Gold Gains amid Berlusconi Confusion, Greece "Must Reform or Get Out of the Euro"

By: Ben_Traynor

U.S. DOLLAR gold bullion prices climbed to their highest level in almost seven weeks on Monday, hitting $1778 an ounce – 3.1% above where they started the month, amid confusion over whether or not Italy's prime minister had resigned.

Silver bullion hit a high of $34.80 per ounce – 0.3% below last week's high, but 8% above last week's low.

"The probability of precious metals trading in a volatile manner in the coming sessions is rather strong," says a note from Swiss gold bullion refiner MKS.

European stock markets rallied this morning following a weak start, while commodities also edged higher. Major government bond prices also saw gains, in contrast to those of distressed Eurozone sovereigns.

Greece is to form a national unity government after George Papandreou agreed over the weekend to step down as prime minister – after the European Union gave Greek politicians until Monday evening to explain how they will enact reforms agreed as part of a €130 billion rescue deal.

Former European Central Bank deputy president Lucas Papademos is the favorite to take his place, according to Greek press reports. Papademos was governor of Greece's central bank between 1994 and 2002 – a period that covered Greece's preparations to join the Euro.

"The Greeks have a choice," Germany's vice chancellor and economy minister Phillip Roesler told mass market tabloid Bild on Monday.

"Reform in the Euro area or don't reform and get out. There is no third way...the Greek government must at least understand that at some point our patience will end."

"Eurozone solidarity has its limits," echoed Wolfgang Schaeuble, Germany's finance minister, speaking in Finland.

The move to a national government "by no means leads Greece out of the woods," says one gold bullion dealer here in London.

"[However], some commentators are already shifting their attention to Italy, whose borrowing costs are soaring."

Yields on Italian 10-Year government bonds hit 6.6% Monday morning – their highest level since the creation of the Euro. Italy has to refinance nearly €300 billion of sovereign debt over the next 12 months, according to its official figures.

Italian prime minister Silvio Berlusconi meantime was forced to deny rumors of his impending resignation this morning – following defections from his party that some believe have left him without a majority ahead of a key finance vote tomorrow.

Over in Brussels, Eurozone finance ministers are meeting to continue work on scaling up the European Financial Stability Facility – the single currency area's €440 billion bailout fund.

"Considering the pressure on countries like Italy...there is a sense we need to have [a leveraged EFSF] ready already by the end of this month," one official told newswire Reuters.

"The leveraged EFSF may still turn into a bazooka," says Joachim Fels, chief global economist at Morgan Stanley in London.

"But so far it looks more like a water pistol."

The EFSF has resurrected a €3 billion bond auction which it cancelled last week – and has received €2 billion of orders so far, according to one of the banks handling the sale. 

A spokesman for German chancellor Angela Merkel revealed Monday that she told last week's G20 summit that Germany's government could not use any of its reserves – including gold bullion and International Monetary Fund Special Drawing Rights – to boost the EFSF since these are controlled by the Bundesbank.

Since October 27 – the day the latest Euro Summit deal was unveiled – the gold price in Euros has risen 4.6% to €41,552 per kilogram (€1292 per ounce).

"Gold is responding to the general market mood that the European crisis will develop much worse before it gets better," reckons Bayram Dincer, at LGT Capital Management in Pfaeffikon, Switzerland. 

"At the moment we do not have a foreseeable lasting solution and high uncertainty remains."

Over in New York meantime, number of bullish minus bearish contracts on the Comex exchange held by noncommercial gold futures and options traders – the so-called speculative net long – rose for the second week running in the week ended November 1, according to data published Friday by the Commodity Futures Trading Commission.

The spec long rose 5.8% to the equivalent of 553.8 tonnes of gold bullion. Speculative short positions fell by 22% over the period, to the equivalent of 70 tonnes of gold bullion.

"With two weeks of improvement in the net position, coupled with a drawing down of short positions, the speculative market finally seems more confident about gold's prospects," says Marc Ground, commodities strategist at Standard Bank.

The continued rise in speculative net longs implies "that gold is back in favor" agrees today's note from precious metals consultancy VM Group.

"The current backdrop is certainly supportive [for gold]."

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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