Tuesday, July 12, 2011

London Gold Market Report - July 12, 2011

London Gold Market Report
from Ben Traynor
Tuesday 12 July, 08:00 EDT

 Gold Drifts Lower, Stock Markets Nosedive as "Crisis Path" Italy Shows Eurozone Woes "Systemic"

DOLLAR 
gold prices fell to around $1543 an ounce Tuesday morning London time – just below where they ended last week – while stocks and commodities took a beating as concerns grew over Italian sovereign debt.

Silver prices also dropped, falliing below $35 per ounce – 4.6% down for the week so far.

The FTSE Eurofirst 100 index of leading European stocks plunged to €3235 – a 4.4% drop from last week's close – while commodities also took a hit.

Copper futures were down 0.8%, Brent crude oil lost 1.3% and wheat futures were off 2.2% – all by Tuesday lunchtime in London.

The US Dollar Index meantime – which measures the currency's strength against a basket of six other currencies – hit its highest level since the start of April on Tuesday.

Gold prices at Monday afternoon's London Fix saw a clean sweep of record highs in Dollars, Euros and Pounds.

The gold price in Euros was fixed at €1106 per ounce, with the Pound Sterling gold price coming in at £976 per ounce.

"Gold re-affirms its safe haven status," says a gold bullion dealer here in London on Tuesday.

"Very few of the risk factors in the economic and financial environment have been dispelled," adds the latest Precious Metals Monthly report from Standard Bank – which suggests taking advantage "of any bout of weakness" in gold prices to reinforce holdings.

"We'll probably see a lot of support for gold from rising risk aversion due to concerns of escalating debt in Europe," reckons Natalie Robertson, commodities analyst at ANZ Bank.

Government bonds issued by Italy – home of the Eurozone's largest bond market – fell on Tuesday for the seventh day running, pushing the yield on a 10-Year bond up to 5.76%.

"Italy appears on a crisis path," says a note from Bank of America Merrill Lynch.

"At this pace, Italy's borrowing costs could reach levels that would make its debt dynamics unsustainable in a week."

Italy's largest bank, UniCredit, saw trading in its shares suspended on Tuesday after plunging 7% on the Milan stock market.

"Europe needs to recognize it's no longer a crisis of small sovereigns," says Jacques Cailloux, chief Europe economist at Royal Bank of Scotland.

"Italy is still in better shape [than other Eurozone periphery countries]," counters Nobel Prize-winning economist Michael Spence.

"It has a high amount of debt, but it has a high savings in the private sector...it can manage its way through this unless there is a huge attack on the Euro and risks spreads go way up."

On the currency markets the Euro fell against the Dollar to $1.39 on Tuesday morning – a 4% drop since the start of the month.

"Downward pressure is likely to remain on the Euro, reckons Lee Hardman, London-based currency economist at Bank of Tokyo-Mitsubishi, citing investor fears that the Eurozone crisis "is becoming more systemic".

In Brussels meantime, Eurozone ministers indicated Monday evening that they could use the single currency area's €440 billion ad hoc bailout fund – the European Financial Stability Facility – to buy Greek government bonds on the open market. Greek debt is currently trading at around half its face value.

Over in China – the world's second-largest gold market – new lending in June was up 15% compared to the previous month, according to figures published Tuesday by the People's Bank of China.

The PBOC also revealed that foreign exchange reserves grew 30% in the year to June to $3.2 trillion. 

The growth in new lending "suggests more tightening on the horizon," says Joe Lau, economist at Societe Generale in Hong Kong.

"This may be more likely through further reserve ratio hikes."

Taking the first half of 2011 as a whole, however, Chinese new lending actually fell 9.7% compared to the same period a year earlier.

"Worries that China could continue raising rates [could] weigh on [gold prices] in the near-term," says Tom Pawlicki, precious metals and energy analyst at MF Global, citing Saturday's news that inflation rose to 6.4% in June.

The PBOC last week raised its deposit interest rate to 3.5% – the fifth hike since last October.

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.

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.