Gold Climbs as Europe Says "We're Not There Yet"

Source:

"Gold gained as markets digested the news from the first of this week's two European Union summits."

The spot market gold price climbed to $1,657 an ounce Monday morning London time—a 0.9% gain on last week's close—as markets digested the news from the first of this week's two European Union summits.

European stock markets failed to hold onto early gains—with Germany's DAX down 0.5% by lunchtime—while commodities edged up and US Treasury bond prices rose.

The silver price bounced between $31.77 and $31.27 per ounce.

"The main level to watch now [for the gold price] is the $1,627-$1,595 where the market is currently finding some support," says Reuters technical analyst Phil Smith.

"Gold looks set to benefit from the renewed concerns about inflation and currency debasement that any cure for Europe's ills will inevitably fuel," says a research note from Barclays Capital.

Italy's prime minister Silvio Berlusconi scheduled an emergency cabinet meeting for Monday evening, following the weekend's European Union summit at which he was reportedly told by fellow Eurozone leaders to draft legislation on fiscal reforms ahead of a second summit this Wednesday.

"Italy has great economic strength," German chancellor Angela Merkel said on Sunday.

"But Italy does also have a very high level of debt and that has to be reduced in a credible way in the years ahead."

Merkel appeared to smirk when asked if she was reassured by her meeting with Berlusconi.

Yields on 10-Year Italian government bonds spiked to 5.97% Monday morning—after breaching 6% last week for the first time since the European Central Bank began buying Italian debt in August.

"Work is going well on the banks," French president Nicolas Sarkozy said Sunday.

"[As well as] on the [European Financial Stability Facility] fund and the possibilities of using the fund. . .on the question of Greece, things are moving along. We're not there yet."

Sarkozy dropped his proposal that the EFSF be funded by the ECB, a move opposed by Germany.

"Central banks should not be called upon to finance states," said German finance minister Wolfgang Schaeuble.

It remains undecided how the EFSF will be funded and for what precisely it will be used.

Europe's banks meantime will need to find €108 billion of new capital within the next nine months, according to the Financial Times. The shortfall was reportedly identified by stress tests carried out by the European Banking Authority, which required a Tier 1 capital ratio of 9% to pass.

Banks have agreed to a voluntary 'haircut' of 40% on their Greek bond holdings—while politicians want it to be at least 50%—news agency Reuters reports. Banks agreed a 21% haircut back in July, but this is now seen as insufficient.

The EU said Friday it will pay its €5.8 billion share of Greece's next bailout installment worth around €8 billion in total.

"Ahead of the Wednesday summit, there remain many open questions," reckons Juergen Michels, lead Euro area economist at Citigroup in London.

"It seems that progress has been made over the weekend to get to a 'comprehensive package', but it is unlikely to be a bold one."

Over in India—which today celebrates the festival of Dhanteras, the start of the five-day festival of Diwali—the rise in the gold price since last year means gold sales "are lower in volume but higher by value", according to Prithviraj Kothari, director of the Bombay Bullion Association, adding that sales by volume have reduced by up to 30% in some parts of Mumbai.

"With high inflation there is hardly any money left with people to invest in gold. I fear that this year jewelry sales may be 20-30% lower than last year."

The United States is expected to experience "at least one credit downgrade in late November or early December," according to analysts at Bank of America Merrill Lynch. Their report cites a bipartisan "super committee" formed by Congress to address the deficit—and which is due to agree $1.2 trillion worth of deficit reduction measures by November 23.

Ratings agency Standard & Poor's downgraded the US one notch to AA+ in August. US government debt is still rated triple-A by Fitch and Moody's, the other two major ratings agencies.

In New York meantime the 'speculative' net long position of bullish minus bearish gold futures and options contracts held by noncommercial Comex traders fell 4.8% in the week ended Tuesday 18 October—hitting its lowest level since May 2009—figures published on Friday show.

"The past week's deterioration confirms that the speculative market is indeed cautious about gold's short-term prospects," says Marc Ground, commodities strategist at Standard Bank.

"However, positioning remains uncommitted either way, so participants don't seem particularly worried about the gold price falling off a cliff."

"Despite the two-year low in net spec length," adds a note from precious metals consultancy VM Group, "the ratio between gross longs and gross shorts remains above this year’s low...and well above lows recorded in 2009 and 2008."

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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