Wholesale market prices for gold bullion hit a low of $1,561 an ounce during Friday's Asian session, 4.8% down on this week's high, while stocks and commodities also fell this morning and major government bond prices gained.
On the currency markets, the Euro dropped back below $1.25 as the dollar rallied, after Federal Reserve Chairman Ben Bernanke yesterday "disappointed" traders by not making a firm commitment to a third round of quantitative easing, known as QE3.
Gold prices managed to recover some ground by Friday lunchtime in London, rising back above $1,580 an ounce, but gold bullion was still down 2.5% on the week, having unwound most of last Friday's jump.
Silver bullion meantime dipped below $28 an ounce in early London trading, before it too recovered some ground, adding about $0.50 ahead of the U.S. session.
"Gold bulls were very disappointed by the Bernanke testimony yesterday," says Lynette Tan, investment analyst at Phillip Futures in Singapore.
"Bernanke gave few clues on QE3," adds the latest note from Swiss precious metals group MKS, "and attributed much of the recent job weakness to seasonal factors."
"This morning, we are seeing some support for [precious metals] despite a persistently strong dollar," says Marc Ground, commodities strategist at Standard Bank.
"This support is most likely coming from the physical market as buyers find current price levels once again more attractive. . .however, we would not completely discount another leg down."
At his testimony to the Joint Economic Committee on Thursday, Bernanke warned Congress that current U.S. fiscal policy is "clearly unsustainable." The Fed chairman added that the so-called fiscal cliff—the expiration of tax cuts and reduced government spending currently due to happen at the start of 2013—poses "a significant threat to the recovery."
A day earlier, European Central Bank President Mario Draghi also drew attention to fiscal policy issues, saying on Wednesday that "some of [Europe's] problems have nothing to do with monetary policy. . .[which should not be used] to compensate for other institutions' lack of action."
Europe "poses significant risks to the U.S. financial system," Bernanke said yesterday.
"The Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate," he added. Later in his testimony, Bernanke argued there is "no justification" for fears that QE poses a risk of high inflation.
"[Bernanke is] saying what he has said before," reckons Fabian Eliasson, New York-based vice president of currency sales at Mizuho Corporate Bank.
"[He is] reassuring people that they will act if things deteriorate further."
A day before Bernanke's testimony, Fed vice chair Janet Yellen told an event in Boston she was "convinced that scope remains for [the Fed] to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions."
"Bernanke threw traders a curve ball," complained one Chicago analyst following the Fed chairman's testimony.
"After his vice chair made it seem like [QE] was a foregone conclusion, he really messed people up."
Despite its rhetoric, the Fed is actually tightening policy, argues Grant's Interest Rate Observer publisher Jim Grant. In an interview with CNBC this week, Grant pointed out that the Fed's balance sheet has contracted over the last three months.
"The Fed is withdrawing stimulus even as more and more [Fed policymakers] are talking about QE3," said Grant, who nevertheless says he expects there will be a third round of quantitative easing.
Here in Europe meantime, Spain is due to ask the European Union to inject funds into its banking sector, according to a Reuters report which cites EU and German officials.
"The government of Spain has realized the seriousness of their problem," the newswire quotes a senior German official.
Spanish banks hold €184 billion in real estate loans described as "problematic" by the Economy Ministry, news agency Bloomberg reports.
Ratings agency Fitch downgraded Spain's sovereign credit rating from A to BBB Thursday, putting it two notches above junk.
Fitch also warned Thursday that it will cut its rating for the U.S. next year if it does sufficiently address its fiscal problems.
"The United States is the only [AAA-rated] country which does not have a credible fiscal consolidation plan," said Fitch sovereign ratings analyst Ed Parker.
China, the world's biggest buyer of gold bullion in the six months to March, is due to publish several pieces of key economic data this weekend, including the latest consumer price inflation, money supply and trade figures.
China's central bank cut interest rates yesterday for the first time since early 2009, a move that surprised many analysts.
"This rate cut is a clear indication the government sees further weakness in the May economic data," reckons Stephen Green, head of research, Greater China at Standard Chartered in Hong Kong.
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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