Gold Subject to High Emotions in Quiet Market


"Having seen sharp falls during Tuesday's U.S. trading, gold prices regained some lost ground Wednesday morning, climbing as high as $1,583/oz, while stocks and commodities were broadly flat and U.S. Treasuries dipped."

Having seen sharp falls during Tuesday's U.S. trading, gold prices regained some lost ground Wednesday morning, climbing as high as $1,583/ounce (oz), while stocks and commodities were broadly flat and U.S. Treasuries dipped.

The Euro also rose after hitting a new two-year low on Tuesday, while by Wednesday lunchtime Spain's Ibex stock index was up nearly 1% on the day despite news that ordinary Spanish investors may have losses imposed on them as part of Spain's banking sector restructuring.

A day earlier, gold fell by more than 2% on Tuesday after briefly touching $1,600.

"The market looked non directional with low volumes," says a note from Swiss refiner MKS.

"Profit taking kicked in around $1,600."

Silver prices also saw a slight bounce this morning, hitting a high of $27.24/oz falling a 3% fall on Tuesday.

"The silver market saw a rather wide trade range [on Tuesday]," says a note from commodities exchange operator CME Group, "which in turn probably emboldened the bear camp from a technical perspective."

Tuesday brought news of the collapse of Iowa futures brokerage PFGBest amid allegations that client funds have gone missing.

"The whereabouts of the funds is currently unknown," said a complaint from the Commodity

Futures Trading Commission, which says the brokerage's owner, who is reported to have attempted suicide, lied to regulators to cover a shortfall of more than $200 million.

An estimated $1.6 billion (B) of client money went missing last year when brokerage MF Global went bankrupt.

Investment bank Jefferies confirmed yesterday it had begun liquidating PFGBest positions.

"If Jefferies is doing an orderly liquidation, you have to believe that there have to be some concerns about 'Do I let [my] positions go?'" says George Nickas, commodities broker at INTL FCStone.

"You've got a higher degree of emotions now in a quiet market. . .with the €100B being made available to Spanish banks, gold should not be lower," he added.

European leaders agreed last month that Spain could borrow up €100B for rescue funds to recapitalize its banking sector, while this week Eurozone finance ministers agreed €30B will be made available by the end of this month.

Banks that receive official aid however will be required to write off their subordinated bonds and preferred shares, according to a draft Memorandum of Understanding obtained by Spanish newspaper El Pais.

"The difference between Spain and other European countries is that these instruments are held mainly by retail investors," says Nomura banking analyst Daragh Quinn.

"People who bought them might not have known exactly what they were investing in."

Bank of Spain data show the amount of outstanding Spanish bank subordinated and hybrid debt—which can be converted into equity—is around €67 billion, the Financial Times reports.

Spain's prime minister Mariano Rajoy meantime unveiled his fourth austerity package in seven months Wednesday, announcing €65 billion of spending cuts and tax increases.

Elsewhere in Europe, German consumer price inflation fell to 1.7% last month—down from 1.9% in May—official data published Wednesday show.

Holdings of gold bullion to back shares in the SPDR Gold Trust (GLD), the world's largest gold ETF, fell by 4.2 tonnes Tuesday to 1,271 tonnes. The volume of GLD gold holdings has fallen by 10 tonnes over the last two weeks—though it remains higher than it was at the start of 2012.

Over in India, where the weak rupee has contributed to record local gold prices in recent weeks, gold ETFs saw their biggest monthly outflow on record by value in June—2.3 billion rupees—India's Money Control reports.

"If you look at the total amount which has gone out. . .I would think it is marginal, not even marginal for that matter," says Sanjiv Shah, managing director at Goldman Sachs Asset management in Mumbai.

"Some people [have] book[ed] profits. But I won't even call it anywhere close to huge amount of redemptions."

Analysts at Credit Suisse meantime have cut their 2012 average gold price forecast to $1,680/oz—down from $1,765. Credit Suisse's Silver price forecast has also been cut by three dollars to $30.50/oz.

Based on afternoon London Fix prices, gold has averaged $1,648/oz so far this year, while the average silver price has been $30.88/oz.

Ben Traynor

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 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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