agency Fitch has responded to Vladimir Putin’s election as Russia’s president by issuing a statement reminding investors that it cut the country’s outlook from ‘positive’ to ‘stable’ in January.

“Fitch Ratings is closely monitoring how quickly the new government will act to reform the Russian economy and hasten fiscal consolidation,” said a Fitch report Monday.

“Putin made large spending commitments prior to and during his election campaign, while members of the government’s economic team recommended fiscal consolidation.”

Ten US states are holding ballots in the contest to win the Republican presidential nomination in today’s so-called Super Tuesday elections. Mitt Romney and Rick Santorum appear favorites.

Former House of Representatives speaker Newt Gingrich, who has suggested the United States could consider tying the Dollar’s value to gold bullion, has fallen behind in the race.

Long standing gold advocate Ron Paul, who last week held up a silver coin during Federal Reserve chairman Ben Bernanke’s appearance before the House Financial Services Committee, is hoping to win Alaska, Reuters reports.

Following Bernanke’s testimony last week, gold bullion has fallen to levels not seen since January 25 – the day it spiked higher after Fed policymakers revealed they expect interest rates to stay near zero until at least late 2014.

Ben Traynor

BullionVault

Gold value calculator | Buy gold online at live prices

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

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.

China’s “Mystery” Gold Buyer

February 22nd, 2012 No Comments   Posted in Gold

Was the People’s Bank of China really buying gold at the rate of 1 ounce in every 8 sold worldwide last quarter…?

SO THOSE MILITANT crazies known to the mainstream media as “gold bugs” – and to the FBI as subversives – got the headline they’ve been longing for, apparently, last week.

“China central bank in gold-buying push,” declared the Financial Times. “It does appear the People’s Bank of China has been a significant buyer,” agreed a Reuters columnist.

At last, rapture is upon us! Beijing is buying gold in the open market! The FT picks up the story…

“China’s imports from Hong Kong, which account for the majority of its overseas buying, soared to 227 tonnes in the last three months of 2011, according to data published by Hong Kong. Mine production in the country, the largest gold producer, stood at about 100 tonnes in the quarter, implying total supply of at least 330 tonnes.

“That compares to demand of 191 tonnes for gold jewellery, bars and coins – which account for the vast majority of Chinese demand – reported by the World Gold Council on Thursday.”

With gold exports banned, you can see the gap right there…all 139 tonnes of it. The FT‘s conclusion? Courtesy of an “inference” and a “could be” from two leading analysts, that excess of supply over demand must have gone to the People’s Bank of China. Must have, right?

Well…

  • The data came from 3 different sources, one of which is an official agency, another is the mining industry, and the third is trying to cover end-user sales in the world’s second-heaviest gold market and most populous nation;
  • Those demand figures in particular are likely to be revised – upwards – by Thomson Reuters GFMS (who supply the WGC). The best data available, they were certainly revised –  upwards – quarter-on-quarter over recent years. And even on first release, China’s retail jewelry and investment sales show average compound growth of 36% per year since 2001. That’s one hell of a trend to keep count of in real time;
  • No, a revision to end-demand of 139 tonnes will not happen. But would a 75% hike be any less likely than the People’s Bank of China growing its stated reserves (officially 1054 tonnes) by more than 13% inside 3 months? And inside 3 months that saw the gold price average $1684 per ounce, its highest level in history outside the $1702 record of July-Oct. last year?

Somehow, we doubt that China’s central bank snapped up 1 ounce in every 8 sold worldwide between October and Christmas. Most especially because, if Beijing’s policymakers were the “mystery” buyer, why would they then go and make importing gold a little bit harder for China’s bullion brokers?

Starting this month, China’s wholesalers now need to seek permission, reports our friend Bruce Ikemizu at Standard Bank in Tokyo, for each inbound shipment of gold from not only the People’s Bank  of China, but also from the bureaucrats of the State Administration of Foreign Exchange (SAFE). “So it takes longer to import gold,” notes Bruce.

Weirdly, SAFE was the agency which hoarded the 600-tonne addition of 2003-2009, officially switched to and reported by the PBoC three years ago in its last public update. So again, why would anyone buying gold – and already paying very nearly the highest prices in history – want to temper supply?

