Weakness in Gold "Non-Sustainable", China, Investors and Central Banks "Happy to Buy on Dips"

By: Ben Traynor, BullionVault

-- Posted Tuesday, 4 December 2012 | Share this article | Source: GoldSeek.com

London Gold Market Report

SPOT MARKET prices to buy gold rose back above $1705 an ounce during Tuesday morning's London session, though it remained below where it started the week following falls overnight, while stock markets also edged higher along with the Euro after European leaders welcomed progress on Greece's debt buyback program.

Silver meantime fell to around $33.30 an ounce, still above last week's low, as other commodity prices also dipped.

Earlier on Tuesday spot gold fell to $1700 an ounce, its lowest level since the first week of November. Gold priced in Euros meantime fell to its lowest level since mid-August this morning.

"Clearly the situation has eased with respect to the Euro debt crisis, or market players are ignoring it," says a note from Commerzbank.

"The dip in the price of gold was not accompanied by weaker ETF demand," Commerzbank adds, noting that Bloomberg data show gold exchange traded funds saw their holdings rise to a fresh record yesterday.

"We therefore view the current price weakness is non-sustainable."

"The break [lower] probably will not last long," agrees one trader in Sydney, speaking to newswire Reuters this morning.

"Funds are happy to buy on dips, and so will the central banks and the Chinese."

Self-directed individual investors are also taking advantage of dips to add to their gold positions, according to the latest Gold Investor Index data published Tuesday.

The Gold Investor Index, which measures investor sentiment towards physical gold by tracking buying and selling activity on online precious metals exchange BullionVault, rose to a six-month high of 56.5 last month, up from 56.0 in October, with a reading above 50 indicating more net buyers than net sellers over the month.

On the currency markets meantime the Euro rallied to a seven-week high against the Dollar Tuesday morning, breaching $1.30.

Following their meeting on Monday Eurozone finance ministers said they confident Greece's debt buyback program will be a success.

Last week's Eurogroup statement said single currency finance ministers expected the prices Greece paid to buy back its bonds "to be no higher than those at the close on Friday 23 November 2012". 

Since the buyback announcement however Greek bond prices have risen, and Athens yesterday revealed the maximum price it will pay to be above that 23 November level.

Since the bond buyback announcement, the volume of Greek bonds traded has "increased by the day", according to Citigroup head of European government bond trading Zoeb Sachee.

"Hedge funds must have bought lower than here."

"The official sector continues to demonstrate its total misunderstanding of how markets operate," adds Julian Adams, chief investment officer at Adelante Asset Management in London, whose firm holds Greek debt.

"The whole saga has been a textbook case of how not to do this sort of thing."

Finance ministers from the 17 Euro member nations also formally agreed Spain's banking bailout. Back in June, a credit line of up to €100 billion was agreed for Spain's government to finance the restructuring of the country's banking sector. 

The single currency's permanent bailout fund the European Stability Mechanism has now authorized the first tranche of payments, worth €39.5 billion. 

The ESM was downgraded by ratings agency Moody's at the end of last week, with its credit rating cut one notch from Aaa to Aa1, following an earlier decision by Moody's to downgrade France.

Over in Washington meantime, in an open letter to President Obama, Republican House of Representatives speaker John Boehner called yesterday for reforms to Medicare and Medicaid as part of a package aimed at reducing federal spending over the next decade.

Boehner and several other Republicans also called for an additional $800 billion to be raised in revenue, half the amount they say Obama has asked for, as US political leaders continue to disagree over how to address the federal deficit.

"[The Republicans'] plan includes nothing new and provides no details on which deductions they would eliminate, which loopholes they will close or which Medicare savings they would achieve," said White House communications director Dan Pfeiffer in response to the open letter.

Failure to agree a deal would mean the US will encounter the so-called fiscal cliff of tax rises and spending cuts currently scheduled for the end of this month.

"Drawn-out talks that go down to the wire could potentially hurt equities and drag gold prices down," says Ed Meir, commodities analyst at INTL FCStone.

"However, one could make an equally convincing case that were the talks to flounder amid general market mayhem, investors could flock to gold as a safe haven."

