Gold News

Gold "Builds Momentum", Signals Boost in Liquidity, As Bond Yields Rise Despite Central-Bank Queasing

Gold Prices ticked higher for the sixth session running on Friday, reaching the best Gold Fix in London since April 1st before dropping half-a-per-cent – and outpacing a drop in the Dollar – as world stock markets and commodities also slipped back.

The US currency fell hard against the Euro, dropping to a 5-week low, on news of April's smaller-than-expected drop in Non-Farm Payrolls.

That cut this week's gains for the Gold Price in Euros in half, knocking it back to €677.50 an ounce.

"The strength of gold indicates to us that central banks have succeeded in boosting liquidity," says Steven Barrow, head of currency dealing in London for Standard Bank.

"If this is the case, recent strength in asset prices may not be a flash in the pan.

With crude oil trading back at $58 per barrel – a five-month high – "Market psychology has clearly turned around," reckons Christoffer Moltke-Leth at Saxo Capital Markets in Singapore.

"I could see oil going above $60."

Money continued to quit "safe haven" government bonds, meantime, pushing US Treasury yields up to fresh 6-month highs and further reversing the Federal Reserve's "quantitative easing" of long-term rates.

Bond prices move inversely to yields, as the fixed-rate of interest they pay becomes a greater (or lower) percentage of their market price.

"From a technical point of view, German five-, ten- and 30-year yields are now close to very important resistance levels," says a note on the bund market from KBC Bank in Brussels.

"A sustained break above would dismiss our call for range trading."

UK gilts also fell this morning, taking the 10-year yield up to 3.76% – the highest level in 12 weeks – even after the Bank of England raised its "queasing" by two-thirds on Thursday to pump £125 billion of new money into the bond market ($187bn).

"The ECB has resorted to quantitative easing," says Walter de Wet's commodities team at Standard Bank – "an important step, we believe, to provide more upward momentum to the Gold Price.

"From an investment perspective, gold has been building momentum. However, we believe the return of scrap flows to the market, such as was seen in January and February, will be key to gold's momentum.

"We will be monitoring this closely," says Standard Bank, pegging support for Dollar Gold Prices at $909, with resistance at $926 and $935 an ounce.

Also noting the ECB's Switch to Quantitative Easing, "Longer term these policies have the potential to create a very bullish environment for gold as inflation kicks in," agrees Friday's note from precious-metals dealer Mitsui.

"But for now the market is just edging higher."

On the data front this morning, both German industrial output and US employment were less bad than forecast, but still showed sharp rates of contraction.

Losing 539,000 pay-rolls last month, the US economy has now shed 2.5 million jobs since the start of this year.

Germany's industrial production was unchanged in March from Feb., but shrank by more than one-fifth from the same month in 2008.

Over in Tokyo this morning – where Tocom Gold Futures ended the week 3.5% better – Toyota Motor Corp. confirmed its worst-ever losses since launching in 1937, with a $7.7bn loss between Jan. and March.

"Our hope is that banks are going to be able to get back to the business of banking," said US Treasury secretary Tim Geithner in a halting presentation after Thursday's "stress test" results for the top 19 banks were released.

Claiming that the scenarios applied to test the strength of bank balance-sheets were harsh and unlikely, the US authorities have asked America's largest banks to raise an additional $75bn in capital.

"The stress was not much of a stress" however, says Nobel-prize winning economist Joseph Stiglitz.

Ken Rogoff, ex-chief economist at the International Monetary Fund (IMF) told Bloomberg today that "If the banking plan still falls short, the fiscal stimulus will have been wasted to some extent.

"We could end up like Japan, sliding in and out of recession."

But with US interest rates now at a record low beneath 0.25%, "relatively weak revenue growth is likely to be offset by cheap and largely government guaranteed funding," says Goldman Sach's Jan Hatzius, plus "a steep yield curve, and ample spreads on bread-and-butter lending."

Adrian Ash

Adrian Ash, BullionVault Gold News

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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