Gold Lacks Upside Drivers, but Support Seen at $1,700/oz


"'Gold has been trading lower as it follows the U.S. dollar appreciation,' says Bayram Dincer, analyst at LGT Capital Management in Switzerland."

Gold prices dropped below $1,710/ounce Monday morning in London, below where they ended last week, after failing to hold onto gains made in Asian trading.

Silver prices dropped below $31.80 an ounce, also down from Friday's close, as European equities also fell. US stock markets will be closed today as a result of Hurricane Sandy—the first unscheduled U.S. market closure since September 11, 2001, and the first to be caused by weather since 1985.

On the commodities markets, oil and copper ticked lower, while gasoline futures rose. The U.S. dollar also gained, along with major economy government bond prices.

"Gold has been trading lower as it follows the U.S. dollar appreciation," says Bayram Dincer, analyst at LGT Capital Management in Switzerland.

"Gold is still range-bound, lacking any upside drivers above $1,725 an ounce. The lower range of $1,700 is perceived as a good support."

"Market focus switches to this week's U.S. non-farm payrolls data [on Friday]," says a note from Barclays Capital, which cites $1698 as a support level for gold prices.

US core personal consumption expenditure data for September, a key inflation measure followed by the Federal Reserve, were published this morning, showing a slight rise in PCE inflation to 1.7%.

Over in India, traditionally the world's biggest source of private gold demand, the rupee fell to a five-week low against the dollar Monday, pushing up the local price of gold.

"[There are] a few stray deals are there in the market," one Mumbai importer told newswire Reuters, "[but] we haven't seen big volumes yet compared to last week."

The Reserve Bank of India raised its wholesale price inflation forecast for 2012–13 to 7.7% Monday, up from 7.3%. The central bank also cut its projection for India's growth rate from 6.5% to 5.7%.

India's finance minister P. Chidambaram meantime set a target of 3% for the government budget deficit by 2017 as part of a five-year plan of economic reforms announce Monday.

"[Chidambaram's timing] suggests growing political pressure on the RBI to cut [interest] rates," says a note from Nomura.

Here in Europe, Greece's public sector creditors, which include the European Central Bank, should take losses on their holdings of Greek government debt, according to a draft report from the so-called 'troika' of lenders—the ECB, European Commission and International Monetary Fund—reported by German magazine Der Spiegel.

A restructuring of Greek debt back in February saw losses imposed on private sector bondholders. The ECB said it would forego any profits on maturing bonds bought below par in the market, but did not take losses as part of that deal.

"For the ECB, forgiving debt isn't possible because it would be equivalent to indirect state financing," ECB Governing Council member and Austrian central bank governor Ewald Nowotny said today.

German Finance Minister Wolfgang Schaeuble rejected the idea Sunday, describing it as unrealistic. Schaeuble has proposed creating a so-called "currency commissioner" by extending the powers of the European Commissioner for Economic and Monetary Affairs to include a veto over national budgets.

"I explicitly support this proposal," ECB president Mario Draghi said in an interview published by Der Spiegel Sunday.

"If we want to restore confidence in the Eurozone, countries will have to transfer part of their sovereignty to the European level."

In Madrid meantime Spanish Prime Minister Mariano Rajoy met with Italian Prime Minister Mario Monti Monday, three days after Monti told reporters that a Spanish bailout request "would make market speculation less aggressive."

A formal bailout is a precondition of the ECB's Outright Monetary Transactions program unveiled last month, which would see the central bank buy distressed sovereign debt on the secondary market.

"Rajoy is very much following his own route now," says Gilles Moec, London-based co-chief European economist at Deutsche Bank.

"Rajoy was probably pressed by Monti in August to accept a pre-emptive [bailout]. . .it would have made things so much smoother in Europe and for Italy as well."

Italy sold €8 billion of six-month Treasury bills Monday, at a yield of 1.347% —down from 1.503% last month, and the lowest since March.

In the UK, mortgage approvals rose to a four-month high in September, according to figures published by the Bank of England this morning.

Over in the U.S., the difference between number of bullish and bearish contracts held by noncommercial gold futures and options traders on the Comex—known as the speculative net long—continued to fall in the week to Tuesday, weekly data published by the Commodity Futures Trading Commission Friday show.

"The liquidations are unsurprising," says Standard Bank research strategist Marc Ground.

"However, we expect some stability going forward for two reasons. First, net speculative length as a percentage of open interest has come off considerably. . .second, we believe the key $1,700 support level should hold, mostly due to renewed physical demand at this price level."

Elsewhere in the U.S., President Obama has called off a presidential campaign trip to Florida while his opponent Mitt Romney has cancelled appearances in Virginia and New Hampshire as a result of Hurricane Sandy.

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 2012

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