Eurozone Enters Recession, Worldwide Gold Demand Down in Q3

By: Ben Traynor, BullionVault

-- Posted Thursday, 15 November 2012 | Share this article | Source: GoldSeek.com

London Gold Market Report

THE DOLLAR gold price drifted lower to $1720 an ounce during Thursday morning's London session, around ten Dollars down on the week, as stocks and the Euro also drifted lower following the release of weak economic growth data from the Eurozone.

The silver price dropped below $32.60 an ounce, more-or-less exactly where it started the week, while other industrial commodities edged higher.

"We like the price action of silver and think there is a good chance of another leg up," says the latest technical analysis from bullion bank Scotiabank.

Prices for longer dated US Treasury bonds meantime ticked lower this morning, as did prices for German bunds, while longer-dated UK gilts saw gains.

The Eurozone fell into recession in Q3, according to official gross domestic product data published Thursday.

Eurozone GDP shrank 0.1% from Q2, a 0.6% year-on-year drop. Germany and France both grew 0.2% quarter-on-quarter, while Italy's economy shrank by 0.2%. Spain's economy also contracted, shrinking 0.3% in the three months to end September, while in the Netherland GDP fell by 1.1% during Q3.

Eurozone inflation meantime fell to 2.5% in October, down from 2.6% a month earlier, consumer price index figures published by Eurostat show.

The European Central Bank's Outright Monetary Transactions program, under which the ECB proposes to buy sovereign debt in the secondary market, "will not lead to inflation", ECB president Mario Draghi told an audience at the Università Bocconi in Milan this morning.

"For every Euro we inject, we will withdraw a Euro," said Draghi.

"In our assessment, the greater risk to price stability currently is associated with the possibility of falling prices in some Euro area countries."

Federal Reserve policymakers meantime discussed the use of using quantitative economic thresholds to communicate their outlook on policy when they met last month, minutes from the Federal Open Market Committee published Wednesday show.

The Fed has said it will buy $40 billion of mortgage backed securities a month until there is a "substantial improvement" in the US labor market, although it has not defined what that means. The Fed is also due to continue with its maturity program known as Operation Twist, which attempts to 'flatten' the yield curve for US Treasury bonds, until it expires at the end of this year.

"Looking ahead," the FOMC minutes say, "a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market."

Global gold demand fell 11% in the third quarter compared to the same period last year – an all-time record quarter –although it was up 10% from Q2 this year, according to the latest Gold Demand Trends published by the World Gold Council Thursday.

Demand from India, traditionally the world's largest market, was up 9% compared to Q3 2011.

"The strong year-on-year performance was partly reflective of price expectations among Indian consumers," the report says, noting that the Rupee gold price rose to hit new records towards the end of the quarter.

"This fed expectations of further price rises," the report adds, "which – in a slight departure from historical precedent...encouraged consumers to buy into the rising trend."

The value of the Rupee measured against the Dollar was on average 20% lower in Q3 2012 than over the corresponding period last year.

In contrast with India, Q3 gold bullion demand from world number two China was down 8% year-on-year, with investment demand for gold bars and coins down 12%.

"The preference among Chinese to buy into a clear rising price largely explains the drop in investment demand, as range bound price action during July and much of August curbed demand," the Gold Demand Trends report says, adding that slower economic growth also "had a negative impact on consumer sentiment".

"Since the Chinese economy has stabilized following its poor third-quarter growth," a note from Commerzbank says, "Chinese gold demand can also be expected to gather pace again."

Central banks meantime bought 97.6 tonnes of gold bullion during the third quarter, according to the report, which adds that in six of the last seven quarters central bank demand has been around 100 tonnes.

"Gold is beginning to re-establish itself as part of the fabric of the financial system," says Marcus Grubb, managing director, investment at the World Gold Council.

"Against a backdrop of continued global economic uncertainty and elections in China and the US, it is clear from five year rising demand trends that gold's fundamental property as a vehicle for capital preservation continues to endure, as evidenced by this quarter’s increase in global ETF investment, up 56% and continued purchasing by central banks, the ultimate long term investors."

On the supply side, gold mining production was down 1% year-on-year in Q3, according to Gold Demand Trends. The chief executive of world's largest gold producer Barrick said this week that new gold deposits are being found at a declining rate, despite record exploration spending.

Overall supply down 2% following a reduction in the amount of gold being recycled in industrialized nations. US gold recycling firm Cash4Gold filed for bankruptcy in July.

Ben Traynor