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Gold Bullion Rallies from "Pivotal" Trendline as Eurozone Debt Fears Return, Likely QEII "Puts Floor" Under Gold Price

The price of physical Gold Bullion rallied almost 1% in London on Thursday from yesterday's four-session low, trading at $1333.50 an ounce as European stock markets rose – as did the Euro – despite a fresh plunge in "peripheral" Eurozone bond prices.

Crude oil ticked higher above $82 per barrel, and Silver Prices were steady around $23.75 per ounce after an "extremely volatile" session on Wednesday, one London trader noted.

"Last week's low of $1316 [in Gold Bullion] appears pivotal considering the three-month [rising] trend line comes in today at $1319," says Scotia Mocatta strategist Russell Browne.

"Gold managed [on Wednesday] to hold trend-line support at $1319," agrees a London dealer, and "with gold falling below $1330," says Walter de Wet at Standard Bank, "physical demand for gold has picked up markedly since the start of the week."

In particular, believes de Wet, gold buyers in India – the world's No.1 gold consumer – will keep Buying Gold on price dips until the Hindu festival of Diwali one-week tomorrow. Whereas in the West, "the market still focuses" on the US quantitative easing expected at the Fed's meeting next Wednesday.

"We believe the gold market is pricing $500bn of QEII already. A Gold Price roughly 4% lower than current levels would be consistent with no QE. So, until 3 Nov., we see $1280 as a floor for gold and any price dips in gold should be bought."

"Next Wednesday's [Fed] announcement will carry our qualified endorsement [even though] check writing in the trillions is not a bondholder's friend" writes Bill Gross, head of bond-fund giant Pimco – and long-time advocate of quantitative easing – in his latest Market Outlook.

"It will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers – and, yes, equity managers – to adjust to a new environment."

Forecasting talk of not a second but a third round of QE in the United States within 3 months, "Emerging economies need a fresh spray of capital controls and higher interest rates," says former Morgan Stanley analyst Andy Xie, now a board member of Rosetta Stone Advisors, "because hot money inflows are about to go from boiling to molten.

"Russia gave foreign bondholders a deep haircut a decade ago. Now they are bending backwards to buy Russian bonds."

Noting that the Euro's strength vs. the Dollar has not translated into "excessive" strength against other currencies, "If the US were seen by markets as actively trying to debase its currency...the [European Central Bank] might well choose to offer investors who flee from the reserve currency a new home," reckons current Morgan Stanley analyst Joachim Fels.

"True, the price to pay for becoming a reserve currency is a significant loss in external competitiveness and a current account deficit reflecting the capital inflows. Yet, the benefits of offering investors a form of Ersatzgold would include higher asset prices and permanently lower interest rates, which would help especially highly indebted governments."

The ECB was seen buying Irish government bonds today according to Bloomberg report, after the yield on Dublin's debt jumped to new record highs compared to German Bunds, offering new buyers more than 7% over comparable debt.

Ireland's 2010 budget deficit is now forecast at almost one-third of the country's annual economic output.

Both Portuguese and Greek government bonds also fell hard in price, driving 10-year yields on Athens' debt above 10.5% after it revised its 2009 budget deficit figure up from 13.5% to 15.3% of last year's GDP.

Fears of a snap election are adding to concerns that Greece's targeted deficit of 8.1% may be impossible in 2010, says Reuters.

"Gold Prices are currently being driven by the weakness/strength of the Dollar," says the latest Commodities Weekly from French bank Natixis, "unlike the early part of the year when gold prices were being driven predominantly by European [credit-default insurance] rates.

"Were we to see a shift in focus away from the Dollar after next month's Fed meeting...we could [also] see a move away from the highly negative correlation between Gold Prices and the Dollar."

"If the market senses any chance at all that the 'nuclear' option [of pan-Eurozone bond issues or quantitative easing] could be taken as a result of shifting political sentiment, the Euro is likely to endure a re-run of the weakness that we saw through the first half of 2010," says Standard Bank's currency strategist

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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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