Gold Climbs as Euro Crisis Terrifies Markets

By: Ben_Traynor

U.S. DOLLAR spot gold prices climbed to $1664 an ounce Tuesday morning London time – 1.8% off the month's high – while stocks and commodities also gained and US Treasury bonds fell, following reports that European negotiators are demanding larger Greek debt writedowns.

"Strong resistance is pegged...[at] the 100-day moving average of $1665," said yesterday's note from Swiss gold bullion refiner MKS.

Were spot gold to close below $1638, however, this "would indicate the downside potential of the metal" MKS added.

Tuesday saw silver prices climb to $32.13 per ounce – a 2.4% gain for the week so far.

Greek government bond holders have been asked by European negotiators to take a 60% 'haircut' on the value of their holdings, according to a report in the Financial Times, ahead of tomorrow's second European debt crisis summit.

French officials – along with those of the European Central Bank and the International Monetary Fund – are reportedly wary that such a writedown would trigger credit default swaps, a form of insurance contract written against sovereign default, which could in turn threaten the financial institutions that would have to pay out.

"The CDS market is not very transparent," explains Jacques Cailloux, European economist at Royal Bank of Scotland.

"You don't know where the exposures are."

Despite their reservations, France, the ECB and the IMF agreed over the weekend to give Vittorio Grilli – director general of Italy's Treasury Department and the Eurozone's lead negotiator with the banks – a mandate to negotiate for 60% haircuts.

"It is advisable to avoid any restructuring that is not purely voluntary or that shows elements of compulsion, and to avoid any credit events and selective default or default," Yves Mersch, governor of Luxembourg's central bank and a member of the ECB governing council, said on Monday.

"There are limits, however, to what could be considered voluntary," warned Charles Dallara, chief negotiator for the Institute of International Finance, which is representing private sector bondholders.

"Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default... it would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth."
"You don't need to be paranoid to be terrified," the FT quotes someone familiar with the negotiations.
"I don't think Europe will be out of the woods yet," says Bernard Sin, Geneva-based head of currency and metal trading at MKS.

"[Plus] there is physical demand out of India...nobody really wants to go short on gold."

Dealers report that strong Indian demand kept gold premiums high across Asia for most of Tuesday's session. Premiums in Hong Kong were around $2 per ounce above spot gold, while in Singapore the gap between deal prices and spot gold was around $1.50 per ounce.

"We still don't have spare stocks and clients need to pre-book orders," one Singapore dealer told newswire Reuters.

Following a quiet month, several reports suggest gold sales in India picked up yesterday, which saw the celebration of Dhanteras, the first of the five-day Diwali festival.

"We are expecting 60% more in terms of value as compared to [Dhanteras] last year," says Mehul Choksi, chairman and managing director of Mumbai-headquartered jewelers Gitanjali Group.

In tonnage terms, Indian gold demand for the fourth quarter 2010 was 37% higher than for the same period a year earlier, according to data published by the World Gold Council. Year-on-year demand growth was 30% in Q4 2009 compared to Q4 2008, and 99% between Q4 2007 and a year later.

"This season, though, sales volumes are down by 30% as compared to the previous season," says Prithviraj Kothari, director of Riddhi Siddhi Bullions in Mumbai and president of the Bombay Bullion Association.

"People have bought two grams on an average compared to 10 grams last year...the value is higher owing to increased rates."

The Rupee has fallen more than 10% against the Dollar since this time last year – meaning the price of gold in India has risen faster than the spot gold price quoted on international markets.

Over in the US, sales of American Eagle bullion gold coins by the US Mint could fall 32% this month compared to September, news agency Bloomberg reports.

The US Mint sold 41,500 ounces of American Eagle bullion coins this month to October 20 – compared to 91,000 ounce last month and 112,000 ounces in August.

The gross tonnage of gold held to back shares in the SPDR Gold Trust (ticker GLD) – the world's largest gold ETF – meantime rose for the first time in over a month on Monday, climbing 0.5% to 1233.6 tonnes.

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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