Thursday, July 14, 2011

Gold Close to $1600 as U.S. & Europe's Debt Struggle

London Gold Market Report
from Ben Traynor
Thursday 14 July, 08:00 EDT


Gold Close to $1600 as U.S. & Europe's Debt Struggle Creates "Bullish Cocktail"

PRICES to buy
gold bullion came within a few cents of $1595 an ounce Thursday morning London time – a new wholesale market record and a 7.8% gain from the July 1 low.

Gold bullion also set a Dollar record in Dollar terms at Thursday morning's London Fix, at $1592.50 per ounce.

Silver prices rose to $39.39 per ounce – 16.3% up in the period since July 1.

Stock markets and US Treasury bonds fell meantime, while the commodities picture was mixed, after US debt ceiling talks again stalled and the country was threatened with a sovereign debt downgrade.

"Gold is becoming more attractive by the day despite being on or near record highs," says Swiss precious metals group MKS, citing the worsening Eurozone crisis and potential US default.

"Gold is reacting to a similarly bullish cocktail of factors" as the second quarter of 2010, adds James Steel, precious metals analyst at HSBC.

Gold bullion prices "also jumped to then record highs...buoyed by the emergence of the Greek sovereign crisis and US quantitative easing," says Steel, who reckons that "conditions are more bullish now...[as] policymakers appear to have more limited options".

President Obama walked out of budget talks with Republicans on Wednesday, suggesting politicians are no closer to agreeing a deal to raise the federal debt ceiling – which the US Treasury says it will hit on August 2.

Ratings agency Moody's announced earlier in the day that it has placed US government bonds on review for a possible downgrade – citing concerns that Congress may not agree to raise the $14.3 trillion federal limit.

"What we're looking for is a raising of the limit," said Steven Hess, senior credit officer at Moody's.
"It doesn’t matter the process that they get there."

Also in Washington on Wednesday, Federal Reserve chairman Ben Bernanke testified to the House of Representatives Financial Services Committee.

Any US default would be a "major crisis" and would "throw shockwaves through the entire global financial system", Bernanke told the committee.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support." 

Bernanke is due to testify to the Senate Banking Committee on Thursday.

Bernanke's comments left "the door ajar over QE3", says one gold bullion dealer here in London, referring to a potential third round of Fed quantitative easing.

"[This] reinforces the perception that the very low interest rate environment that has supported this leg of the precious metals rally will persist."

"The hurdle for QE3 is too high right now," counters Dana Saporta, New York-based economist at Credit Suisse.

"But if the European peripheral crisis intensifies, further policy accommodation might be considered."

"Even if the Fed does not provide additional QE, gold should be driven higher by liquidity created by government borrowing," says Marc Ground, commodities strategist at Standard Bank.
The US Dollar continued to fall against the Euro on Thursday, hitting €0.72 – a 2.8% drop in 48 hours.

Over in Europe, Eurozone members must "decide how they fundamentally wish to support Greece," according to a report published Wednesday by the International Monetary Fund.

"Comprehensive private sector involvement is appropriate, given the scale of financing needs and the desirability of burden sharing."

Ratings agency Fitch has downgraded Greek debt to CCC – joining Standard & Poor's and Moody's in giving Greece the lowest rating possible short of declaring it in default.

Officials from the European Central Bank and the European Commission were meeting with private creditors in Rome on Thursday to discuss a second Greek rescue package. Greece was bailed out last year to the tune of €110 billion.

Also in Rome, the Italian Treasury sold €1.25 billion of 5-Year government bonds Thursday morning  at a yield of 4.93% – the highest since 2008, and a full percentage point higher than the most recent 5-Year bond auction on June 14.

Italy's national debt is worth around 120% of its annual economic output.

The Euro price of gold bullion came close to €1125 per ounce Thursday morning – also a record, and a 9.8% rise in less than two weeks.

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.

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