London Gold Market Report
from Ben Traynor
Tuesday 27 September, 08:30 EDT
Gold & Stocks Rally as "Hong Kong Housewives Queuing Up for Gold", New Eurozone Plan "Treats Symptoms, Not Causes"
U.S. DOLLAR prices to buy gold rose to $1676 an ounce Tuesday morning London time – a 9% gain on yesterday's spot market low – as stocks and commodities also rallied and government bonds fell as reports circulated that European officials were drawing up new plans to battle the ongoing debt crisis.
The price to buy gold has now recovered all of yesterday's losses.
"Housewives are queuing up outside jewelry shops to buy gold after the dip," says one gold bullion dealer in Hong Kong, citing local press reports.
"At the current level people are buying," confirms another Hong Kong dealer, Ronald Leung at Lee Cheong Gold Dealers.
"They believed what happened in the past few days was only a correction."
"We continue to believe that gold will push higher into 2012," says Walter de Wet, commodities strategist at Standard Bank.
"However, until short-term funding, especially in Europe has been resolved, we remain neutral on gold."
Silver prices climbed to $33.54 per ounce – 28.2% up on Monday's low.
Overnight deposits made by Eurozone banks with the European Central Bank – rather than with each other – rose to a two-week high of €165.12 billion yesterday, a 9.6% jump from Friday's figure. Overnight ECB deposits hit their 2011 peak on September 12 at €197.75 billion.
Eurozone policymakers are currently devising a plan aimed at providing assistance to distressed European banks, according to a report published by financial news outlet CNBC on Monday.
Stock markets surged Tuesday morning – with the FTSE up 3% and Germany's DAX up 4.4% by lunchtime – in what CNBC's Jim Cramer hailed the 'No More Lehmans' rally, in reference to the plan.
The plan reportedly involves the European Financial Stability Facility – the Eurozone's €440 billion ad hoc bailout mechanism set up last year – as well as the European Central Bank and the European Investment Bank, which is owned by the 27 member states of the European Union.
The AAA-rated EIB, according to its website, exists to make "long-term finance available for sound investment" – including microfinance and loans to small businesses.
Under the new plan, the AAA rated EIB would set up special purpose vehicle capitalized by funds from the EFSF. This SPV would then issue bonds to private investors, using the money received to buy troubled sovereign debt. The SPV's bonds could also be used by the institutions that hold them – such as banks – as collateral against loans from the ECB.
The EIB "is certainly not a bailout-institution for the Eurozone," adds Jim Reid, head of global fundamental credit strategy at Deutsche Bank.
"[We understand the] EIB's charter currently does not allow sovereign or bank bond buying...changes to the EU Treaty with regards to the EIB's mandate would require a lengthy political process...[which] may involve all 27 EU member states rather than just the single-currency ones."
"Buying bonds," adds Standard Bank analyst Steve Barrow, "or recapitalizing banks works on the symptoms of the problem, not the causes...Eurozone growth will stay weak, leaving periphery countries like Italy and Spain fighting an uphill battle whether the EFSF can buy large amounts of their bonds or not."
Senior members of Germany's Free Democratic Party, the junior partner in the coalition government, said on Monday they would not vote for any plan that involves leveraging the EFSF – a suggestion made earlier this month by US Treasury secretary Timothy Geithner.
Over in Greece parliament is due to vote Tuesday on a new property tax aimed at cutting the country's deficit – while tax collectors are set to join a 48 hour strike in protest at the tax and other austerity measures. Greece is still awaiting confirmation that it will receive the next installment of its bailout funding – without which the government expects to run out of money within weeks.
Second hand home sales in Beijing meantime have fallen 73% in the last year, according to Chinese media reports.
Also in Beijing, Chinese consumers were given the chance to buy gold from the country's first gold vending machine over the weekend – although the machine was soon switched off again as it was not producing receipts.
China has been the world's fastest-growing source of private gold demand in recent years, and is currently the world's second-largest market behind India, according to World Gold Council figures.
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.