“In the medium term we do know the Chinese central bank and other Asian central banks with large foreign exchange reserves have been increasing their holdings of gold,” as Marcus Grubb of the World Gold Council told the Financial Times. Plugging some of last quarter’s gap “is consistent with that.” But plugging the whole 139 tonnes as the FT‘s headline suggests?

Both the WGC and GFMS’s Phillip Klapwijk – also quoted in the FT‘s report – in fact added that bullion banks and other stock-pilers would be likely candidates, too. And that would make sense after the scramble to secure supplies in early 2011. Because gold imports through Hong Kong – well ahead of last month’s 2012 Lunar New Year holidays – actually peaked in November. They then fell hard in December as the festivities drew closer.

Indeed, as the London gold price dropped late last September, the Hong Kong premium tripled to jump above $3 per ounce. So calling your UK supplier and booking new shipments would have been a natural response. Cheap prices, plus a fat mark-up if the metal arrives in good time? What trader wouldn’t try to book that? October and November then saw record imports of gold through Hong Kong to China. But the premium had fallen quickly however (according to Reuters data), already back down to $1 per ounce in October.

That’s the trouble with a physical market – delivery needs brokers and shipping, and wholesalers need stockpiles to draw on. Not much of a headline though, is it?

Stock-piling is common in base metals and oil. Standard Bank’s commodities team now reckon silver stockpiles in China are equal to 15 months of fabrication demand. And if Beijing were really on the bid for imported metal, then why, immediately after January’s Chinese New Year celebrations – the single biggest event on China’s gold buying calendar – did it set China’s gold importers a new hurdle?

Our guess? No doubt China is buying gold direct from its miners. That metal is then lacking for retail consumption. So to ensure lots of supply for what proved another strong Chinese New Year, importers booked early and often. But following that trebling of gold imports in 2011, the timing of SAFE’s move, immediately after New Year – and only two weeks after India doubled its gold and silver import duties – suggests Beijing is live to the trade-balance risks posed by Chinese households’ soaring demand.

“IMF slashes forecast for China current account surplus,” announced the Wall Street Journal last week.

“China’s current account surplus for 2011 shrank to $201.1 billion ($187.37bn), from $305.4bn in 2010. More important, as a ratio of gross domestic product, the surplus fell to about 2.7%…close to a decade-low.”

Now, “as China’s trade surplus declines dramatically,” reports University of Peking professor Michael Pettis, “more and more people within the country are calling for interventionist steps to halt the decline, including depreciating the [Yuan], or at least halting its appreciation.”

Pettis’ comment should remind us that Beijing is a big bureaucracy, with lots of divergent views and voices. Devaluing the Yuan would look a highly aggressive decision to its would-be friends in Washington, especially those US politicians talking up China’s “violations” of international law. But trying to stem – or rather slow – the pace of import growth wouldn’t look quite so rude.

This new rule is already frustrating those banks importing gold, but it’s likely only to delay, rather than deter, the flow of bullion. Still, it’s a hat-tip to the potential drain on China’s foreign currency holdings which gold has become for India – still the world’s No.1 consumer, and importing twice as much as bullion as China in 2011 because it has no domestic mine output to help feed its consumption, whether central-bank or private.

India’s hunger for a metal it does not produce is plain to see in its trade balance. The only current-account deficit in the region as Morgan Stanley notes, this gold-heavy outflow of cash also weighed on the Rupee’s exchange rate in 2011, down 15% versus the Dollar as the currency markets tried to force an adjustment.

Because even then, and with Rupee gold prices pushed to fresh record highs despite a 20% drop for US investors after September’s top, India’s full-year 2011 gold demand still rose from 2010 in Dollar terms, setting a fresh record of $46 billion on the World Gold Council’s data, and equal to more than three-quarters of the country’s current account deficit.

“[We hope to] discourage imports so that the Rupee steadies against the Dollar,” admitted a senior, unnamed official quoted by India Today after New Delhi raised import duties and handed a tax advantage to the domestic recycling lobby in January. Beijing’s policy wonks are being equally coy about trying to dampen gold bullion imports just ever so slightly. But China’s feint should remind precious-metals bulls that Asia’s massive demand growth can pose a risk to itself.

