Friday, October 12, 2012

Gold Market Report -12 October

Market "Lacking Impetus" to Push Gold Higher, But "Ultra Loose" Central Bank Policies "Should Preclude Sharp Falls"

THE U.S. DOLLAR gold price eased lower Friday morning in London, falling to $1767 an ounce, 0.7% down on the start of the week, while stock markets also ticked lower and commodities were broadly flat.

The silver price fell below $34 an ounce, before trading sideways until lunchtime in London.

"For days now the gold price has been hovering in a narrow trading range around the $1770 per troy ounce mark," says today's Commodities daily note from Commerzbank.

"It clearly lacks the necessary impetus to make further gains just now, the debt crisis in the Eurozone having not escalated any further and the supply risks in South Africa already being largely priced in."

"Investors are very cautious," agrees Andrey Kryuchenkov, analyst at VTB Capital.

"[Gold holdings backing] exchange-traded products are near record highs, long speculative positions [in Comex Gold Futures] are substantial and they showed little reaction to Spain's downgrade [on Wednesday]." 

Credit Suisse meantime raised its forecast for the 2013 average gold price Friday to $1840 per ounce, up from $1720, citing the US Federal Reserve's announcement last month that it will continue asset purchases indefinitely as a factor behind the decision.

Over in China, the world's second-largest gold buying nation in 2011, the Yuan has risen to its highest level against the Dollar in 19 years.

The Yuan has been allowed to come close to the upper limit of the trading range maintained by the People's Bank of China two days in a row this week.

"This is something that has been quite remarkable," says Royal Bank of Scotland economist Louis Kuijs in Hong Kong. 

"The PBoC has surprised the markets but the appreciation is in line with the observation that policy makers don't seem to be as concerned about the slowdown as some people in the markets and some corporates."

"It would be in Beijing's interest to see [US president] Obama re-elected [in next month's presidential election]," argues Credit Agricole strategist Dariusz Kowalczyk.

"Given [Obama's opponent] Romney's tougher stance on China…the PBoC may be trying to help Obama to make the argument in the next debate that he has succeeded to pressure Beijing into appreciating [China's currency]."

Romney has said that if he wins the presidency on of his first acts would be to label China a currency manipulator. 

"Labeling China as a currency manipulator might not help enhance the Dollar's safe haven status," says this morning's note from Standard Bank analyst Steve Barrow, "given that foreign central banks, including China's, own just over a third of [US] Treasuries."

Japan's government meantime has cut its assessment for the country's economic outlook for the third month in a row, the longest stretch of consecutive downward revisions since the five months following the Lehman Brothers collapse four years ago.

US Federal Reserve policymakers have studied Japan's experience over the last two decades "very carefully", Fed vice chair Janet Yellen said yesterday.

"The key lesson that we have drawn about the Japanese experience is that when an economy is faced with a serious downturn that threatens deflation, the most important thing that the central bank can do is to act very aggressively to fight it," Yellen told an audience at a panel discussion held as part of the International Monetary Fund and World Bank annual meetings in Tokyo.

Here in London, Financial Services Authority chairman Adair Turner "believes the Bank of England should consider telling the Treasury it never has to repay some of the £375bn of government debts the Bank acquired through quantitative easing", according to a report by BBC journalist Robert Peston.

"Many conventional economists would regard with horror," Peston adds, "because it would be seen as the government, in effect, printing money to finance public spending."

In a speech last night Turner, who is regarded by some as a front runner to take over from Mervyn King as Bank governor next year, argued that QE is of diminishing benefit and that there is a need for "still more innovative and unconventional policies".

"The ultra-loose monetary policy pursued by central banks is likely to preclude any sharper fall in prices [for gold]," says Commerzbank.

Over in Europe meantime, the European Union was awarded the Nobel Peace prize Friday.

"It is a great honor for all 500 million citizens of Europe, for all the member states, and for all the European institutions," European Commission president Jose Manuel Barroso said this morning.

"Through its transformative power, the EU was able, starting with six countries, to reunite almost all the European continent."

Elsewhere in Europe, German finance minister Wolfgang Schaeuble today rejected calls made yesterday by IMF chief Christine Lagarde to give Greece extra time to implement austerity measures. 

Schauble argued that leaders should wait for the report from the so-called 'troika' of international lenders – the European Central Bank, European Commission and IMF – whose representatives have been in Athens this week negotiating with the Greek government on austerity measures.

"There is progress," said one official quoted by the Wall Street Journal Thursday.

"We are close to an agreement and I hope that by the summit next week we will have settled most issues," the official added, referring to the European Union summit that begins next Thursday.

Ben Traynor

BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, 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. Ben writes and presents BullionVault's weekly gold market summary on YouTube and can be found on Google+

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