Gold News

Gold Rallies from 4-Week Low, "Expected to Struggle" as Euro Currency Hit by Greece, Banks, Weak Data

Gold Prices rallied from near 4-week lows at $1111 an ounce early Monday, recording the lowest London Gold Fix since Nov. 13th at $1120 as Asian stock markets ended the day flat but European shares rose despite poor data.

The government of Abu Dhabi surprised analysts by lending neighboring Dubai $10 billion today to help repay debts at its Nakheel real-estate group.

Lloyds Banking Group here in London said shareholders bought 95% of last week's £13.5 billion ($21.9bnb) rights issue, launched to repay government support after it bought the failed HBOS mortgage lender in late 2008.

Citigroup, the Western world's largest bank, agreed on Monday a $20bn cash-raising share issue to repay its "Troubled Asset" support from the US authorities.

The sixth-largest bank in Austria, Hypo Group Alpe Adria, was nationalized after losing of €1 billion ($1.5bn) this year, with further write-downs likely.

"The severity of [last week's] price fall was probably due to the weight of Gold longs, who decided to take profits and exit," says the latest BNP Paribas Fortis Metals Monthly from London consultants the VM Group.

"Given that much of the additional investment seen in October/November must have been over-the-counter (as ETF and coin purchases were steady but not spectacular), it is hard to be sure how much has been liquidated and whether there are further falls to come."

Last week the SPDR Gold Trust listed in New York reduced the volume of Gold Bullion held to back its "gold-tracking" shares by 1.2% to 1116 tonnes.

What dealers called "intense demand" at the start of this month emptied the US Mint's new offering of fractional-ounce gold Eagle coins in just two days, however.

Some 260,000 items were snapped up. "Additional inventory is being produced based on available in-house blank supplies," says the Mint. Sales of one-ounce Eagle Gold Coins will be resumed on Tuesday.

Latest figures from London's professional dealers, heart of the world's wholesale gold market, will be available later this week.

"Investors who bought above $1200 an ounce will be nervously watching their trading screens after gold's latest correction," the VM Group goes on.

"If gold stabilises here, then by historical standards this correction will have been a relatively mild one."

Open interest in US gold derivatives shrank more than 11% in the week-ending last Tuesday from Nov.'s record levels, new data showed after Friday's New York close.

The "net long" position held by speculative traders (the number of bullish bets minus bearish bets) dropped to a 6-week low worth 961 tonnes of metal.

The five-year average is 535 tonnes equivalent.

On the other side of Comex Gold Futures and options trading, commercial players (meaning miners, refineries and bullion wholesalers) also cut back their bullish betting on gold derivatives faster than their bearish bets, pulling their "Bull Ratio" down to a five-week low of 25.1%.

It bottomed at an historic low of 22.8% in late Oct.

"The price drop has Gold back into our old bull channel of 1078 to 1148," says the latest note from Scotia Mocatta.

"We feel the risk remains for a deeper correction to 1078."

"Greece is struggling with its debt burden, reflected by Greece sovereign bond spreads having risen sharply in recent days," writes Standard Bank metal strategist Walter de Wet.

"The Euro may therefore continue to struggle, and so we expect precious metals to struggle too."

Gold and the Euro typically move in the same direction against the US Dollar, averaging a daily correlation coefficient of +0.51 over the last five years.

It would stand at +1.0 if they moved perfectly in synch all the time, or -1.0 if they moved in perfect opposition.

Early Monday the Euro struggled near a 9-week low to the Dollar beneath $1.4620. Crude oil meantime sank to new two-month lows beneath $69 per barrel.

Government bonds rose across the board, pushing the yield offered by 10-year German Bunds down to 3.17%.

"Greece has to show it understands the magnitude of the crisis," said Nikos Karamouzis of EFG Eurobank, the largest private bank in Greece, following last week's credit-rating downgrade of Athens' sovereign bonds.

"This means implementing immediately very radical and painful measures. This is what international financial markets and our European partners are demanding."

European Central Bank president Jean-Claude Trichet is thought to have attended this weekend's rescue meetings regarding Hypo Group Alpe Adria, Austria's sixth-largest bank and a major investor in the former Yugoslav states.

Speaking in Cambridge last week, he noted that the speed with which financial crises now spread "[has] accelerated tremendously over the past few decades."

"We remain convinced that European banks will have to repatriate funds ahead of the fiscal year end, but once this operation is complete the Euro will suffer [on the currency market]," say analysts at BNP Paribas in a report today.

"The weak equity position of banks explains weak lending in Europe, which itself suggests Europe will become an economic under performer."

New data released Monday showed industrial production across the 16-nation Eurozone fell 11.1% year-on-year in Oct., faster than analysts forecast.

Unemployment rose for the fifth quarter running between July and end-Sept., the Eurostat agency also said.

The rate of job losses was worst in Central Europe and the Baltic states.

This week's major data releases will bring wholesale and consumer price-inflation data for the UK, Eurozone and United States.

"With central banks likely to be net gold purchasers this year for the first time since 1988," says a new report from South Africa's Investec Asset Management, "a similar scenario [to the 1970s] appears to be taking shape.

"Moreover, the '70s bull market was facilitated by tight energy markets, overly accommodative central banks and nervousness that policymakers had lost their way.

"A familiar scenario perhaps?"

Russia's central bank will this week buy 30 tonnes of gold at a cost of some $1 billion from the state-owned Gokhran bullion repository.

"The primary aim is to make sure this gold doesn't hit the market and influence prices," reckons Olga Okuneva, a metals and mining analyst at Deutsche Bank in Moscow.

"It's also a way for the Russian central bank to diversify more into gold."

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Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum 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 he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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