First, high prices could dissuade new buyers, as shown all too clearly by Western jewelry demand since 2005. A slow-down in GDP growth, worsened by a shrinking trade surplus, would make that risk worse. But for Asia’s ravenous gold buying, state interference is perhaps the present threat, especially in a market averaging 36% compound growth by value each year since China began deregulating gold a decade ago.

China’s gold buyers have needed no help from over-excitable headlines. But they have needed Beijing’s blessing to date.

Adrian Ash

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

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.

Default Threat “Will Keep Coming Back” in Despite Greece Bailout Agreement, Gold Trading Volumes Rise in London But Imports by India May Decline

February 22nd, 2012 No Comments   Posted in Gold

London Gold Market Report

U.S. DOLLAR gold bullion prices spiked to $1747 an ounce Tuesday lunchtime in London – a 1.3% gain on last week’s close – as US Markets re-opened to the news that European finance leaders have agreed to bail out Greece.

Silver bullion also spiked, hitting $33.97 per ounce – 1.9% up on the start of the week.

European stock markets by contrast drifted lower in Tuesday morning trading, while the Euro gave back most of the gains it made against the Dollar immediately after the Greek deal was announced. Commodities edged higher, while US Treasuries fell.

“Market reaction [to the Greek deal] has been remarkably muted so far,” one London gold bullion dealer noted this morning, before US markets opened.

Greece’s €130 billion second bailout was finally approved in the early hours of Tuesday morning, following a day of discussions among Eurozone finance ministers in Brussels.

The European Central Bank will pass on profits from its Greek debt holdings – bought below face value as part of its Securities Markets Programme aimed at supporting troubled sovereign debt markets – to the Greek government as a means of alleviating Greece’s debt burden.

Private sector creditors meantime will be asked to take bigger losses on their Greek debt holdings than previously agreed.

“From my point of view, this is a solid deal for investors, a fair deal for all parties involved,” said Charles Dallara, managing director of the Institute of International Finance, which negotiated with the Greek government on behalf of private bondholders.

“We’ve been able to avoid a disorderly default.”

Private sector losses will be equivalent to “more than 70%” of the net present value of the bonds, according to Jean Lemiere of BNP Paribas, who was involved in the negotiations.

The bailout means Greece should now be able to pay €14.5 billion of bonds that mature on March 20.

“Does this alleviate the risk of imminent default?” asks Callum Henderson, Singapore-based global head of foreign-exchange research at Standard Chartered.

“Yes, but not further out. Further out, the concerns of a default will keep coming back.”

“The risk,” adds a Hong Kong gold bullion dealer, “that we are going to have a sovereign default which leads to the collapse of the Euro still exists, but for that to happen in March, that risk is gone.”

The official statement released last night by Eurozone finance ministers calls for “further major efforts by the Greek society…to return the economy to a sustainable growth path”, as part of an effort to reduce the country’s debt-to-GDP ratio to 120.5% by 2020.

The statement also invites the European Commission “to significantly strengthen its Task Force for Greece…in order to bolster its capacity to provide and coordinate technical assistance”.

“Greece will find it difficult to shoulder even the reduced debt in the long-run if it does not implement far- reaching reforms,” says Commerzbank chief economist Joerg Kraemer.

“The probability will rise in the second half of the year that a frustrated EU stops payments to Greece.”

Gold imports to India meantime could fall in 2012 for the first time in three years, according to analysts polled by newswire Bloomberg.

India imported 969 tonnes of gold bullion in 2011, according to World Gold Council data, in a year that saw gold ETF demand double. The median estimate in Bloomberg’s poll was for 900 tonnes to be imported this year.

Silver bullion imports however could breach 5000 tonnes – up from 4800 tonnes last year – according to Bombay Bullion Association president Prithviraj Kothari.

“Silver demand is expected to rise on firm industrial and investment demand,”  Kothari told reporters at a conference on Tuesday.

Here in London, the daily average volume of gold bullion transferred between parties by clearing members of the London Bullion Market Association was 690.5 tonnes in January – a 1.0% gain on the previous month, and a 15.3% year-on-year gain – LBMA clearing statistics published Monday show.

