Gold Bounces on "Physical Demand", as Bond Market Attention Shifting Spain's Way

By: Ben_Traynor

U.S. DOLLAR gold prices bounced to $1771 an ounce Tuesday lunchtime in London – still nearly 1% down on where they started the week after sharp falls yesterday and this morning.

"The yellow metal continues to find good scaled down buying interest towards $1750 as safe haven diversification continues," says a note from Swiss precious metals group MKS.

"Yet the metal still has to overcome the technical resistance of $1800."

Physical gold premiums "recovered another couple of Dollars" on the Shanghai Gold Exchange, says one Hong Kong dealer – referring to Tuesday's $5 sudden drop from $1775.

"[This indicates] that there is some physical demand around below current price level in gold."
Silver prices rallied to $34.32 – 1.2% down on Friday's close.

Stock markets fell Tuesday morning and commodities were broadly flat, while US, UK and German government bond prices all gained as market anxiety focused on Spain.

Yields on Spanish 10-Year government bonds continued to rise Tuesday morning, hitting 6.3% - the highest level since the European Central Bank began buying Spanish and Italian bonds back in August.

The spread between Spanish yields and 10-Year German bunds hit a Euro-era high, breaching 457 basis points (4.57 percentage points).

"[This is] an ominous sign that market attention is beginning to shift Spain's way," says one London gold dealer.

Belgian and French spreads over bunds also set Euro-era records on Tuesday, with French spreads hitting 173 basis points.

"With the core now suffering the effects of contagion, the Euro can be expected to remain vulnerable," says Jane Foley, senior foreign exchange strategist at Rabobank.

The Euro fell for the second day running against the Dollar, while Euro gold prices climbed steadily to €1308 per ounce – within 5% of September's all-time high.

Europe needs "to build the political union that we didn't manage to achieve in the 1990s," German finance minister Wolfgang Schaeuble the CDU party conference yesterday.

"That means a fiscal union."

Schaeuble told news agency Reuters he wants to see changes to the Lisbon Treaty to enable closer integration, and that these should be pushed through by the end of next year.

Over in New York – where police this morning began evicting Occupy Wall Street protesters – the number of bullish minus bearish contracts on the Comex exchange held by noncommercial gold futures and options traders (known as the speculative net long position) rose for the third week in a row in the period up to 8 November.

Data published Monday by the Commodity Futures Trading Commission show the speculative net long grew 12.9% to the equivalent of 625.1 tonnes of gold bullion.

"Unlike in the previous week, the change in the net position was largely due to speculative longs being added...with only a marginal decrease in speculative shorts," notes Standard Bank commodities strategist Marc Ground.

"Given the sustained improvement in the net position...the speculative market is showing a growing confidence in gold's prospects."

Over the same period, the gross tonnage of gold held to back shares in the SPDR Gold Trust (ticker GLD) – the world's largest gold ETF – grew by 1.7%. As of Monday, GLD was backed by 1268.3 tonnes of gold.

Hedge fund Paulson & Co. – which offers its clients the option of gold-denominated holdings – cut its exposure to GLD by one third during the third quarter, a US regulatory filing revealed yesterday.
Paulson reduced its holding from 31.5 million shares to 20.3 million – though it remained the largest holder in the GLD at the end of September. Reuters reports the sale is equivalent to around 1.1 million ounces – or 34.2 tonnes.

Between June 30 and September 30, GLD saw net inflows of 23.7 tonnes of gold bullion.
Here in the UK, consumer price inflation fell to 5.0% in October – down from 5.2% the previous month – according to official figures published this morning.

Bank of England governor Mervyn King has written an open letter to chancellor George Osborne explaining why inflation is above the Bank's 2.0% target.

"The key consideration for monetary policy is the outlook for inflation in the medium term, and the balance of risks around it, rather than the current rate of inflation," explains King.

"Uncertainty about the prospects for the global economy...[make] it more likely that inflation would undershoot the 2% target in the medium term."

In his reply, Osborne notes that "monetary policy has a critical role in supporting the economy as the government delivers on its commitment to necessary fiscal consolidation."

The Bank's governor is obliged to write to the chancellor whenever inflation is more than one percentage point above target – as has been the case for the last 23 months.

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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