Gold Climbs as Euro Crisis Gets Worse Every Day

By: Ben_Traynor

U.S. DOLLAR prices to buy gold climbed to $1779 an ounce Wednesday lunchtime in London – 0.5% down from last week's close –amid suggestions that central bankers in London and Frankfurt are growing more interventionist.

"Our strategic view remains unchanged," says Standard Bank commodities strategist Walter de Wet.
"Gold will push higher in 2012 with a target of $2000 in the first quarter of 2012."

Silver prices meantime traded in a tight range around $34.40 per ounce – 1% down on the week.

The European Central Bank was rumored to be buying European sovereign debt again this morning, after Tuesday saw sharp rises in yields on several Eurozone government bonds – including those of Belgium, France, Italy and Spain.

The ECB was "heavily in on Italy and Spain, 2-10 years," one trader told Reuters news agency.
Yields on Italian 10-Year bonds fell from 7.1% to below 6.8% at one point – although by lunchtime they were back above 7%.

Spanish 10-Year yields also dropped – though they too quickly rose again, breaching 6.3% again by the end of the morning.

Belgian and French bond yields followed similar patterns – a fall followed by a sharp rise – while the spread between 10-Year French and German yields set a new Euro era record at 191 basis points (1.91 percentage points).

"Each day that goes by the situation is getting worse," says Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi in London.

"There's unbelievably difficult decisions that lie ahead for Europe in terms of resolving this crisis."
Any solution to the crisis "has to be decided by national parliaments," Bundesbank president Jens Weidmann said Tuesday.

"Monetary policy cannot and must not solve solvency problems of states and banks...the participation of monetary policy for fiscal policy purposes must come to an end."

The price to buy gold in Euros held steady this morning around €1315 per ounce – a 1.1% gain for the week so far.

Here in the UK, inflation "is more likely to be below the [Bank of England's 2%] target than above it at the forecast horizon" according to the Bank's quarterly Inflation Report, published on Wednesday.

"The outlook for growth is unusually uncertain," the report notes, "reflecting in particular the exposure of the UK economy to developments in the Euro area."

"[The Bank] is so concerned about the escalating sovereign-debt crisis," says Philip Rush, UK economist at Nomura, "that the £25billion [quantitative easing] extension we originally penciled in for February no longer appears sufficient."

The Bank has kept its main interest rate at 0.5% since March 2009. Last month it expanded its asset purchasing program (QE) from £200 billion to £275 billion.

"We now expect £50bn of new gilt purchases to be announced in February and another £25billion in May," says Rush, adding that he does not expect the Bank to raise its interest rate until 2014.

The Bank has lowered its central growth forecast since August's Inflation Report and expects growth "to be broadly flat" over the next year at around 1%.

"Before the report, we expected more asset purchases in February," says Richard Barwell, UK economist at RBS.

"But December looks a hell of a lot more likely now. You look at these forecasts and think more is coming soon. And potentially a lot more."

Goldman Sachs and JPMorgan Chase have between them sold protection on over $5 trillion of debt worldwide, according to a Bloomberg report published Wednesday.

The two banks are heavily involved in the market for credit default swaps – which act as a form of bond insurance and are used by some traders to hedge their sovereign bond holdings.

Neither Goldman nor JPMorgan have revealed how much of the outstanding debt protection relates to Eurozone government debt.

Over in China, jewelry retailers are reducing the counter space given to platinum jewelry in order to allow more customers to buy gold, according to the Platinum 2011 Interim Review, published by leading refinery Johnson Matthey.

"Gold jewelry has been in great demand due to the rising price of gold and the perception of gold as a store of value," the report says.

"The Chinese have stayed faithful to the yellow metal," says the latest update from precious metals group Heraeus, noting a strong rise in the numbers choosing to buy gold bars in China.

"Contrary to demand for bars, jewelry demand has shown no growth [in recent years], but at the same time, despite higher prices, it has not gone down either."

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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