Christmas Week Rally Spied in Gold as ECB Member Sees No Reason Not to Use QE

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"'We still stress the vulnerability of precious metals to a tightening of Eurozone money market liquidity,' says Standard Bank's London team, 'which might result from the region's sovereign debt problems.'"

Wholesale prices to buy gold were little changed in London on Friday, ending the short pre-Christmas session at $1,607 per ounce, some 0.6% higher against the dollar from last week's finish.

Silver prices also held flat, moving in a tight range below $29.50 per ounce and recording a London Fix almost 1.9% down for the week at midday.

Thursday's series of attacks in the Iraqi capital Baghdad, which killed perhaps 200 people, were followed today by the murder of 40 people by two suicide car bombers in Damascus, Syria—blamed by the government on al-Qaeda. But global stock markets ticked higher overall in what equity dealers called "very thin" trade.

U.S. crude oil prices extended their strongest week since October, up more than 6.5% from last Friday.

"Our Hong Kong office observes that the gold price has gone up during the period between Christmas and New Year in eight of the last nine years (2004 being the exception)," said Mitsui's London note today, "[rising] by just over 2% on average.

Dealing in London's bullion market will re-open Wednesday after the Christmas and Boxing Day holidays.

"If [the] trend continues," says Mitsui, "gold would stand around $1,650 by the year's end."

"[But] the 200-day moving average, currently at $1,624, continues to provide strong resistance," says Russell Browne at Scotia Mocatta in New York.

"We still stress the vulnerability of precious metals to a tightening of Eurozone money market liquidity," says Standard Bank's London team, "which might result from the region's sovereign debt problems."

European Central Bank member Lorenzo Bin Smaghi—who leaves the ECB this month to avoid "over representation" of Italy after Mario Draghi became president in November—says in a Financial Times interview today that he sees "no reason" not to use quantitative easing "if the economic outlook deteriorated and deflation became a risk."

Spanish and Italian government bonds ticked lower in price on Friday, nudging the interest rate on 10-year debt above 5.4% and 7.0% respectively.

The ECB should "use as much constructive ambiguity as possible," Bin Smaghi says, adding that the ECB "has a duty of action" to help struggling governments where the issue is liquidity, not solvency.

Meantime in India—the world's No.1 physical gold consumer—"A sharp drop in the gold price is required to boost the demand," MoneyControl today quoted a Chennai-based wholesaler, as the Indian Rupee gold price continued to hold near historic highs thanks to the currency's record low exchange rate.

"Jewellery demand is very weak. . .gold investment demand is also weak," the Reuters news agency quotes a spokesperson in Ahmedabad for Zaveri and Co, one of India's largest jewelry retail chains, who attributes low sales to the current period of Kharmas observed by some Hindu calendars, when there are no "auspicious" festivals or events.

Across in Tehran, however, "Iranians are rushing to buy gold and dollars," reports Bloomberg, "sending the national currency plunging."

The rial has lost some 15% vs. the dollar this month, and bureau de change are charging 15,300 rials per dollar, says Bloomberg—almost 39% above Tehran's official rate.

"State television this week showed lines of people camped out overnight in front of state banks, with sleeping bags and blankets, saying they were waiting to buy gold coins," the newswire goes on.

Faced with new U.S. and E.U. sanctions—plus inflation running near 20% per year—the Central Bank of Iran suspended deliveries of gold coins on Dec. 20, imposing what it calls a "just distribution" system by delaying settlement of new purchases by four months.

Adrian Ash, BullionVault

Gold price chart, no delay / Buy gold online at live prices

Formerly city correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is head of research at BullionVault—winner of the Queen's Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body—where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

© BullionVault 2011

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