Thursday, July 28, 2011

US Reaching "End of Empire", Investors Have "No Safe Havens Left"

London Gold Market Report
from Ben Traynor
Thursday 28 July, 08:30 EDT


Gold Choppy, US Reaching "End of Empire", Investors Have "No Safe Havens Left"

THE PRICE to buy gold in US Dollars oscillated Thursday morning London time – soaring to just under $1620 an ounce before easing back – while stocks fell and commodities were mixed as Washington prepared for a postponed debt ceiling vote.

On Wednesday gold price set a new intraday high in Dollar terms of $1628 per ounce in New York trade – a jump of 1.75% from last Friday's close.

The price to buy silver meantime hovered around $40.28 per ounce – up 0.5% on the week.

The Euro price to buy gold meantime rose steadily throughout Thursday morning to hit €1133 per ounce – a 1.6% gain for the week so far.

"The so-called 'ugly competition' between the Dollar and the Euro just seems to get uglier all the time," says Steve Barrow, currency analyst at Standard Bank.

"The debt ceiling still looms large in the markets with gold finding support from the dysfunctional discussions," adds one London bullion dealer.

The US House of Representatives is due to vote on speaker John Boehner's deficit cutting plan on Thursday – after it was postponed yesterday when the Congressional Budget Office found it did not deliver the claimed spending cuts.

Many of Boehner's fellow Republicans have expressed dissatisfaction that the plan does not go far enough, while Democrat Harry Reid, Senate majority leader, says it will be "dead on arrival".

Nevertheless, Reid says he may incorporate elements of Boehner's plan into his own rival proposal. 
The US Treasury has said it expects to hit its $14.3 trillion borrowing limit next Tuesday.

"Should a default occur gold will be vulnerable to a sharp correction as investors cut their risk exposure and use gold to generate cash," warns Swiss precious metals group MKS.

"But as seen previously once the initial sell-off is complete there are likely to be further upside gains."

Even if Congress agrees to raise the debt ceiling "America's problems would not be solved," said Germany's finance minister Wolfgang Schaeuble on Thursday.

"The main issue is overly high debt and economic prospects... the Americans must find long-term solutions for solid fiscal policy and growth."

One potential sticking point of Boehner's plan is it would only raise the debt ceiling enough to cover a few months of US Treasury borrowing. President Obama has repeatedly said he will not accept any short-term deal.

"The US is experiencing an 'end of empire' moment," says Jim Leaviss, London-based fund manager at M&G Investments.

"The Dollar share of global reserves is likely to fall gradually." 

"Investors worldwide," says Dick Bove, banking analyst at Rochdale Securities, "may actually be horrified that the only safe haven at the minute is short-term Treasuries and bank deposits backed by the FDIC [Federal Deposit Insurance Commission]." 

"The quest is on to find a new global safe haven."

Gold bullion is not an option, Bove says, because "there is not enough of it", while the Swiss Franc won't work either because the Swiss government "needs to stop the inflows...to protect its economy."

Until a new safe haven is found, investors "must protect themselves by remaining liquid," says Bove.

China meantime "will continue to diversify the asset allocation of [its] reserve assets", according to a statement made Thursday by the State Administration of Foreign Exchange.

"We don't pursue large-scale reserves and don't pursue long-term surplus in international balance of payments," added SAFE.

"Some have argued that we should buy oil, buy gold, buy iron ore, or even buy into companies and land," SAFE's director Yi Gang said earlier this year.

"But it is much easier said than done." 

China boasts the world's second-largest private gold bullion demand. Using a significant portion of its $3 trillion plus reserves to buy gold or oil "could push up market prices, which may affect our people's consumption and economic development," SAFE said last week.

Here in Europe, ratings agency Standard & Poor's downgraded Greece again on Wednesday – from CCC to CC.

"Standard & Poor’s has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,’" said a statement from S&P.

"We view the proposed restructuring as a 'distressed exchange' because, based on public statements by European policy makers, it is likely to result in losses for commercial creditors."  

Moody's meanwhile cut its rating for Cyprus by two notches, from A2 to Baa1. Both countries remain on negative outlook.

Over in New York, the volume of gold futures contracts traded on the Comex exchange soared to 423,981 on Wednesday – a 30% jump on the day before, and up 142% compared to Wednesday 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.

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