Thursday, August 11, 2011

Margin Hike on Gold Futures - Gold price spiked to over $1814

London Gold Market Report
from Ben Traynor
Thursday 11 August, 08:30 EDT

Margin Hike on Gold Futures, France Debt "Similar to US", Global Leaders "Need to Get their Act Together"

THE SPOT MARKET gold price spiked to over $1814 an ounce in Thursday's Asian trade – up 9% on the week – before falling after news that gold futures will be subject to a margin hike.

The gold price at Thursday morning's London Fix set records in all three currencies – Dollars, Pounds and Euros – at $1786, £1105.74 and €1254.39 per ounce respectively.

Silver prices ended the morning around $39 per ounce – up 1.7% for the week.

Stock and commodity markets continued falling Thursday morning London time, following rumors that France could be next to suffer a ratings downgrade.

"With serious doubts still overhanging world's largest economies and various Eurozone nations still trying to avoid default, traders and investors are unlikely to rush back into rebuilding risk exposure," says Swiss gold bullion refiner MKS.

"A driver of gold currently," adds a note from UBS, "is the search for safety, driven by fears over global growth and the potential for sovereign debt downgrades in the US and Europe."

France was hit by rumors Wednesday that it would be the next triple-A sovereign to have its debt downgraded, following ratings agency Standard and Poor's announcement last Friday that it had stripped the US of the top notch credit rating.

"The debt ratios of the US and France are very similar," says Julian Callow, chief European economist at Barclays Capital, adding that France has "economic rigidities", as well as the further burden of contributing to the European Financial Stability Facility – which European leaders agreed last month should be empowered to buy government bonds on the open market.

"People are asking themselves whether S&P can downgrade the US without downgrading France." 
President Sarkozy recalled key ministers from holiday Wednesday and vowed that the country's "pledges will be kept whatever the evolution of the economic situation".

Sarkozy gave finance ministers one week to devise fresh deficit-cutting measures.

All three major ratings agencies – S&P, Moody's and Fitch – moved to confirm France's triple-A status on Wednesday.

"That is completely in line with the reasons for [S&P's] downgrade of the US," says a note from wealth management firm Sanford Bernstein.

The US downgrade "was more about concerns over the willingness of the US to pay than the ability of the US to honor its obligations. There is no indication whatsoever that France would waver in its determination to honor its obligations."
There was one sovereign downgrade on Wednesday. Fitch joined S&P and Moody's in downgrading Cyprus – knocking it down from A- to BBB.

In Switzerland meantime, central bank officials have confirmed that they would consider pegging the Swiss Franc to the Euro.

"Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability," said Swiss National Bank vice chairman Thomas Jordan in an interview published Thursday.

"It's certainly not the easiest measure to introduce," notes SNB governing board member Jean-Pierre Danthine, "neither in political nor legal terms."

Danthine  points out that the SNB's mandate is "to conduct an independent monetary policy". In a floating currency regime without capital controls, central banks have traditionally struggled to combine monetary independence with maintaining a peg to another currency.

The SNB has repeatedly said the Swiss Franc is "massively overvalued". Yesterday it announced it was increasing liquidity by 50%, while last week it pledged to set interest rates "as close to zero as possible".

Other central banks have also been active in recent days. The US Federal Reserve said Tuesday it expects to keep interest rates at record lows for at least two years. 

The Bank of Japan last week increased by 20% its quantitative easing program, while the country's finance ministry intervened to halt the rise of the Yen on currency markets. The BoJ has also resorted to directly buying the shares of exchange traded funds on the stock market.

In Europe meantime the European Central Bank began buying Spanish and Italian government bonds at the start of this week.

Central banks' actions are "necessary but not sufficient," says Mohamed El-Erian, chief executive of world's largest bond fund Pimco.

"We need other get their act together."

Over in the US, the Chicago Mercantile Exchange announced Wednesday that it is raising the margins for trading 100 ounce gold futures contracts on its New York-based Comex exchange by 22.2%. It follows a 10% margin hike for gold futures traded on the Shanghai Gold Exchange earlier in the week.

The Dollar gold price dropped over 1% immediately following Thursday's news of the CME hike.

Over in Germany meantime tabloid newspaper Bild is today running a contest to win gold bars. Ten 20 gram gold bars will be given away to winning callers each hour.

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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