By contrast, the daily average volume of silver bullion transferred fell last month, dropping to 4641 tonnes – the lowest level since March last year. The daily average silver volume fell 24.3% from December – though year-on-year it posted a gain of 24.6%.

Ben Traynor

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

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.

“Quiet Session” Sees Gold and Silver Flat, ECB Could Create “Dangerous” Two Tier Debt Market

February 20th, 2012 No Comments   Posted in Gold

London Gold Market Report

SPOT MARKET prices for buying gold held just above $1730 an ounce during flat trading this morning in London, as speculation continued over whether a Greek bailout will be agreed next week.

Prices for buying silver were also very flat – hovering above $33.50 an ounce – as were those for commodities and stocks ahead of President’s Day in the US on Monday.

“A quiet session,” said one Hong Kong gold dealer this morning.

Heading into the weekend, the price of buying gold was up less than half of one percent on the week by Friday lunchtime, with silver also showing very little movement from last Friday’s close.

German finance minister Wolfgang Schaeuble has reportedly called for Greece to be allowed to default. Chancellor Angela Merkel is firmly against such a development, according to press reports.

“Schaeuble doesn’t think the Greeks can deliver any more [austerity measures],” an official from Merkel’s CDU party tells the Financial Times. Schaeuble has also this week suggested Greece should postpone general elections scheduled for April and install a technocrat government.

Eurozone finance ministers are due to meet Monday to discuss Greece’s second bailout, with Germany, the Netherlands, Luxembourg and Finland – all rated AAA by ratings agencies – calling for increased permanent supervision of Greece’s fiscal affairs.

“The one thing we should take away from Lehman Brothers,” former US Treasury secretary Henry Paulson said this week, “is you don’t want a big systemic institution to fail in a messy way, and you clearly don’t want that to happen with a [Euro] member state.”

“We expect [gold's sideways] trend to continue into the weekend, as participants remain wary of taking on new positions ahead of Monday’s Eurozone meeting,” says today’s note from Standard Bank commodities strategist Marc Ground.

The German parliament is expected to vote on any bailout deal on February 27. If enough members of Merkel’s coalition government oppose the measure, she may need to rely on opposition Social Democrat and Green votes.

Elsewhere in Germany, Merkel’s personal choice for the ceremonial role of German president resigned today amid allegations he misled parliament over a €500,000 loan to buy a house.

The European Central Bank meantime is expected to swap its existing Greek bonds for new ones that would not tie it to any collective action clauses to which private investors would be subject.

This means the ECB would be protected from taking losses on its holdings – an event that ECB president Mario Draghi has said would amount to monetization of government debt.

“In Europe, all bond holders are equal, but the ECB is more equal than others, apparently,” says Thomas Costerg, London-based economist at Standard Chartered bank.

“This could set a dangerous precedent, and, by creating a de-facto two-tier market, this could discourage investment in other peripheral debt markets.”

If private sector Greek bond losses are deemed to be involuntary, this could also trigger payments on credit default swaps, which act as a form of debt insurance.

“The probability of triggering CDS has increased because the ECB has protected itself,” says Padhraic Garvey, head of developed-market debt at Amsterdam-based ING Groep.

The United States meantime has no plans to give additional money to the International Monetary Fund, US Treasury undersecretary for international affairs Lael Brainard told the Senate banking Committee Thursday.

US consumer price inflation dropped to an annual rate of 2.9% last month, according to figures published Friday – down from 3.0% in December.

China’s central bank may have been buying gold in the fourth quarter of last year, according to a report in Friday’s FT.

Elsewhere in China, a huge stockpile of silver bullion has built up in the country, according to investment bank analysis this week.

Ben Traynor

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

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.

Dollar Weakness “Creating Gold Demand” after Greek Deal, Time for American Austerity “Is Not Now” says White House

February 15th, 2012 No Comments   Posted in Gold

London Gold Market Report

SPOT MARKET gold prices touched $1733 per ounce Monday morning – 0.5% up on last week’s close – as stock markets, commodities and the Euro all rallied following Greece’s vote in favor of new austerity measures.

Silver prices meantime hovered around $33.90 per ounce – 0.8% up on the end of last week – while government bond prices dipped and the Dollar fell on the currency markets.

“The weakness in the Dollar…creates a bit of demand for gold,” reckons Bernard Sin, head of currency and metal dealing at Swiss precious metals refiner MKS.

