"Negative sentiment surrounding the Eurozone sovereign debt crisis and concerns that some economies are heading for a 'double-dip' recession continues to lift market uncertainty and consequent choppy conditions," says a note from Swiss gold bullion refiner MKS.
"The turmoil still going on in financial markets and the euro/dollar swap rates are still fairly high," adds Credit Agricole analyst Robin Bhar.
"Gold may still be a casualty of that. . .the bullish factors for gold haven't really disappeared, it's more positioning pushing it down."
Stocks and commodities also fell: UK gilts were the only major government bond to see prices rise, with German bunds hit by a disappointing debt auction and longer-dated US treasuries slipping following last might's release of the latest Federal Reserve minutes.
Silver prices meantime slid to $31.40/oz—still down for the week, but 2.3% above Monday's low.
Euro Falls After Disastrous German Bond Auction
German government bond yields rose this morning following what some analysts called a "failed auction" of 10-year bunds.
Germany sold just under €3.9 billion of 10-year bunds at an average yield of 1.98%. The maximum target was €6 billion—meaning the bid-to-cover ratio was only 0.65.
"This auction is nothing short of a disaster for Germany," one analyst told news agency Bloomberg.
"I cannot recall a worse auction," agrees Marc Oswald, strategist at Monument Securities. "If Germany can only manage this sort of participation, what hope for the rest?"
The euro dropped 0.6% against the dollar immediately following the auction—though it remains 1.4% above where it started October and, despite the ongoing Eurozone crisis, remains up against the dollar in 2011.
"As Eurozone banks and other Eurozone entities lose access to funding markets abroad, they are forced, at least partly, to sell foreign assets," explains a note from Morgan Stanley.
"Balance of payments data show that Eurozone residents sold foreign portfolio assets heavily in the summer, with the selling intensifying in August. . .this creates the rather counterintuitive result that stress in funding markets abroad induce repatriation flows that support rather than hurt the euro."
Some non-Eurozone European currencies, however, have been hit hard. Poland's zloty, for example, is down 12.5% against the euro since the start of the year. Poland's central bank has intervened four times in the last three months in an effort to support the currency.
Back in Germany, manufacturing activity continued to decline this month, according to provisional purchasing manager index data published this morning. Germany's manufacturing purchasing manager’s index (PMI) fell to 47.9—down from 49.1 last month (a figure below 50 indicates contraction).
China's provisional PMI, released by HSBC today, also shows contraction in manufacturing—falling to 48 this month from 51 in October.
Eurobonds Not the Answer, says Merkel
In a speech to the Bundestag this morning, German Chancellor Angela Merkel restated her opposition to the idea of jointly-issued "eurobonds," ahead of today's publication by the European Commission of a discussion paper on the subject.
"I don't find it particularly fitting that we are now once again conducting [this discussion] in the middle of the crisis," said Merkel.
"In the long term, it isn't. . .the answer to this crisis."
The commission's green paper suggests the possibility of states pledging gold bullion, among other assets, as collateral on any jointly-issued debt.
"In order to increase acceptance of the stability bond," it says, "the quality of the underlying guarantees could be enhanced. Member states could provide seniority to the debt servicing of stability bonds. Furthermore, member states could provide collateral, such as cash, gold reserves which are largely in excess of needs in most EU countries, as well as earmarking specific tax receipts to servicing of stability bonds."
Italy, for example, has 2451.8 tonnes of gold bullion—worth around €100 billion at current gold prices—according to World Gold Council figures.
"It is my absolute view that in the next two years, you will see Italy use its gold to once again plug some of the holes in their budget, because they are going to have to," Pierre Lassonde, chairman of the gold mining firm Franco-Nevada, told the London Bullion Market Association's conference in Montreal in September.
In her speech, Merkel also warned against criticism of the European Central Bank for not taking a bigger role in the crisis.
"The European currency union is based. . .on a central bank that has sole responsibility for monetary policy. . .I am firmly convinced that the mandate of the European Central Bank cannot, absolutely cannot, be changed."
Here in the UK, the minutes from the Bank of England Monetary Policy Committee's latest meeting—at which it voted to maintain its asset purchase program at £275 billion—have caused some analysts to lower their expectations for more quantitative easing in Britain.
"I thought we'd see some dissenting votes from Adam Posen and perhaps one other for more QE," says Ross Walker, UK economist at RBS.
"The conclusion is they're less dovish than expected. . .I think the probability of more QE January has been reduced significantly. . .there's maybe greater clarity in the sense that February is now looking more likely and anything before February is much less likely."
Over in the U.S., meantime, the minutes of the latest Federal Open Market Committee (FOMC) meeting, published last night, show that all but one member of the FOMC was in favor of refraining from additional stimulus measures, such as quantitative easing.
"Any such accommodation would likely be more effective if it were provided in the context of a future communications initiative," the minutes said.
The Fed has today announced stress tests for the largest U.S. banks. It will test their loan portfolios against a deep U.S. recession—and will also model for a European shock for those with large trading operations. The announcement comes less than a month after brokerage MF Global filed for bankruptcy following losses on Eurozone sovereign debt positions.
JPMorgan Chase was reported this morning close to completing a deal to buy MF Global's seat on the London Metals Exchange for £25 million.
MF Global is alleged in its final days to have covered its own position using funds from customers' accounts—including that of "Martial Artist of Trend Forecasting" Gerald Celente, who was buying gold through MF Global using futures contracts.
"The amount of money MF Global should have segregated for customers may be short by $1.2 billion or more," bankruptcy trustee James Giddens said yesterday.
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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