Gold Market Report

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"As gold fluctuates, analysts suggest a 'domino effect' from Greece could send shockwaves throughout Europe's Banking System."

U.S. dollar gold bullion prices slipped back to $1,813/oz. Monday lunchtime in London—roughly where they ended last week—following a sharp rise at the start of Asian trading that saw the gold price leap 0.8% in half an hour.

"Investor interest in gold has continued to be sustained by widening economic uncertainties," says the latest Metals Monthly from London commodities consultancy VM Group.

"We remain bullish on the long-term outlook for gold as any of the various remedies available for diminishing the debt crises and/or pulling stagnant Western economies back to visible growth imply higher inflation and depreciating currencies."

Silver bullion prices dropped to $40.17 per ounce—1.4% down on Friday's close.

European stock markets fell sharply Monday morning—with Germany's DAX down 2.4% by lunchtime—while commodities also fell and U.S., UK and German government bonds gained as concerns grew over whether Greece will receive its next tranche of bailout funding.

"The Greek situation could be coming to a head," reckons Khiem Do, head of multi-asset strategy at Baring Asset Management in Hong Kong.

"[A default] could create a domino effect in countries like Spain, Italy and Portugal. That's what the market is fearing."

A disorderly default "clearly has the potential to send shock waves throughout Europe's banking system," adds Jane Foley, senior foreign exchange strategist at Rabobank.

Inspectors from the European Union and International Monetary Fund are due to hold a teleconference later on Monday with Greek finance minister Evangelos Venizelos, as part of ongoing efforts to decide whether or not Athens should receive the next installment of last year's €110 billion bailout.

"We can't move along without real implementation of fiscal reforms and we are late," said Venizelos on Monday.

Greece risks becoming "the easy alibi for the weakness of European and international institutions to manage this crisis" he said over the weekend.

Venizelos's comments "do not augur well for a quick and simple negotiation," notes one gold bullion dealer here in London.

Here in the UK, the government deficit is 25% larger than previously thought, according to analysis by the Financial Times.

"A £12 billion black hole has opened in the public finances," writes the FT, which found that the so-called output gap—a measure of spare capacity in the economy—was not as large as previously estimated, implying a slower recovery as there is less prospect of swift 'catch-up' growth.

In Washington meantime, U.S. president Barack Obama will propose $1.5 trillion in tax increases over the next ten years, news agency Bloomberg reports. The increase is roughly equivalent to the projected U.S. deficit for 2011.

Also today, the annual conference of the London Bullion Market Association (LBMA) began in Montreal, Canada, with keynote speaker Pierre Lassonde of Franco Nevada gold mining due to open the presentations by reviewing the 10-year bull market to date.

"Still no bears at the LBMA conference," says BullionVault's Adrian Ash of last night's cocktail reception, "but the general bullishness of the last two events is switching almost to resignation...everyone says with a shrug that gold looks nailed on to keep rising."

Over in New York, there was a 4.8% fall in the number of noncommercial—so-called speculative—long positions held by gold futures and options traders on the Comex exchange, according to data published by the Commodity Futures Trading Commission for the week ended 13 September.

The net speculative long position of bullish minus bearish positions fell 6.9% to 224,728 100 ounce contracts—equivalent to nearly 700 tons of gold bullion.

"The resumption of a decline in gold speculative longs. . .indicates the increased caution with which participants are approaching the gold market," reckons Marc Ground, commodities strategist at Standard Bank.

U.S. Federal Reserve officials including Fed chairman Ben Bernanke "dismiss the idea that [Bernanke]'s confronting a rebellion inside the Fed," according to Monday's Wall Street Journal.

In a move that would recall the Fed's so-called Operation Twist of half a century ago, the FOMC—which meets this Wednesday to decide US monetary policy—is likely to consider measures that would push down the interest rates on longer-dated Treasury bonds, the WSJ reports.

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.

(c) BullionVault 2011

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