By Monday lunchtime, Euro-denominated gold prices were roughly where they ended last week, at around €42,000 per kilo (€1306 per ounce).

Greek lawmakers last night approved a fresh austerity package, including public sector layoffs, minimum wage reduction and pension cuts. A reported 80,000 people took to the streets in protest, while press reports said up to 30 buildings were firebombed.

Antonis Samaras, leader of the New Democracy party and widely tipped as Greece’s next prime minister, expelled 21 members from his party for voting against the measures. Former prime minister George Papandreou, leader of the socialist Pasok party, also expelled members who did not support the measures.

Eurozone finance ministers are due to meet on Wednesday to review the new agreement, and potentially sign off Greece’s €130 billion second bailout. This in turn should pave the way for a deal with Greece’s private creditors to reduce the country’s debt burden, as well as stave off a default on March 20 when €14.5 billion of 3-Year Greek bonds mature.

“The government may yet find that approving the new measures…proves to be far less of a challenge than implementing them in the months ahead,” reckons one gold bullion dealer here in London.

“We are still looking for more measures out of Europe before we see a sustainable risk rally,” adds Ong Yi Ling at Phillip Futures in Singapore, who expects gold prices to hit resistance at $1760 per ounce.

“That will be the first resistance and the second one is at about the $1800 level. For gold to break the $1800 level, we need more measures, I would say.”

Here in the UK, the latest Bank of England figures relating to Project Merlin – the agreement between the UK government and British banks aimed at promoting lending to business – show that banks lent £214.9 billion overall to business in 2011, against a target of £190 billion.

However, the target for smaller businesses was missed, with £74.9 billion lent versus a target of £76 billion. The final quarter of last year saw a 3% drop in net lending.

“The Merlin targets have failed,” says Andrew Cave, head of external affairs at the Federation of Small Businesses.

“Talking to our members, 30% of them say they missed a growth opportunity because they weren’t able to access finance at the right times, so there is still a problem.”

“The reality,” adds Lee Hopley, chief economist at manufacturers’ federation EEF, “is that small and medium enterprises continue to be frustrated by the cost and terms and conditions around lending, with some opting out of using external finance altogether. This cannot be good for growth.”

China’s government has ordered the country’s banks to begin rolling over its loans to local governments, according to the Financial Times. When the global financial crisis broke in 2007-8, the state launched a massive stimulus program. Local authorities in China now have debts worth an estimated $1.7 trillion the FT says.

US president Barack Obama will today call for higher taxes on millionaires and billions of Dollars’ worth of infrastructure projects to create jobs as part of his 2013 budget proposals, news agency Reuters reports.

“I think there is pretty broad agreement that the time for austerity is not today,” White House chief of staff Jack Lew said Sunday.

Obama is expected to repeat his call made during his State of the Union address for the introduction of the so-called Buffett Rule, which would see millionaires pay a tax rate of at least 30%.

The net difference between bullish and bearish gold futures and options contracts held by traders on New York’s Comex – the so-called speculative net long – went up for the fifth week in a row over the week ended last Tuesday, according to the latest data from the Commodity Futures Trading Commission.

The spec net long and open interest both hit their highest levels since the week ended 15 November.

“It is likely that net spec length may consolidate or even decline in the week to 14 February as futures open interest in the period 8-10 February fell in parallel with the gold price,” reckons Carl Firman at precious metals consultancy VM Group.

“Options open interest in this period also shows a rise in puts relative to calls, suggesting some doubt may be creeping into the sustainability of the price rally.”

The volume of gold bullion held to back shares in world’s largest gold ETF the SPDR Gold Trust (GLD) meantime is at its highest level since 20 December, having risen 0.1% over the course of last week.

Ben Traynor

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

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.

China’s Rebalancing Should Be Good for Gold Demand

February 10th, 2012 No Comments   Posted in Gold

The next stage of China’s development could give gold buyers a boost…

THERE IS an old saying: “Nobody rings a bell at the top or bottom of a market.”

Having said that, anyone reading about the stampede for gold during last month’s Chinese New Year celebrations might have heard a faint ringing in their ears.

