Gold News

Gold Adds 2% for the Week as "Gold-Pooled" European Monetary Fund Rejected

Gold held flat for US investors in London on Friday, heading for a 2% weekly gain as the Dollar rose against everything but the commodity-currencies on the forex market.

European stock markets edged 1% higher from last Friday's finish, while Euro and Sterling bonds both ticked lower as their currencies fell sharply.

Gold priced in Pounds neared its second-highest weekly close at £743 an ounce, just shy of the £750 finish hit a fortnight ago.

The Gold Price in Euros rose within 1% of March 5th's all-time peak at €838 an ounce.

"Many of the Western countries with fiscal problems have large gold reserves, while the developing countries with rapidly accumulating foreign exchange reserves hold very little gold," says Nic Brown's research team at French bank Natixis.

Noting "suggestions" reported by Reuters this week that Eurozone central banks might "pool" their Gold reserves to back a European Monetary Fund aimed at rescuing Greece from its fiscal crisis, "At some point this equation may lead to the transference of gold from developed to developing countries as part of a more global solution to the growing fiscal problems that the world currently faces."

"Just as the [International Monetary Fund] is in the process of selling some of its gold reserves, so an EMF might ultimately find itself in a similar position."

Already in the last five years, analysis by BullionVault showed on Wednesday, emerging-market states have bought 994 tonnes of gold for their reserves, equal to nearly half of the 1881 tonnes sold over the same period by developed-economy OECD members. (Read: He Who Has the Gold here...)

"Gold is quietly, at the edge, becoming the world's second reservable currency, supplanting the Euro and rivaling the Dollar," says Dennis Gartman in his eponymous advisory letter.

"The trend shall continue months, if not years, into the future."

"Unsurprisingly," Natixis' Commodities Weekly goes on, "the rumors [of a gold-backed EMF] were quickly rebuffed by the Bundesbank." Germany has the world's second-largest official gold hoard behind the United States, giving it "a traditional and deeply rooted attachment to its gold as a safety net."

Eurozone central banks currently hold a total of 10,832 tonnes of Gold Bullion, worth some €289 billion ($392bn) – only just equal to Greece's outstanding debt, and less than the Eurozone's current-year fiscal deficit across all of the 16 members.

World Gold Council analyst Rozanna Wozniak confirmed to Reuters yesterday that the mining-backed marketing and research group expects central banks as a group to continue Buying Gold in 2010.

New York's CPM Group forecasts a net rise of 187 to 218 tonnes in global central-bank holdings this year, says Bloomberg, adding to 2009's net addition of 645 tonnes.

"Using the IMF rather than a new EMF [to held Greece] might seem preferable for the Euro," writes Steven Barrow, chief currency strategist at Standard Bank today, "given that the no-bailout rule would remain unscathed."

European Commission president Jose Manuel Barroso said today that turning to the IMF "is not a question of prestige, it's a question of seeing what is the best way to respond to the situation."

"[But] what would happen if other – larger – countries like Spain and Portugal start to need the same sort of support?" asks Barrow. "The last few months show that Euro weakness goes hand in hand with wider bond spreads [between different Euro-members' sovereign debt] and we doubt this is about to change.

"Hence an IMF solution for Greece, while it might initially lead to a 'relief' narrowing of bond spreads, should cause wider spreads over the slightly longer-term – and a weaker Euro."

Typically moving together with the Euro against the Dollar, the Gold Price for US investors has now shown a negative correlation with the 16-nation currency for four weeks running, the longest stretch since March 2009.

Averaging a one-month rolling correlation of plus 0.52 since the start of Jan. 2000, daily changes in Gold and the Euro have shown a negative correlation – meaning they move in opposite directions – of minus 0.26 since this time last month.

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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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