Gold Hovers as Dominance of Dollar Could End as IMF Considers Increasing Liquidity

By: Ben_Trayner

DOLLAR PRICES for gold bullion continued moving in a range bound fashion around $1758 an ounce – 8.3% up from where they began October – after the release of US nonfarm payroll data, which showed the US economy added 80,000 jobs last month.

The unemployment rate meantime fell to 9.0% in October – down from 9.1%, where it spent the previous three months.

Silver bullion meantime hovered around $34.40 per ounce – 14.8% above where it started last month – while stocks, commodities and government bond prices were also flat.

Heading into the weekend, gold bullion prices were looking at a slight gain of around 1% for the week – though the trough-to-peak difference was 5%. 

"A chaotic session [on Thursday] brought gains for all four precious metals, albeit with some vicious swings along the way," said one gold bullion dealer in London this morning.

"Yesterday's price action seemed in thrall to the constantly changing headlines emanating from Europe."

"I think gold is really supported by the [crisis in the] Eurozone," adds Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.

G20 leaders meeting in Cannes are considering using the International Monetary Fund's Special Drawing Rights as a way of boosting global monetary liquidity, newswire Reuters reports.

SDRs are accounting units created by the IMF and allocated by it to member countries, and take the form of a weighted currency basket comprising Dollars, Euros, Sterling and Yen. They were introduced in 1969 to support the Bretton Woods fixed exchange rate system, which was effectively ended two years later when US President Nixon cut the Dollar's link to gold bullion.

"The G20 will be specific in their determination to increase resources," an unspecified G20 official told Reuters, "but it is unclear how specific they will be."

"Global liquidity...is the dominant causal driver for gold," argued Walter de Wet, commodities strategist at international gold bullion Standard Bank, back in August – reiterating Standard's long-held position on what is driving the gold price.

The IMF has also proposed creating a new six-month lending facility, which could form part of the mechanism by additional SDRs are used to boost global liquidity, the Financial Times reports.

"This has been in the works as a way to provide some assurance to emerging markets that their interests won't get completely sidetracked if the Fund focuses on Europe in its lending operations," says former IMF official Eswar Prasad, now at Washington think tank the Brookings Institution.

"It is a savvy move by the G20 and IMF to justify an SDR allocation and other mechanisms to add to the IMF's resource pool by signaling that the new resources won't be devoted entirely to saving Europe."

Brazil's finance minister Guido Mantega last month opposed the notion of Brazil buying European bonds, adding that any assistance should come through the IMF.

G20 leaders should "reform the SDR currency basket," China's president told the summit on Thursday, "and build an international reserve currency system with stable value, rule-based issuance and manageable supply."

"The world is now loath to see the dominance of the Dollar," adds Li Jianjun, analyst at the state-owned Bank of China.

"[This] opens doors for change."

The Chinese government today published the text of President Hu's G20 speech.

"There is nothing [in the speech] to suggest China will stump up any cash to help Europe," says the FT's Chris Giles.

Greek prime minister George Papandreou meantime faces a confidence vote later on Friday. His governing Pasok party holds 152 of the 300 seats in Greece's parliament – though several Pasok members have said they will not support Papandreou, meaning he will need opposition support to win.

Papandreou last night dropped his call for a Greek referendum on last week's Euro Summit deal, which was previously expected to take place next month.

Italy meantime "has decided on its own initiative to ask the IMF to monitor the implementation of its [austerity] commitments," European Commission president Jose Manuel Barroso said Friday.

"The likelihood of Eurozone worries disappearing with a 'snap of a fingers' is very little," says a note from Swiss gold bullion refiner MKS.

"[This] will probably benefit gold in the coming sessions as the metal slowly regains is safe-haven and store of value characteristics."

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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