Here are a few quotations from various press sources:

  • “Some customers just walk in and buy a bunch of 100g gold bars all at once…Companies come in too to buy gold bars for presents.” – branch manager, Industrial and Commercial Bank of China.
  • “Some companies are giving out gold instead of cash to their employees” –Jia Zhihong, jeweler, Wuhan.
  • “With customers crowding and rushing in, we did not even have time to eat and drink.” – gold counter sales clerk.
  • “People seem crazy about gold, snatching it up more like a cheap cabbage than such a precious metal…You have to quickly decide whether to make a purchase, or it will be taken away by others.” – Beijing shopper
  • “Think of it like investing in the stock market…Gold maintains its value much better than stocks.” – sales clerk, China Gold store.

The classic signs of an investment mania are there. Mass participation, frenzied buying, an established narrative that something is a ‘sure thing’. But though this may look like the-mania-before-the-crash, that doesn’t mean it is.

China’s industrial development is still very much a work in progress. The likely next phase is a rebalancing of wealth away from industry and towards households. Given the demonstrable appetite for gold among Chinese consumers, this should be a major supporting factor for global gold demand.

According to World Gold Council data, Chinese gold consumption totaled 207.4 tonnes in 2003. By 2009 it had more than doubled to 457.7 tonnes. More recently, gold imports from Hong Kong, widely regarded as a proxy for total gold imports, tripled in 2011.

China only began deregulating its gold market a decade ago. Until the Shanghai Gold Exchange opened in late 2002, the government held a monopoly on gold ownership. It is possible that the growth in Chinese gold demand could merely represent catch-up, but this seems unlikely given how rapidly China’s economy grew over the same period. Ordinary Chinese have been growing steadily wealthier, meaning more and more people have had the wherewithal to buy gold.

A working paper by economists Guonan Ma and Wang Yi published last year by the Bank for International Settlements, for example, found that household savings as a percentage of gross domestic product (GDP) rose from 16% in 2001 to 23% by 2008 – a period in which GDP itself regularly grew by 10% or more a year.

The authors also found there was a considerable rise in household’s average propensity to save – that is, the proportion of disposable income that is held as savings. One possible explanation for this could be that economic growth has raised more and more Chinese to just above subsistence level, as agrarian workers urbanize and take higher-paying factory jobs for instance. As incomes grow, an increasing number can for the first time afford to save. Compared to those on higher incomes, though, these new savers must save a greater proportion of their disposable pay in order to attain a given level of savings.

This is not the only factor likely to have driven Chinese savings higher. Ma and Wang also argue that “precautionary savings motives” also explain the rise in personal savings. They cite the period 1995-2005, which saw a 50% fall in employment at state companies:

‘Downsized employees received modest social welfare benefits, while many smaller money-losing state companies were shut down altogether. As a result, the enterprise-based cradle-to-grave social safety net shrank rapidly…The large-scale corporate restructuring and downsizing between 1995 and 2005 increased both income and expenditure uncertainties and weakened the enterprise-based social safety net, thus reinforcing the precautionary motives to save.’

Consider that for a second. Consider how it would have felt from the perspective of a “downsized” Chinese worker. Your socialist government, in power since 1949, has thrown a whole load of people out of work and done very little to help them afterwards.

In this context, it is understandable why people in China started saving more. One only has to think of the long shadow cast by Germany’s hyperinflation in the early 1920s, and the pathological fear Germans to this day have of price instability, to see how economic upheaval can have an enduring impact on financial behavior.

China therefore looks set to have a high savings rate for the foreseeable future. Furthermore, the rapid growth of Chinese gold demand suggests that many of those who can afford it choose to use some of their savings to buy gold (indeed, many have chosen to store some savings as gold).

Of course, this is not to say that the Chinese will continue to buy gold in ever greater quantities indefinitely. Indeed, it is impossible to know how a sharp slowdown in growth would affect Chinese gold demand. There may be some safe haven buying, especially if financial institutions collapse or people fear higher inflation as a result of any central bank response. On the other hand though, slower growth would sap the buying power of would-be gold consumers.

