'Flat Momentum' Sees Gold in Contracting Range


"The U.S. dollar gold price hovered above $1,580/oz during Friday morning trading in London—in line with where it has spent the last two weeks—while stocks and commodities ticked lower and U.S. Treasuries gained."

The U.S. dollar gold price hovered above $1,580/ounce (oz) during Friday morning trading in London—in line with where it has spent the last two weeks—while stocks and commodities ticked lower and U.S. Treasuries gained, as market attention returned to the European debt crisis, currently focused on Spain.

The silver price dipped to $27.07/oz, though it too remained firmly within its range for the last fortnight.

Based on Friday afternoon London Fix prices, the gold price has alternated between up and down weeks since the week ended May 11. A gold fix below $1,595.50/oz this afternoon would see this pattern extended for a tenth week.

"The [daily trading] range is contracting these days," says Standard Bank's Yuichi Ikemizu, head of commodity trading, Japan.

"I don't see much encouragement for people to have a big position."

"Daily momentum is flat," agrees Tim Riddell, head of global markets research, Asia, at ANZ Bank "Gold appears to have lost its glimmer. . .as it languishes in the lower reaches of a $1,555–1,635/oz range. The near-term inability to regain levels above $1,600 will keep the bias towards retesting the base of this range."

For both dollar and sterling investors, the gold price is at the same level it was two months ago. In New York, the volume of gold held to back SPDR Gold Trust (GLD) shares fell to a six-month low yesterday, falling nine tonnes to just over 1257 tonnes.

Over in Europe, Germany's Bundestag yesterday voted in favor of Spain's banking bailout—which would see the Spanish government borrow up to €100 billion (B) to finance banking sector restructuring. The aid may in time be converted so it takes the form of direct loans to banks, subject to conditions such as the creation of a single European banking supervisor. The vote passed by 473 votes to 97.

"Any problems in the Spanish banking sector are a problem for the financial stability of the Eurozone," said German finance minister Wolfgang Schaeuble ahead of the vote.

"Spain is the fourth biggest economy in the Eurozone," added Andrea Nahles, deputy leader of the main opposition party the Social Democrats.

"A couple of its banks need to be stabilized. If we don't do it, the country that suffers most is Germany, so it is in Germany's interests to help Spain."

Finland's parliament meantime voted 109 votes to 73 in favor of the bailout on Friday.

Spain's parliament meantime voted in favor of a €65B austerity package on Thursday. The vote, which was not attended by Prime Minister Mariano Rajoy, was passed with 180 votes out of 350 seats, newswire Bloomberg reports, suggesting no opposition members supported the package.

Yields on 10-year Spanish government bonds remained above 7% this morning, having risen back above that level yesterday for the third time in just over a month.

"[Spain's government] can't survive for long with this sort of pressure," reckons Jose Carlos Diez, chief economist at brokerage Intermoney in Madrid.

"There is still more fear than anger on the streets but the demonstrations are increasing and as unemployment increases, it will get worse."

"They are wrecking the future of a generation," said actor Javier Bardem, quoted by Spanish newspaper El Pais as he attended a demonstration in the Spanish capital.

"It's an injustice to take responsibility away from the banking industry and attack the unemployed, the sick and the poor."

German producer price inflation meantime fell to 1.6% last month, its lowest level since May 2010. On the currency markets, the euro ticked lower against the dollar. Since this time last year, the euro has fallen around 15% against the dollar, while the euro gold price has risen by a similar amount.

"At first sight, this should boost output," says a note from UBS.

"But the exchange rate response is simply part of the bigger, well-known picture of economic stress in the common currency region. . .although the weaker currency will help the troubled economies rebalance [towards more exports], the weakness is not a trigger for [economic growth] forecast revisions."

UBS also notes that the European Central Bank (ECB) has expanded the size of its balance sheet much faster than the Federal Reserve over the past 12 months, "simply because the Eurozone economy and its banks remain troubled."

The ECB cut its main policy interest rate to a new record low of 0.75% earlier this month, while on the same day China also cut rates and the Bank of England announced more quantitative easing.

"The apparent dependency on central bank support for an ailing global economy highlights its chronic weakness," says the latest economic commentary from the World Gold Council.

"This challenging environment tends to be conducive to gold investment."

Here in the UK, government borrowing last month was larger than forecast at just over £12B, official figures published Friday show.

"It is clear that the recession is leading to a worsening of the UK's underlying fiscal position," says London-based ING economist James Knightley.

"[This] raises more question marks over the effectiveness of the government's austerity measures."

Ben Traynor

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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.

(c) BullionVault 2011

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