"Huge Physical Demand" as Gold Prices Touch $1600, but "Bears in the Driving Seat" as Eurozone Braces for Downgrades

Gold Prices touched $1600 per ounce Friday lunchtime in London – a 2.3% rally from this week's lows – while stocks and commodities were broadly flat on the day.

"Physical market demand continues to improve," says Walter de Wet, commodities strategist at Standard Bank.

"The demand is not stellar, but much stronger than a week ago."

"We saw huge physical demand [on Friday] from Thailand and Indonesia," adds one dealer in Singapore.

"But there isn't much demand from India, mainly because the Rupee is very weak."

Silver Prices rose to $29.96 per ounce – still 7.0% down on last week's close – while on the currency markets the Euro rallied against the Dollar despite fears that Eurozone government downgrades may be imminent.

Heading into the weekend, Dollar Gold Prices were down 6.9% for the week. Based on Gold Prices at the afternoon London Fix, the last time gold fell further in one week was the first week of December 2008.

Bigger Friday-to-Friday falls were seen in October of that year. Today's London Fix would have to come in below $1488.75 per ounce to surpass the 12.9% weekly drop in Gold Prices seen in the week ended 17 October 2008.

Nevertheless, net outflows saw the volume of Gold Bullion held to back shares in the SPDR Gold Trust (ticker: GLD) – the world's largest Gold ETF – fall yesterday by nearly 15 tonnes to just under 1280 tonnes, the biggest one day outflow by volume since August this year.

"Bears are in the driver seat," says Miguel Perez-Santalla, New York-based vice president of sales at Heraeus Precious Metals Management.

"But the problems in Europe have not been solved and buying will come back and we will see higher prices because of a lack of confidence in the financial system."

"Could Eurozone sovereign ratings be cut as early as this evening?" asks this morning's note from Standard Bank currency analysts Steve Barrow and Jeremy Stevens.

Ratings agency Standard & Poor's last week announced it had placed every country in the Eurozone on CreditWatch negative, stating that Eurozone governments have demonstrated they "are not prepared to act collectively in a way that convinces markets".

"This sounds to us very reminiscent of the warning S&P gave to the US government ahead of the August 2 debt ceiling deadline," note Barrow and Stevens.

"The US had its AAA rating taken down to AA+ a few days later. Notably the rating cut occurred late on Friday August 6, after the markets had closed."

The potential downgrade of France – which is currently rated AAA – "does not seem justified based on economic fundamentals," Bank of France governor Christian Noyer said Thursday.

"Or if it is, they should start by downgrading the UK, which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing."

"It is true," agreed French finance minister Francois Baroin today, "that the economic situation in Britain is very worrying today and one prefers to be French than British at the moment on the economic level."

"If the international community doesn't work together," International Monetary Fund chief Christine Lagarde warned last night, "[it risks] retraction, rising protectionism, isolation...this is exactly the description of what happened in the Thirties and what followed is not something we are looking forward to."

Lagarde added that the Eurozone crisis "is not a crisis that will be resolved by one group of countries taking action".

"It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action."

European Central Bank president Mario Draghi meantime has repeated that the ECB's program of buying government bonds – which is said to be capped at €20 billion per week – is "neither eternal nor infinite."

In a speech given in Berlin yesterday, Draghi also said a "firewall" to prevent contagion across different sovereign debt markets "will be in place and can be activated when needed subject to proper conditionality". 

Eurozone leaders have agreed to "assess the adequacy of the firewall by next March," he added.

Ratings agency Fitch meantime has cut the credit ratings of seven major banks. Bank of America, Citigroup and Goldman Sachs have been downgraded by one notch from A+ to A. Barclays, BNP Paribas, Credit Suisse and Deutsche Bank have all been cut by two notches from AA– to A.

"With access to liquidity being constrained, market participants have increasing problems to refinance," says a note from Credit Suisse researchers.

"As a result they have to sell their assets – including precious metals – to raise the much needed cash. This is the main reason why Gold Prices fall on days of increasing funding stress."

Over in the US, the House of Representatives is due to vote today on a spending bill agreed last night that, if approved, will avert a shutdown of government agencies.

Negotiations continue meantime on a separate deal to extend unemployment benefits and a payroll tax cut.

"Congress should not and cannot go on vacation before they have made sure that working families aren't seeing their taxes go up by $1,000 and those who are out there looking for work don't see their unemployment insurance expire," US president Barack Obama said Thursday.

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