This is not an academic consideration. China faces a number of likely headwinds going forward. Most immediately, its export-led growth model means it is exposed to any deterioration in the global economy, for example the ongoing crisis in Europe, with which China has major trade links. It’s also probable that China has more deep-rooted troubles brewing. Beijing-based economist Michael Pettis argues that China has for years been misallocating capital “on a grand scale”, with state-owned enterprises investing in projects of questionable economic merit.

Elsewhere Pettis draws a parallel with Japan, which he argues underwent a similar phase of overinvestment, making Japan’s subsequent stagnation akin to what China might face (and also qualitatively different from the post-consumption boom crisis the US and Europe currently find themselves in):

‘This is not the problem that that the US or Europe is suffering from.  [The US and Europe] suffer from a typical debt-fueled overconsumption boom, whereas Japan suffered from a typical debt-fueled over-investment boom, and Japan’s period of over-investment was much, much more extreme (centralized investment booms can last much longer and go much further than decentralized consumption booms).  This is why I think the Japanese experience tells us almost nothing about what Europe and the US will go through.

‘On the other hand, it might tell us a lot about what China will go through.  In fact we can make a more general point.  Command economies (Japan, the USSR, Brazil and many others during their “miracle” periods) tend to have much more rapid investment-driven growth during the good times and much more difficult and longer-lasting adjustments.’

So far, so very bearish for China. But Japan’s experience in the years following World War 2 also offers longer term hope. In a working paper published last year,  Bank of Japan economists Tomoyuki Fukumoto and Ichiro Muto argue that the high economic growth rates of today’s China mirror those seen in Japan between 1955 and 1970, which they say were “initiated by vigorous investment”.

After 1970, Japan saw a significant rebalancing of its economy away from investment towards consumption:

Consumption and investment in Japan as percentage of nominal GDP

Fukumoto and Muto find that one key factor behind this rebalancing was the rising share of national income that went to labor, with labor’s share of GDP shooting up ten percentage points between 1970 and 1975.

Pettis argues that ongoing rebalancing towards consumption also explains why Japanese living standards have continued to rise over the last two decades despite the stagnant Japanese economy:

‘It was the state sector that bore most of the brunt of the slower growth, and this shows up as the explosion in government debt.  Households were fine because although the GDP pie was growing at a much slower rate after 1990 than before, their share of the pie was growing after 1990, whereas it shrank before 1990…I think the same might happen, or at least could happen, in China.’

China’s rebalancing has barely begun; consumption as a share of GDP has continued to fall in recent years much as it has for the last three decades:

Consumption and investment in China as percentage of nominal GDP

At the start of last year, the Economist Intelligence Unit rated the results of China’s 11th Five-Year Plan, which ran from 2006 to 2010. One of the categories was ‘Economic rebalancing’, a term which includes China’s external as well as internal imbalances. China scored poorly in this category, being graded a ‘D’ for its efforts to address ‘external imbalances’, another ‘D’ for ‘excessive investment’ (see chart above) and a ‘C’ for ‘innovation- and services-based growth’.

There are, however, signs that an internal rebalancing may be starting to get underway. The EIU scored China a B- on ‘boosting farm incomes’, a B+ on ‘social security expansion’ and an ‘A’ on ‘reducing regional disparities’, commenting that “economic growth has gradually shifted inland”.

This may go some way towards explaining the rise in household savings as a percentage of GDP noted earlier, and in particular the rise in the average propensity to save as prosperity spreads and raises more people above subsistence. (As an aside, it is worth pointing out that expansion of social security provision could in time actually lead to a fall in savings rates if it sufficiently weakens the precautionary motive for saving – i.e. to provide for contingencies such as sickness and unemployment in the absence of a social safety net).

There are other signs of nascent change. Recent disputes at Apple and Microsoft supplier Foxconn are the latest in a series of industrial incidents to hit China recently. Fukumoto and Muto find that China has seen a sharp rise in the number of industrial disputes since the global financial crisis began:

Number of labor disputes in China

Industrial action can and does yield results. As CNN reports, Foxconn twice gave its Shenzhen workers pay rises in 2010 following a spate of suicides at the plant.

