Gold Market Report

U.S. dollar gold bullion prices fell to $1,655 an ounce Friday lunchtime London time—1.6% off the latest all-time high set the previous day—following the release of better-than-expected U.S. employment data.

Stock markets bounced after non-farm payrolls data showed the U.S. economy added 117,000 jobs last month. The U.S. unemployment meantime rate fell slightly to 9.1%.

Stocks and commodities remain down for the week, however, following more heavy selling Thursday after noon and Friday morning, as central bank intervention failed to quell investor fears over sovereign debt problems.

Silver prices meantime drifted down to around $39 per ounce by lunchtime—following a sharp sell-off on Thursday which saw silver lose nearly 6% in the space of an hour.

Gold bullion prices set fresh records at Thursday afternoon's London Fix in all three currencies—the Dollar, Pound and Euro.

Going into the weekend, gold bullion prices were up around 1.7% for the week by Friday lunchtime, while the price of silver bullion was down 2.2%.

"Despite[gold appearing] overbought [by]technical indicators, the threats of a U.S. [credit rating] downgrade and default by one or more EU nation suggests that gains will continue, with $1700 the next upside target," said Swiss gold bullion refiner MKS on Thursday.

"A persistently negative economic outlook," added one gold bullion dealer here in London this morning, "could accelerate the so-called flight to quality that has been pushing gold higher."

The European Central Bank re-entered the bond markets on Thursday for the first time since March—despite opposition from Germany's Bundesbank. The ECB's bond purchases were limited to Portuguese and Irish government bonds, according to traders.

"The ECB is being dragged unwillingly back to the table, having tried originally to palm off responsibility for restructuring the Eurozone to governments," says Peter Dixon, economist at Commerzbank in London.

"If the ECB is serious about playing its part in holding the Eurozone together, then it's going to have to spend a considerable sum."

"Ultimately," says Royal Bank of Scotland economist Jacques Cailloux, "a 'shock and awe' response [from the ECB] will take place, but only after further market deterioration."

Eurozone leaders did grant bond-buying powers to the European Financial Stability Facility—the €440 billion Eurozone bailout mechanism set up last year—on July 21 as part of the Greek rescue deal.

However, the EFSF will not receive its new powers until the relevant legislation is drafted and passed by national parliaments. This is not expected to happen until mid-September at the earliest.

Eurozone leaders must "accelerate the approval procedures...so as to make the EFSF enhancements operational very soon," European Commission president José Manuel Barroso said in a letter to European governments on Thursday, adding that the crisis is "no longer...just in the Euro-area periphery".

France and Germany announced Thursday evening that French president Nicolas Sarkozy and German chancellor Angela Merkel will hold a conference call today with Spain's prime minister José Zapatero to agree a co-ordinated crisis response.

The yield on both Spanish and Italian 10-Year governments bonds remained above 6% Friday morning—compared to 2.32% on German bunds. The yield on 10-year French bonds, meantime, was 3.19%.

Spain and Italy may have to drop out of financing earlier bailouts of Greece, Ireland and Portugal if their borrowing costs continue to rise—while some fear France could follow—reports this Saturday's edition of the Economist.

"Germany's position," warns Barclays Capital economist Julian Callow "appears to be that since it comprises 27% of Euro area GDP, it is not large enough to single-handedly rescue the Euro."

German industrial production fell 1.1% during June, according to figures published Friday.

Silver and gold bullion prices are "well supported by concerns over strength of the global recovery and renewed focus on fiscal problems in Europe," says Marc Ground, commodities strategist at Standard Bank.

Over in New York, the Bank of New York Mellon announced Thursday that it will start charging some institutional clients for holding their money—in effect imposing negative nominal interest rates on some deposits.

BNY Mellon says it has received "sudden, significant increases" in cash deposits, which it blames on market uncertainty.

"Past history shows us that once the storm passes these deposits quickly return to markets. The transient nature of these deposits prevents us from investing [them] to cover the costs from regulatory and deposit insurance."

The charge—equivalent to 0.13% per year—will affect clients whose deposits average over $50 million in one month, and where this amount is not "consistent with prior averages".

Ben Traynor
BullionVault

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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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