Wednesday, December 5, 2012

Gold Market Report 5 December

Weakness in Gold "Being Caused by Futures Market", "Mounting Risk" Britain Will Lose Triple-A Rating

THE WHOLESALE MARKET gold price traded just above $1700 an ounce during Wednesday morning in London, having risen back above that level in the earlier Asian session, though they remained near one-month lows.

Silver hovered just above $33 an ounce this morning, down 1.3% on the week, while stocks and commodities edged higher.

US and German government bond prices gained, while longer-dated UK gilts fell ahead of the chancellor's Autumn Statement in London, at which he will unveil the latest UK economic projections.

A day earlier, gold fell through $1700 an ounce on Tuesday for the first time in nearly a month.

"Because physical demand appears relatively robust at present, the fall in the price of gold was no doubt triggered mainly by the futures market," says today's commodities note from Commerzbank.

Open interest in gold futures trading on the New York Comex fell for the seventh session running Tuesday, down around 10% from the start of last week, according to data from Comex operator CME Group – although that period does cover last Wednesday's sudden price drop.

The volume of gold held by world's largest gold ETF SPDR Gold Shares (GLD) meantime rose to a fresh all-time high yesterday at 1351.2 tonnes.

Britain's chancellor George Osborne was this morning expected to announce a downward revision of UK growth forecasts by the Office for Budget responsibility during Wednesday afternoon's Autumn Statement. Lower economic growth would cast doubt on Osborne's commitment to reduce the UK's government debt-to-GDP ratio by 2015.

"The ratings agencies will not be impressed," says Societe Generale economist Brian Hilliard.

"The risk is mounting that one or other soon strips the UK of its hallowed AAA rating."

"You can criticize the government because we have had very little growth since the [2010 general] election because austerity has been too harsh," says George Buckley, chief UK economist at Deutsche Bank.

Activity in the UK services sector slowed last month, according to purchasing managers index data published Wednesday.

Elsewhere in Europe, Germany's services sector showed signs of improvement during November, with activity contracting at a slower rate than the previous month, PMI data show.

Similar data for the US are due at 08.30 EST, while the latest ADP Employment Report – regarded by some as a precursor to Friday's official nonfarm payrolls – is also due out today. 

In Washington meantime the Republicans risk pushing the US economy over the fiscal cliff, White House communications director Dan Pfeiffer said yesterday.

"This is a choice of the Republican Party," said Pfeiffer. "If they are willing to do higher [tax] rates on the wealthy, there's a lot we can talk about."

Unless Congress passes legislation to avoid it, tax cut expiries and government spending cuts are due at the end of this month and early January.

"We suspect that it may be best to remain on the sidelines during December and let this momentous event play itself out," says December's commodities note from brokerage INTL FCStone.

"There is always a chance, albeit a small one, that the politicians will actually fail to deliver, resulting in a multi-market meltdown that could set in during the first week in January... [but] we think the odds strongly favor a modest agreement that will likely be announced over the second half of December and one which should push most markets substantially higher."

South Korea's central bank meantime announced Wednesday that it bought 14 tonnes of gold bullion in November.

"Gold is a physical, safe asset and allows [the country] to deal with changes in the international financial environment more effectively," said a Bank of Korea statement.

Ben Traynor


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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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