That this rise in industrial action has occurred in the wake of the financial crisis is unlikely to be mere coincidence. But the example of Japan – which saw a rise in industrial disputes from the mid-1960s, and a sharp spike following the oil price shock of the early 1970s – suggests that concessions, once given, are difficult to reverse, as Fukumoto and Muto note:

‘…after the mid-1960s, workers’ sense of entitlement to their “fair share” rose…and their bargaining power strengthened. Consequently, it became difficult to restrain the rise in real wages again after the end of the oil crisis, and the rise in the labor share [of national income] became permanent.’

Indeed, China’s government announced this week that the minimum wage should grow by an average of 13% a year between now and 2015. It remains to be seen how this plays out in practice, but it suggests the authorities are aware of a need to raise household incomes.

China is yet to undergo significant internal rebalancing of real incomes away from industry and towards people, such as that experienced by Japan in the postwar era. There is good reason to assume that, sooner or later, such a rebalancing will occur.

And it is people, not industry, who buy gold. So unless China’s development gets completely stuck, its gold consumption should continue to rise over the long run.

Ben Traynor

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

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.

“Desperate Shot in the Dark” of Quantitative Easing “Will Boost Inflation & Gold” Say Analysts

February 10th, 2012 No Comments   Posted in Gold

London Gold Market Report

The WHOLESALE MARKET gold price slipped 0.6% to $1730 in London on Thursday morning, regaining most of that dip as the European Central Bank kept its key lending rate on hold and the Bank of England extended its purchases of UK government bonds to £325 billion ($515bn).

When completed, this new Quantitative Easing will see the Bank hold nearly one-third of the UK’s outstanding national debt.

“The growing consensus among central bankers is that their experiment with QE is still working,” wrote Gavyn Davies, now of Fulcrum Asset Management and previously a policy advisor to the UK government, as well as head of global economics at Goldman Sachs until 2001 and chairman of the BBC until 2004, in the Financial Times on Wednesday.

“It was a shot in the dark, and a rather desperate one at that. But up to now it has had the desired effect, which is certainly a far better outcome than the alternative.”

“The Bank of England’s latest round of quantitative easing is likely to increase the risk of higher inflation,” said World Gold Council director Marcus Grubb to Reuters, “and prompt investors to seek assets, such as gold, which can act as a hedge against rising prices.”

The gold price for UK investors today slipped 0.5% to £1093 per ounce as the Pound rallied.

Since the Bank of England began quantitative easing 3 years ago, gold has risen 70% for Sterling investors.

“Continued optimism over Greece is supportive of gold,” said one London dealer this morning, noting the recent link in daily moves between the gold price and the European single currency vs. the Dollar.

“There is agreement on all the issues bar one,” said Greek finance minister Evangelos Venizelos to reporters in Athens today, claiming that only state pensions remain under discussion in budget cuts demanded by Greece’s EU partners and the International Monetary Fund in return for their €130 billion ($172bn) bail-out.

Greek unemployment has risen to 20.9%, the Statistical Authority said today. A large chunk of Greece’s outstanding debt is due for repayment on March 20th.

Holding UK rates today at a record low of 0.5% for the 36th month in succession, the Bank of England announced a shift in its purchases of government debt, targeting more 3-15 year maturities than long-dated gilts.

Twenty and 30-year gilt prices fell on the news, nudging interest rates higher, but shorter-term UK debt rose sharply, knocking the annual yield offered to buyers of 5-year gilts back down towards last month’s record lows beneath 1.0%.

UK inflation over the last 5 years has averaged 3.2% per annum. The Bank’s official target is 2.0% per year.

Back in the gold bullion market, “Everyone is in wait-and-see mode,” Reuters quotes Ronald Leung at Lee Cheong Gold Dealers in Hong Kong.

“We don’t see much scrap [supply] and buying has cooled after prices rebounded. [But] Greece seems to be closer to a concrete deal, which weighs on the Dollar and helps [the gold price].”

Keeping its key lending rate at 1.0% again on Thursday, the ECB will this month repeat its unlimited offer of 3-year loans to Eurozone banks, an offer which drew demand of nearly half-a-trillion Euros in December.

Many analysts expect demand to top €1 trillion on Feb. 29th.

“[Such action] will lead to a lot of interest into gold,” reckons UBS Wealth Management’s head of commodity research, Dominic Schnider.

“Real assets remain something people like to have in their portfolios. $2000 an ounce should be easily achieved. We actually expect prices to go above.”

Adrian Ash

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

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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