Gold News

Gold Price Struggles at $1200 After "Unsurprising Profit-Taking"; Gold Remains "Liquid & Highly Attractive" to Central Banks

Gold Prices bounced from a new 6-week low early in London on Thursday, but struggled to hold above $1200 an ounce as world stock markets jumped together with commodity prices.

Silver Prices touched a 1-week high at $18.24 an ounce as the Gold Price in Dollars rallied from its May 25th low at $1186.16.

Neither the European Central Bank or the Bank of England altered their record-low interest rates of 1.0% and 0.5% respectively, leaving both their currencies and government bonds little changed.

"Given the wave of buying across the investment spectrum of Gold in recent months, it is not surprising there has been some profit taking," says July's new Metal Matters for clients of bullion-bank Scotia Mocatta.

Analyzing last week's broad "correction" in global asset prices, "Long liquidation may initially affect Gold," the report says, but "we feel the end result will be increased investor fear.

"That is likely to see more money move into Gold as a means to protect wealth."

New data today showed Germany's trade surplus falling in May, even as the Euro currency slid towards four-year lows.

UK manufacturing output also disappointed analysts, while British house prices showed their first month-on-month drop, on average, since March according to the Nationwide lender.

World economic growth, however, was today revised higher for 2010 to 4.6% by the International Monetary Fund, with the US and China set to expand their GDP more quickly than previously forecast.

"Current global macro-economic risks, such as the European sovereign debt crisis and strong money-supply growth, make a strong case for an additional tactical overlay to gold in reserves," says Natalie Dempster, director in Government Affairs at market-development body the World Gold Council.

"A sovereign debt downgrade to below investment grade reduces the pool of eligible investments for many central banks, while contagion risks lower the attractiveness of similar assets.

"Furthermore, the 2007/2009 financial crisis clearly changed what could be perceived to be markets which are deep and liquid. Gold, which bears no counterparty risk and is permissible as a reserve asset, has remained highly liquid through the worst of the financial crisis, and hence becomes especially attractive in the current environment."

Meantime today, Tuesday's news of central-bank "gold swaps" with the Bank for International Settlements – often called "the central banks' central bank" – was revised after the BIS denied that central banks were its counterparties.

"The operations concerned were purely market operations with commercial banks," the BIS said in an email, refuting an article in the Wall Street Journal which said the 346 tonnes of Gold used to secure $14 billion in currency loans were directly owned by sovereign states.

"Nevertheless, there is one thing of which we can be sure," says the FT's Alpha blog today. "The bulk of gold-swapping did take place in January, and that coincides with the expiry of the Federal Reserve's Dollar swap-line facility."

At its peak amid the collapse of Lehman Brothers, the US Fed's Dollar swap-line with Eurozone banks hit $585 billion. The facility was reinstated as the Greek debt crisis worsened in spring this year.

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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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