Gold and Silver Rise as Germany Angered by Cheating Greece

By: Ben_Traynor

THE WHOLESALE MARKET gold price traded in a $3 range around $1526 an ounce Friday morning London time, while stocks and commodities rose and the Euro rallied in spite of concerns the IMF may halt the latest payment of Greece's €110 billion bailout.

Heading into the UK and US holiday weekend, gold prices at Friday lunchtime looked set for a 1% gain on the week.

"[The gold price] is presently in no-mans-land" says German precious metals trading group Heraeus in its latest weekly report. 

"Further developments in price will depend on how things evolve on the sovereign debt crisis... should things not ease, then gold should remain expensive."

Safe haven demand "remains bullish" adds Swiss precious metals group MKS, but "we wouldn't rule out a small correction due to investors booking their profits."

"We expect gold denominated in Euros to outperform [the Dollar gold price ] on the back of the debt crisis in Europe," says Friday's note from Standard Bank in London.

Silver prices meantime hovered just below $38 per ounce this morning, a gain of 8% on the week.

"I think people are cautious about silver after seeing what happened [on Thursday]", a Hong Kong dealer told Reuters, referring to the 6%-in-three-hours silver price drop.

"There's only a slight amount of physical [silver] buying. It's a holiday in the US next week, so people may square off positions tonight," said the dealer, adding that sentiment is "still bullish" for the gold price "because of the problems in Greece."

The Euro rallied on Friday morning – after hitting an all-time low against the Swiss Franc on Thursday – despite concerns that the International Monetary Fund may withhold the next payment in the Greek bailout package, as Greece cannot guarantee its solvency.

"There are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months," said Luxembourg prime minister Jean-Claude Juncker, chairman of the Eurozone finance ministers, on Thursday.

"Greece cheated to get in [the Euro]," said Otmar Issing, former chief economist at the European Central Bank, in an interview from Copenhagen Thursday. 

Greece "didn't meet the criteria" for Euro membership says Issing. Eurozone rules stated that a country's deficit be no more than 3% of its GDP, and national debt no more than 60%.

"I was among many economists in Germany warning against premature entry into the monetary union and against too many countries."

Greece, aided by investment bank Goldman Sachs, used "creative accounting" to "mask the true extent of its deficit", according to a report last year by German newspaper Der Spiegel.

Across the Atlantic, details have emerged of previously undisclosed loans made by the US Federal Reserve to major investment banks.

Goldman Sachs, Credit Suisse and the Royal Bank of Scotland each borrowed over $30 billion in 28-day loans between March and December 2008. 

Interest rates on the loans – which were made as part of the Fed's single-tranche open market operations – were as low as 0.01%.

"This was a pure subsidy," says Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta.

"The Fed hasn't been forthcoming with disclosures overall. Why should this be any different?"

Here in the UK, Bank of England Monetary Policy Committee member Adam Posen said on Friday that "the majority of the MPC is right to have held its nerve against calls for [interest] rate hikes".

"Tightening fiscal policy with no offset from additional monetary easing will strengthen the underlying disinflationary pressures," wrote Posen in a Financial Times guest column.

The Bank of England has held rates at 0.5% since March 2009. Consumer price inflation (CPI) for April was 4.5% year-on-year. CPI has now breached the MPC's upper tolerance of 3.0% every month since January 2010.

Over in China, meantime, leading precious metals consultancy GFMS forecast Thursday that Chinese gold bullion imports will rise to 400 tonnes this year – equivalent to 15% of 2010 global mine production and more than equal to China's own gold output – while demand for silver will also outstrip domestic supply.

By Ben Traynor
BullionVault.com

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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.

(c) BullionVault 2011

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