At one point on Thursday, gold prices fell 1.9% in just one hour, with several analysts suggesting investors had to liquidate gold holdings to cover positions elsewhere.
An auction of Spanish 10-year bonds earlier in the day saw the government pay 6.97% to borrow €3.56 billion—a euro-era record, and up from 5.43% when Spain last auctioned 10-year debt on October 20.
"Precious metals have been hard hit by renewed concerns over the Eurozone, as evidenced by soaring borrowing costs in Spain," says Marc Ground, commodities strategist at Standard Bank.
"Our main concern for commodities," says Ground, "is the potential for liquidity squeeze in Eurozone money markets. . .we caution that all commodities will suffer should money markets dry up, even gold and silver. Despite concerns over the Eurozone, investment demand [for precious metals] seems lackluster as investors seem to prefer the relative safety of the dollar."
"The theme in the market is that the dollar is very expensive to borrow and funding a lot tighter now," agrees one trader in Singapore, who also suggests many investors were forced to sell gold positions yesterday to obtain dollars for funding requirements elsewhere.
"It's a tricky market, as a lot of what's happening to drive the funding pressure would normally drive investors to buy gold."
Gold rallied to $1,737 per ounce Friday morning—1.5% above Thursday's low—while European stocks were broadly flat following heavy falls yesterday. U.S. Treasury bonds also fell, while commodity prices gained.
By Friday lunchtime, spot gold looked to be headed for a 2.9% weekly drop. Based on London Fix prices, the last time gold saw a larger weekly fall was the final week of September, when it ended down 4.1% at $1,620.
Prices to buy silver also fell sharply yesterday, before hitting a low of $31.09 per ounce in Friday's Asian session—8.4% down on where they began the previous day.
Silver then rallied Friday morning, reaching $32.51 per ounce by lunchtime.
The Shanghai Gold Exchange (SGE) announced this morning it will raise its margin on silver contracts from 15% to 18% if they hit their daily trading limit today.
The SGE also said it will raise the limit—the maximum amount by which the contract price can move in one day—from 12% to 15% should this occur.
The United Kingdom's biggest four banks cut interbank lending to Eurozone periphery counterparts by over 24% in the third quarter, Friday's Financial Times reports.
Eurozone banks are also reducing exposure to distressed Eurozone sovereign debt, partly in response to a need to raise capital ratios to 6% by next June, note Standard Bank currency analysts Steve Barrow and Jeremy Stevens.
"The only significant buyer at the moment in many [sovereign debt] markets seems to be the [European Central Bank (ECB)]," they say.
The ECB, however, has placed a weekly limit of €20 billion on its government bonds purchases, according to German newspaper Frankfurter Allgemeine Zeitung.
A Reuters poll of European and U.S. bond strategists published today finds an average probability of 48% given to the ECB launching an all-out quantitative easing. Most of those who predicted ECB QE said they believe it will happen before March.
The UK meantime has "quite a lot of scope for further quantitative easing," Martin Weale, a member of the Bank of England's Monetary Policy Committee, said Friday.
"If things evolve as the [bank's] forecasts suggest, there will be a very strong case [for more QE] in February."
The bank last month launched a further round of QE, increasing its asset purchase program from £200 billion to £275 billion.
"There is a strong argument that this euro crisis should support gold, especially if the solution to it will involve printing money and easing monetary policies," says Matthew Turner, precious metals strategist at Mitsubishi.
"On the other hand, these big shocks are making investors nervous," Turner said, adding there was "a bit of bargain hunting going on" Friday morning, with the euro price to buy gold flat.
On the currency markets, the euro rallied against the dollar Friday morning, though it remains 1.5% down against the U.S. currency for the week.
British prime minister David Cameron meantime is expected to tell German chancellor Angela Merkel today he will support moves toward "more Europe," which Merkel said this week was the solution to the Eurozone debt crisis.
In return, Cameron will reportedly seek a way to avoid Europe imposing a financial transaction tax on the city of London.
Over in the U.S., the congressional "super committee" convened to decide on $1.2 trillion of deficit cuts is reported to be in deadlock over tax increases. The committee has a deadline of midnight next Wednesday to agree, or risk triggering automatic spending cuts beginning January 2013.
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.
© BullionVault 2011
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