Gold News

Gold Diversification Doubted As Commodity Slump Continues, Euro Falls On Appointment Of New ECB Chief

THE US DOLLAR Gold Price continued to fall on Thursday morning – hitting $1479 per ounce on the wholesale market – as world stock and commodity markets took another tumble.

Thursday's London Silver Fix set the white metal's price at $32.50 per ounce, nearly $7 lower than a day earlier and 33% below the 31-year high of $48.70 set on April 28.

"[Silver] is still in an uptrend, despite the sharp sell-off" reckons Mary Ann Bartels, head of US technical and market analysis at Bank of America Merrill Lynch, who said yesterday silver could hit $50 per ounce by the end of the year.

"[The Gold Price ] has not suffered as much as silver, which is partly due to physical interest at these low prices," says Walter de Wet, commodity strategist at Standard Bank. 

"While scrap and other physical selling have not been completely absent in the past two weeks, we have not seen physical selling outpace buying."

The Gold Price for Euro buyers was holding steady on Thursday morning, trading around €33750 per kilogram (€1050 per ounce), as the single currency continued to fall against the Dollar after Italian policy-maker Mario Draghi was cleared to succeed Jean-Claude Trichet as president of the European Central Bank by German chancellor Angela Merkel.

Director-general at the Italian Treasury during the exchange-rate crisis and devaluation of the early 1990s, Draghi openly resisted the Berlusconi government's failed 2009 attempt to sell some of the Banca d'Italia's reserves of Gold Bullion reserves – the world's 3rd largest state hoard – to help fund its budget deficit.

"Gold has significant downside targets now on our short-term charts," says one London-based bullion dealer today, adding that "the precious complex seems set to remain under pressure."

"Given that the Gold Price sold off in line with last week's correction in risk assets, we no longer feel as comfortable with our sizeable gold position as we once were," wrote Frederik Nerbrand, global head of asset allocation at HSBC, in a note to clients on Wednesday.

"We have bought into gold because of its low correlation to equity markets and its ability to moderate portfolio volatility. While this is still the case, we think the diversification benefits have diminished," he added.

Nerbrand now says gold should make up 10% of portfolio on a three-year outlook, down from 15%.

Since peaking on April 29, the S&P 500 Index of US stocks has lost 2.2%, while the gold has lost 6% since May 1's all-time high.

Earlier this week Hal Lehr, managing director for cross-commodity trading at Deutsche Bank, said he is "bullish on gold despite its current levels."

"It could reach $2,000 an ounce in the next eight months," he said.

US crude oil futures led sharp falls in commodity prices, losing over 2% on Thursday morning.

"Markets always struggle with tightening cycles," says James Holt, director of BlackRock Investment Management. "The China inflation data...shows that the country will need to do more tightening."

Pending a majority vote in the European Council, Bank of Italy governor Mario Draghi will succeed Jean-Claude Trichet as ECB president from November 1 2011. Draghi will inherit a €1.9 trillion balance sheet, over twice as large as when Trichet took over eight years ago.

"Draghi will have to make a huge effort to assert his hawkish credentials," says former ECB forecaster James Nixon. "He may have to contend with the very real threat of a sovereign restructuring. Persuading the Germans that an Italian is the best man for that particular task is going to be difficult."

A former Goldman Sachs executive, Draghi was dubbed "Super Mario" by Italy's press when he led a series of state-asset privatizations in the mid-1990s and also re-drafted country's financial and corporate regulations.

Figures from the World Gold Council (WGC) show there were no sales of Gold Bullion by central banks in February and March. The WGC confirms Gold Bullion purchases by Mexico, Thailand and Russia.

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Editor of Gold News and presenter of BullionVault 's weekly gold market summary on YouTube from 2011 to 2013, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

See full archive of Ben Traynor articles.

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