Precious Metals Under Pressure as Investors and Traders Take Breather
Source: Ben Traynor, BullionVault (2/27/12)
"Prices for buying gold dropped to $1,764/oz Monday morning London time, a 0.5% fall from Friday's close, while stocks, commodities and the euro all lost ground."
Germany's DAX index was down 1.1% by lunchtime, after G20 finance ministers over the weekend said Germany must do more towards solving the Eurozone crisis.
Prices for buying silver meantime dropped to $35.07 per ounce, a 1.1% fall on last week's close.
"Precious metals are a bit under pressure this morning," one Hong Kong bullion dealer noted, adding though that "there seems to be some decent size interest in silver."
Prices for buying gold "are taking a breather," agrees Barclays Capital, "after rallying to levels last seen over three months ago."
"There is nothing to say that gold should directionally pull back," says David Wilson, metals research and strategy director at Citigroup.
"But if it got to a lot of investors' targets, whether that was around the $1,780 an ounce level we saw last week, they will take some money and wait for it to pull back before re-entering."
"Gold. . .is likely to bounce between $1,760 and $1,780," reckons Nick Trevethan, senior commodity strategist at ANZ bank in Singapore.
"The G20 added to the risk anxiety. . .but the eventual breakout will be towards the upside."
Eurozone leaders must do more to boost the single currency bloc's "firewall" against debt crisis contagion before asking for more International Monetary Fund assistance, according to several non-Eurozone finance ministers who met in Mexico over the weekend for a G20 meeting.
"We have to see the color of the Eurozone's money first," said UK Chancellor George Osborne.
"There is broad agreement," added U.S. Treasury secretary Timothy Geithner, "that the IMF cannot substitute for the absence of a stronger European firewall and the IMF cannot move forward without more clarity on Europe's own plans."
The Eurozone "doesn't really need any outside money," reckons Jim O'Neill, chairman of Goldman Sachs Asset Management.
"It needs [its] own policy makers, especially Germany, to show leadership."
Germany has repeatedly expressed its opposition to increasing the size of the €500 billion European Stability Mechanism which is due to become operational in July.
"We see no need to increase the upper limit of the ESM," an official close to Chancellor Angela Merkel's government told newswire Reuters.
European leaders are expected to discuss the ESM at a summit this Thursday, while G20 leaders will reconvene in April to continue working towards a $2 trillion crisis-fighting package.
Germany's parliament is due to vote today on last week's Greek bailout agreement, with German Finance Minister Wolfgang Schaeuble noting last week that "it is possibly not the last time that the Bundestag will have to consider financial assistance for Greece."
"Don't go any further along this crazy path," urged German tabloid Bild on Monday, adding that that "[the] billions for Greece [should] stop."
At least 12 members of Merkel's coalition government are planning to rebel and vote against last week's deal, Reuters reports. If 20 or more were to rebel, Merkel would need to rely on opposition support to ratify the €130 billion second bailout deal.
Many European banks who borrowed from the European Central Bank at December's 3-Year longer term refinancing operation are using the money to refinance maturing debt rather than fund new loans to businesses, news agency Bloomberg reports.
"This will ease credit flows but won't stop the great deleveraging," says Huw van Steenis, head of EMEA banks and financials research at Morgan Stanley.
Banks borrowed €489 billion from the ECB at December's LTRO, which also saw the ECB relax its restrictions on the collateral banks can post against their borrowing. A second LTRO scheduled to begin tomorrow is expected to see a similar level of borrowing.
"Providing money so cheaply, for so long, against what is now effectively any collateral whatever, leaves the ECB in a position no central bank would choose to be in," says a note from London-based analysts at UBS.
"It cannot control the credit risk coming onto its books. . .worse, the success of its interventions risks encouraging politicians to avoid making necessary but difficult decisions."
"This buys time for banks," adds Stewart Robertson, London-based chief European economist at Aviva Investors, "but does it really provide them with an incentive to sort out their books? The worry is it doesn't."
Sweden's central bank on Monday denied buying gold in January, after IMF data suggested it added 18.3 tonnes to its reserves. A spokeswoman for the Riksbanks said its reserves remained unchanged at 125.7 tonnes.
Over in New York, meantime the difference between bullish and bearish contracts for buying gold held by Comex futures and options traders, the so-called speculative net long, rose by nearly 10% over the week ended last Tuesday to hit its highest level since mid-November, latest data from the Commodity Futures Trading Commission show.
"Large spec futures accounted for the lion's share of the rise. . .with much of the rise coming on the 21st, as the U.S. returned from holiday and sentiment turned bullish," said a note out Sunday from precious metals consultancy VM Group.
The volume of gold bullion held to back shares in the world's largest gold ETF, the SPDR Gold Trust (ticker: GLD), edge up 0.2% to 1284.6 tonnes over the course of last week to Friday.
Over the same period the world's largest Silver ETF, the iShares Silver Trust (SLV), saw its silver bullion holdings rise 1.2% to 9692.96 tonnes.
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 2012
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.
Like gold, investing in silver is a great hedge against inflation and financial turmoil alike. It's why demand for silver is increasing at an astonishing rate.