Gold Rallies with Euro

Source:

"Gold prices have tended to rally this year in advance of events such as Fed announcements and Congressional testimony by Fed chairman Ben Bernanke, but have subsequently retreated in the absence of explicit signals that more QE would take place."

Wholesale market gold prices climbed above $1,590 an ounce during Wednesday morning's London trading—coming within 2% of this month' high—while European stock markets gained despite Spanish government borrowing costs hitting new record highs.

Silver prices rallied to $27.20 per ounce—though unlike gold, silver remains down on the week so far.

The euro rallied against the dollar in early European trading, following a press report that suggested the Federal Reserve could be moving closer to more monetary stimulus.

On the commodities markets prices were broadly flat this morning. Platinum continued to trade below $1,400 an ounce, with the gap between platinum and gold prices bigger than at any time since January. The platinum market is "over-supplied and under-demanded" according to one analyst here in London.

Spanish 10-Year bond yields hit a fresh euro era high Wednesday, climbing to 7.75% in early European trading.

"The current levels of interest rates on sovereign debt markets don't correspond to the fundamentals of the Spanish economy," said a joint statement issued yesterday by German Finance Minister Wolfgang Schaeuble and Spanish Economy Minister Luis de Guindos.

Here in the UK, the economy shrank by 0.7% in the second quarter—the third consecutive quarterly fall and the steepest since Q1 2009—according to preliminary GDP estimates published Wednesday.

"This is terrible data," says Commerzbank economist Peter Dixon.

"Frankly there's nothing good that comes out of these numbers at all. . .the economy looks to be badly holed below the water line."

"The UK economy is still very fragile," agrees David Tinsley, London-based economist at BNP Paribas, adding that more quantitative easing could be on the way from the Bank of England.

"Proactive policy measures will continue to be needed to put in place. . .we're still looking for £50 billion pounds of QE in November, supplemented with a 25 basis point [0.25 percentage points] rate cut."

The Bank of England's main policy rate has been at a record low of 0.5% since March 2009, while £375 billion of QE has been announced to date.

Sterling gold prices hit a two-week high at £1027 per ounce following the GDP announcement.

In the U.S. meantime, officials at the Federal Reserve "are moving closer to taking new steps" to boost the economy, according to a Wall Street Journal article by Jon Hilsenrath—dubbed "Fedwire" by some journalists owing to perceived closeness with Fed sources.

"Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move," says the piece.

"Central bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act."

Gold prices have tended to rally this year in advance of events such as Fed announcements and Congressional testimony by Fed chairman Ben Bernanke, but have subsequently retreated in the absence of explicit signals that more QE would take place. Gold has traded in a range within $50 of the $1,600 an ounce mark for most of the last ten weeks.

"Intervention by central banks in the form of stimulus will help gold break away from the range," says Nick Trevethan, senior metals strategist at ANZ Bank.

"But when it will take place is a tricky question."

Gold prices in India meantime hit a two-week high Wednesday, with physical bullion traders reporting lower demand to buy gold as a result.

"Demand is still poor," Maynak Khemka, managing director at New Delhi wholesalers Khemka Group told newswire Reuters today.

"There could be a 50% drop in imports from last year."

India imported an estimated 969 tonnes of gold bullion in 2011, according to World Gold Council data. Over the last 12 months however the rupee has lost more than a quarter of its value against the dollar, pushing rupee gold prices to record highs in recent weeks.

Higher bullion import duties have also impacted gold demand, while there are concerns that the monsoon, critical for gold demand, could be disappointing this year and hit demand from rural buyers.

India has traditionally been the world's biggest market for gold, but in recent months has been overtaken by China.

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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