Euro Breakup: What We Can Learn from Monetary History

UPDATE, 15:00 GMT - Wholesale Gold Prices tumbled Thursday afternoon in London as the US Dollar rallied and stock markets cut their earlier gains on what analysts called "disappointing" comments from US Fed chairman Ben Bernanke, testifying to the Senate's Joint Economic Committee in Washington.

Continuing to "maintain a highly accommodative stance...until at least the end of 2014," Bernanke said in pre-written comments that the US central bank is "prepared to take action as needed to protect the US financial system and economy in the event that financial stresses escalate."

However, "The economy's performance over the medium and longer term also will depend importantly on the course of fiscal policy," he added, noting the need for Washington to address US debt and repeating his inflation target of 2% per year.

"He sounded more moderate than dovish," says Kathy Lien at GFT in London, noting how Bernanke attributed some of the last two "abysmal" US jobs reports to seasonal adjustments and the weather.

Gold Prices today reversed half of last Friday's jump - a jump which came after a much weaker than expected US jobs report for May - with bullion traded in London's wholesale market dropping 2.6% to $1588 per ounce.

Silver Bullion lost 4.1% to trade back where it started the week at $28.55 per ounce.

Oil and other commodities also fell, as did UK and German government bonds. US Treasury bonds rose.

FIRST REPORT, from 12:35 GMT - Gold Prices rallied back above last week's finish in London on Thursday lunchtime, reaching $1628 per ounce as the Euro currency rose to $1.26 for the first time in a week, and European stock markets bounced further from their 3-year lows.

The Bank of England left UK interest rates and quantitative easing on hold at its scheduled monthly meeting, but the People's Bank of China surprised analysts by cutting interest rates for the first time since early 2009.

Brent crude oil rallied after slipping again near 16-month lows at $100 per barrel.

The price of Silver Bullion jumped towards Wednesday's 1-month high just shy of $30 per ounce, a level first reached in this bull market in December 2010.

"Gold's performance over the past month has not been positive but has been the best of the bad bunch," writes Walter de Wet at Standard Bank today.

"However, movements in the US Dollar [are] only a short-term driver of Gold Prices...As a result, we believe that turning structurally bearish on gold purely because of a stronger Dollar (or weaker Euro) would be wrong [and] continue to look for a gold price above $1900 in Q4."

"The gold bulls are desperately hoping for further mention of some form of stimulus," writes Marex Spectron's David Govett in a note, looking to US Federal Reserve chairman Ben Bernanke's appearance at the Senate today.

"If however, as I personally believe, the Fed leaves things as they are for the time being, this will be viewed as negative and Gold Prices will fall."

Over in Europe today, Spain successfully raised €2 billion ($2.6bn) in new government bonds, but at a cost of 6.04% annual interest on 10-year debt.


Commenting at his monthly press conference Wednesday after leaving Eurozone rates and bank-support lending unchanged, "Some of the problems in the Euro area have nothing to do with monetary policy," said European Central Bank president Mario Draghi.

"I don't think it is right for monetary policy to fill other institutions' lack of action."

Today's Financial Times leads with un-sourced comments that "Unlike earlier bailouts for Greece, Portugal and Ireland, the proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU."

Such austerity as has already happened means Madrid – which needs perhaps €400 billion ($500bn) on some estimates to recapitalize its domestic banks – "could even dispense with the close monitoring by international lenders that has proved contentious in Athens and Dublin."

The Wall Street Journal meantime reports that China Investment Corp. – the sovereign wealth fund running much of Beijing's public savings – now deems the risk of a Eurozone break-up "too big" and has cut its holdings of Euro-denominated stocks and bonds.

After announcing a drop of one-sixth in its Euro debt holdings yesterday, Kazakhstan's central bank today said it will Buy Gold worth some $1 billion to raise the proportion of bullion in its reserves from 12% to 15%.

At current Gold Prices, the move should take Kazakhstan's official holdings from 98 to some 120 tonnes.

"Quantitative easing in Europe will infuse liquidity and add little bit more confidence," said commodities researcher Amrita Sen of Barclays Capital to CNBC-TV18 in India this morning.

"The continued flight from capital and risky assets should benefit Gold Prices."

Gold Prices for Indian consumers – the world's heaviest buyers – yesterday reached new record highs, hitting some INR 30,400 per 10 grams and rising at an average annual rate of 28% since the Western world's banking crisis began in June 2007.

China's gold imports through Hong Kong were reported earlier this week to have hit 102 tonnes in April, some 60% higher from a year earlier but below the record set last November when re-exports of 34 tonnes are included.

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