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."