Dollar Weakness Creating Gold Demand after Greek Deal

Source:

"Spot market gold prices touched $1,733/oz as stock markets, commodities and the euro all rallied following Greece's vote in favor of new austerity measures."

Spot market gold prices touched $1,733/ounce (oz) Monday morning—0.5% up on last week's close—as stock markets, commodities and the euro all rallied following Greece's vote in favor of new austerity measures.

Silver prices meantime hovered around $33.90/oz—0.8% up on the end of last week—while government bond prices dipped and the dollar fell on the currency markets.

"The weakness in the dollar. . .creates a bit of demand for gold," reckons Bernard Sin, head of currency and metal dealing at Swiss precious metals refiner MKS.

By Monday lunchtime, euro-denominated gold prices were roughly where they ended last week, at around €42,000 per kilo (€1,306/oz).

Greek lawmakers last night approved a fresh austerity package, including public sector layoffs, minimum wage reduction and pension cuts. A reported 80,000 people took to the streets in protest, while press reports said up to 30 buildings were firebombed.

Antonis Samaras, leader of the New Democracy party and widely tipped as Greece's next prime minister, expelled 21 members from his party for voting against the measures. Former prime minister George Papandreou, leader of the socialist Pasok party, also expelled members who did not support the measures.

Eurozone finance ministers are due to meet on Wednesday to review the new agreement, and potentially sign off Greece's €130 billion (B) second bailout. This in turn should pave the way for a deal with Greece's private creditors to reduce the country's debt burden, as well as stave off a default on March 20 when €14.5B of 3-year Greek bonds mature.

"The government may yet find that approving the new measures. . .proves to be far less of a challenge than implementing them in the months ahead," reckons one gold bullion dealer here in London.

"We are still looking for more measures out of Europe before we see a sustainable risk rally," adds Ong Yi Ling at Phillip Futures in Singapore, who expects gold prices to hit resistance at $1,760/oz.

"That will be the first resistance and the second one is at about the $1,800 level. For gold to break the $1,800 level, we need more measures, I would say."

Here in the UK, the latest Bank of England figures relating to Project Merlin—the agreement between the UK government and British banks aimed at promoting lending to business—show that banks lent £214.9B overall to business in 2011, against a target of £190B.

However, the target for smaller businesses was missed, with £74.9B lent versus a target of £76B. The final quarter of last year saw a 3% drop in net lending.

"The Merlin targets have failed," says Andrew Cave, head of external affairs at the Federation of Small Businesses.

"Talking to our members, 30% of them say they missed a growth opportunity because they weren't able to access finance at the right times, so there is still a problem."

"The reality," adds Lee Hopley, chief economist at manufacturers' federation EEF, "is that small and medium enterprises continue to be frustrated by the cost and terms and conditions around lending, with some opting out of using external finance altogether. This cannot be good for growth."

China's government has ordered the country's banks to begin rolling over its loans to local governments, according to the Financial Times. When the global financial crisis broke in 2007–2008, the state launched a massive stimulus program. Local authorities in China now have debts worth an estimated $1.7 trillion (T), the FT says.

U.S. president Barack Obama will today call for higher taxes on millionaires and billions of dollars' worth of infrastructure projects to create jobs as part of his 2013 budget proposals, news agency Reuters reports.

"I think there is pretty broad agreement that the time for austerity is not today," White House chief of staff Jack Lew said Sunday.

Obama is expected to repeat his call, made during his State of the Union address, for the introduction of the so-called Buffett Rule, which would see millionaires pay a tax rate of at least 30%.

The net difference between bullish and bearish gold futures and options contracts held by traders on New York's Comex—the so-called speculative net long—went up for the fifth week in a row over the week ended last Tuesday, according to the latest data from the Commodity Futures Trading Commission.

The spec net long and open interest both hit their highest levels since the week ended Nov. 15.

"It is likely that net spec length may consolidate or even decline in the week to Feb. 14 as futures open interest in the period Feb. 8-10 fell in parallel with the gold price," reckons Carl Firman at precious metals consultancy VM Group.

"Options open interest in this period also shows a rise in puts relative to calls, suggesting some doubt may be creeping into the sustainability of the price rally."

The volume of gold bullion held to back shares in world's largest gold ETF, the SPDR Gold Trust (GLD) meantime is at its highest level since Dec. 20, having risen 0.1% over the course of last week.

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

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events—and must be verified elsewhere—should you choose to act on it.

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