Investment Demand "Essential" for Gold Bullion to Gain, But Gold "Could Benefit" from Policy Response

Gold Bullion rose as high as $1597 per ounce during Monday morning's London trading – in line with where it ended last week – while European stock markets ticked higher following the release of better-than-expected European manufacturing data.

"Gold still remains in the same range since early May," say technical analysts at bullion bank Scotia Mocatta, adding that gold "would have to move above trendline resistance [at $1624] to reverse the bearish posture."

Silver Bullion this morning hit $27.58 per ounce – also in line with last week's close – as other industrial commodities fell, with WTI crude oil down below $84 a barrel.

US Treasury bonds edged higher, while UK and German government bond prices fell.

Eurozone manufacturing activity continued to contract last month, with the Eurozone PMI staying unchanged at 45.1 – slightly above consensus forecasts. 

Germany's manufacturing PMI dropped from 45.2 to 45.0 – though this too beat expectations.

Eurozone joblessness meantime ticked higher in May, with the unemployment rate rising to 11.1%, up from 11.0% in April, figures published Monday show.

The European Central Bank is expected to cut its main policy rate below 1% when it meets on Thursday, according to a poll of economists by newswire Reuters.

ECB president Mario Draghi said Friday he is "actually quite pleased" with the outcome of last week's European Union summit, at which it was agreed rescue funds could be used to directly recapitalize banks - but only after the creation of a single banking supervisory body.

"The ball is [now] very much in the ECB's camp," says Gilles Moec, London-based European economist at Deutsche Bank.

"We are staunch believers that gold will remain a risk-on asset for the foreseeable future," says Nikos Kavalis, metals analyst at RBS.

"If we continue to see a more definitive policy response by authorities, gold will continue to benefit...[but] the investment bid will be essential for the price to move up."

In Vienna, Austria is today expected to become the latest Eurozone country to ratify the creation of the European Stability Mechanism, the permanent bailout fund that was supposed to become operational yesterday and is now scheduled to launch next Monday, when lawmakers vote on the issue today.

The German Bundestag voted in favor of ratification on Friday, although the ESM still needs to be approved by the German Constitutional Court.

Here in the UK, June's manufacturing PMI came in better-than-expected Monday at 48.6, up from 45.9 in May, though the figure suggests continued contraction in the sector.

Britain is "in the middle of a deep crisis," Bank of England governor Mervyn King said last week.

"I don't think we are yet half-way through."

The Bank's Monetary Policy Committee announces its latest monetary policy decisions this Thursday, including whether it will launch another round of quantitative easing to add to the £325 billion in asset purchases already undertaken.

"Our working assumption is that the committee will raise the QE limit by £50 billion," says Peter Dixon, global equities economist at Commerzbank.

"But given the fragility of the economy and financial markets we cannot rule out an even bigger increase."

Elsewhere in London, some traders at Barclays may have believed the practice of underreporting borrowing costs had tacit approval from the Bank of England, according to newspaper reports. 

Barclays was fined £290 million last week after it admitted some of its staff gave inaccurate information about the borrowing costs to the committee that sets Libor – the London interbank offered rate widely used as a benchmark.

Former Barclays chairman Marcus Agius, who resigned Monday, and chief executive Bob Diamond are due to appear before the Treasury Select Committee this week. 

Reports suggest that a conversation between Diamond and the Bank's deputy governor, financial stability Paul Tucker may have led to the impression among some staff that the Bank, concerned that Barclays' Libor submissions were higher than its peers, was content for Barclays to underreport. The Bank of England denies it was aware of attempts to manipulate Libor.

China's manufacturing sector grew at its slowest pace for seven months in June, according to official purchasing managers index data published Sunday. China's National Bureau of Statistics reported last month's PMI as 50.2 – down from 50.4 a month earlier. A figure above 50 indicates the sector expanded, while below 50 suggests contraction.

"New export orders placed at goods producers dropped at the steepest rate in over three year," says HSBC in the report accompanying its own PMI figure. HSBC's privately-produced PMI was 48.2 for June, up from 48.1 the previous month. 

"It is all about growth and employment," says HSBC economist Qu Hongbin.

"Growth is likely to be on track for further slowdown...we expect more decisive easing efforts to come through in coming months."

"We expect the government to loosen policy further to ensure economic growth rebounds in the third quarter," agrees Nomura economist Zhang Zhiwei, who predicts the People's Bank of China will cut banks' reserve requirement ratio – the amount they have to hold in reserve as a proportion of assets – by 0.5 percentage points this month.

China was the world's biggest source of Gold Bullion demand in the six months to the end of March, overtaking previous world number one India.

Over in New York, the so-called speculative net long position of Gold Futures and options traders on the Comex – calculated as the difference between bullish and bearish contracts held by noncommercial traders – fell 16% in the week to last Tuesday to the equivalent of 360 tonnes of Gold Bullion, figures from the Commodity Futures Trading Commission show. 

"We regard the current skepticism displayed by speculators to be constructive [for gold]," says a note from Commerzbank this morning, adding that most traders' fears should now be "priced in".

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