Gold Steadies as Italy, Spain Face Higher Borrowing Costs

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"Gold hovered near $1,600/oz as European stock markets recovered some ground following yesterday's losses."

Dollar prices to buy gold hovered at just under $1,660/oz during most of Wednesday morning's London trading—up around 1.5% for the week so far—as European stock markets recovered some ground following yesterday's losses, commodities were broadly flat and government bond prices fell.

Gold prices rallied in yesterday's U.S. trading, hitting a high of $1,663/oz.

Silver meantime held above $31.50/oz—though it remains below where it started the week.

"This lessens the short-term bearish posture," says the latest technical analysis note from bullion bank Scotia Mocatta.

"However, we would like to see another close higher before shifting to bullish."

U.S. stock markets meantime fell in Tuesday's trading, as markets continued to digest Friday's disappointing nonfarm payrolls report.

"If weak [economic] data continues, the Fed will have to intervene again to stimulate consumption," reckons Jeremy Friesen, Hong Kong-based commodity strategist at Societe Generale.

"The next couple of years will be really challenging for global growth and central banks will be relied on as a crutch to get us through."

Spain's prime minister Mariano Rajoy is due to speak to members of his People's Party this afternoon as he tries to gather support for spending cuts aimed at reducing the government deficit to 3% of GDP next year.

"Without a doubt, a good part of Spain's future is at stake," he told Spain's upper house of parliament yesterday.

"The problem is that the markets can lend or decide not to lend."

Benchmark yields on 10-Year Spanish government bonds breached 6% this morning, before easing lower. This is the first time Spanish yields have been above this level since December, and the first time since the European Central Bank launched the first of its two three year longer term refinancing operations that month.

Spain's 10-Year bond yields set a Euro era record last November when they spiked above 6.7%.

"The idea that Spain is going to be able to avoid a bailout is going to be tested over the next few months," reckons Harvinder Sian, senior interest rate strategist at Royal Bank of Scotland in London.

"We think the market will smash [Spanish bond yields] back to the highest levels we've seen and go beyond that."

Italy meantime saw its borrowing costs nearly double this morning when it sold €8 billion of 12-month bills at a yield of 2.84% - up from 1.492% for a similar auction last month.

A further €3 billion of debt due to mature in July next year was sold at 1.249% - compared to 0.492% last month.

Over in Asia, Hong Kong exported nearly 39.7 tons of gold bullion to China in February—a 20% increase on the previous month—according to Hong Kong Census and Statistics Department data.

In the first two months of 2012, China has imported 72.6 tons of gold from Hong Kong—a 589% increase on the same period last year. Chinese gold imports from Hong Kong are widely regarded as a proxy for overall imports.

"At this point [however] I don't think China's gold demand growth this year will be as strong as last year," says Dick Poon, manager at precious metals group Heraeus in Hong Kong, adding that many people in China prefer to hold onto cash than buy gold.

Figures published Monday show that China's consumer price inflation index rose by 3.6% year-on-year in March—up from 3.2% in February but below the 3.9% average rate of inflation in the first two months of this year.

Ordinary Chinese however appear to be becoming increasingly skeptical of the official figures.

China is due to publish its latest economic growth figures on Friday. The Asian Development Bank forecasts that these will show an annual growth rate of around 8.5%—down from9.2% for 2011.

In the U.S. meantime, Rick Santorum has ended his bid to become the Republican presidential nominee for this November's election.

Ben Traynor
BullionVault

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

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