Gold News

Gold "Is Actually Euro Insurance" Says Bond-Heavy Pension Fund as Gold Rises, Dealers Await Chinese Buyers Return

The price of Gold in Dollars held onto this week's 1% gain in London trade on Friday, as bonds and commodities rose but world stock markets headed for their first weekly loss in three.

"Euro denominated gold has now convincingly broken back above the €1000 level" per ounce, says one London dealer in a note.

The Gold Price in Sterling today rose above the £852 level it touched four times in the last three weeks.

"We expect all the Chinese to be back in the game on Monday" says Swiss-based MKS Finance, echoing comments from many Hong Kong and London dealers, after the long Lunar New Year holiday extended into this week.

"Activity in China remains muted [but] there is evidence of strong interest for silver," says Standard Bank.

"China's recent rate hike is also fuelling these inflation worries."

Silver Prices ticked lower Friday morning in London, but neared their third week-on-week gain in succession – adding some 14% against Dollars, Euros and Sterling alike from end-Jan.'s two-month lows.

"With inflation in China expected to be above 5% for much of the early part of 2011, [its rising] rates are not yet at levels that offer an attractive opportunity for savers," says Nic Brown and the commodities team at French bank Natixis.

"But with each rate increase the opportunity cost [in missed interest payments] of holding Gold rises."

South Korea's central bank surprised the market on Friday by keeping its key lending rate on hold. Vietnam meantime devalued its currency, the Dong, by 9% vs. the US Dollar – the second such move in 6 months – after the Communist Party's recent 5-year congress ordered the central bank to "stabilize the macroeconomy".

"Demand from China, India and central banks has been strong over the last year," says Natixis. But "if western investors become net sellers of gold the market may find it difficult to sustain the current elevated prices," it adds, noting early 2011's strong outflows of metal from the large exchange-traded gold trusts.

The giant SPDR Gold ETF shed another tonne of bullion on Thursday to near January's 9-month low of 1224 tonnes held in trust.

Following a week of strong earnings results from publicly-listed Gold Mining companies in North America and South Africa, slack investor interest last night forced Severstal to pull the £441 million ($709m) float of its Nord Gold division on the London stock market – "the fourth Russian offering in the City to be hit by emerging market outflows in less than a week" says the Financial Times.

Mid-sized Dutch pension fund SPVG was meantime ordered by its regulator to sell three-quarters of its 13% allocation to gold, because that level is not deemed "prudent".

SPVG is 85% invested in Dutch and German government bonds, says SPVG – which runs €300m for employees of glass manufacturer Vereenigde Glasfabrieken – adding in a statement that "The fund has its formal obligations secured in Euros.

"But the Euro is actually secured by trust in government...[and] the decision to invest in Gold is actually an insurance."

Reporting a 67% gain since its 2008 purchase, "This [insurance] is also the same argument of central banks and the IMF for holding large gold positions," says SPVG, vowing to appeal the judgement but accepting that it may have to sell down its gold allocation.

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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