Investors Hedging Against Fiat Currency Devaluation with Gold, France Calls for ECB Solution

By: Ben_Traynor

SPOT MARKET gold bullion prices fell to $1741 per ounce Wednesday lunchtime in London – 2.6% down for the week so far – while stocks, commodities and government bonds also sold off as tensions grew between France and Germany.

As yields on French, Italian and Spanish government debt spiked, leaders of the Eurozone's two largest nations were in disagreement over how best to solve the crisis.

Silver prices fell to $32.83 per ounce – a 5.5% drop for the week – while on the currency markets the Euro held steady against the Dollar at around $1.34. Since the start of the week, however, the Euro has dropped over 2% against the US currency.

"The technical picture [for gold] looks weak," says one Hong Kong gold bullion dealer.

"The US Dollar is strong and there does not seem to be a good solution for Europe... gold is probably not going to break above $1800 soon."

Demand for physical gold, however, has continued to grow in recent months, new figures published today show.

Global gold bullion demand in the third quarter was 6% higher than during the same period a year earlier – coming in at 1053.9 tonnes – according to the World Gold Council's latest Gold Demand Trends report, published on Thursday.

Central banks worldwide remained net buyers in Q3 2011 – purchasing 148.4 tonnes of gold bullion.

"A number of banks continued their well-publicized programs of buying," the report says, "while a slew of new entrants emerged wishing to bolster their gold holdings in order to diversify their reserves."

"We don't know exactly who the central banks are," Marcus Grubb, managing director, investment at the World Gold Council told Bloomberg television this morning.

"But if you look back over the last year, the buyers tend to be those countries that aren't suffering the debt problems we have in Europe. They tend to be the surplus countries in Latin America, Central Asia and of course the Far East. We suspect the buying is coming from those central banks."

Global gold jewelry demand fell 10% year-on-year – with world's biggest market India seeing a 26% drop in jewelry demand by volume. Over the same period the Rupee has fallen 13.2% against the Dollar – with the Rupee gold price hitting all-time highs this week.

Third quarter gold investment demand, by contrast, rose 33% worldwide compared to Q3 2010.
"[Gold's] popularity as an investment asset has definitely increased," said Grubb. "It is a hedge against fiat currencies and a hedge against currency devaluation. For example, in the Eurozone it's particularly attractive at this time as an investment."

European gold demand grew 135% year-on-year to 118.1 tonnes of gold bullion– with Germany Europe's biggest gold buyer.

Elsewhere in Europe this morning, yields on Spanish 10-Year bonds hit a Euro era high of 6.78% Thursday morning. Italian 10-Year yields also spiked, hitting 7.1% at one point.

France and Germany meantime continue to disagree over what role the European Central Bank should play in resolving the crisis. 

"We consider that the best way to avoid contagion is to have a solid firewall," French finance minister Francois Baroin said Wednesday. Baroin has said he would like to see the European Financial Stability Facility granted a banking license, enabling it to access ECB funds.

"We haven't won the argument. We won't make it a casus belli, but naturally we continue to think it would be the best way to bring stability to Europe."

"If politicians believe the ECB can solve the problem of the Euro's weakness," German chancellor Angela Merkel said today, "then they're trying to convince themselves of something that won't happen."

Yields on French 10-Year government debt rose to 3.8% this morning – while the spread above German 10-year yields set a new Euro-era record at 204 basis points (2.04 percentage points).

"Unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the US banking industry could worsen," ratings agency Fitch said Wednesday.

Fitch warned there is a "serious risk" to US banks' creditworthiness as a result of their exposure to European sovereign debt.

Here in London meantime, the volume of gold bullion cleared in October fell from a month earlier, according to figures published Thursday by the London Bullion Market Association.

A daily average of 662.5 tonnes of gold bullion  was transferred between LBMA clearing members last month – down 4.3% from September.

By contrast, October saw a 12.4% rise volume of silver bullion transferred between LBMA clearing members – with an average of 6139.8 tonnes transferred per day.

The total volume of silver and gold bullion traded each day will, however, be several times larger, since the clearing statistics only show net transfers of gold between London's largest, market-making bullion banks.

Elsewhere, in the silver market, leading precious metals consultancy Thomson Reuters GFMS published its Interim Silver Market Review today, giving its latest silver market estimates. 

Silver fabrication demand – which includes the jewelry sector – is forecast to grow nearly 4% this year, with more modest growth in 2012.

Industrial demand "will reach a new record high in 2011, with a near 4% gain", the report says, while total supply is expected to remain "broadly stable" – with an estimated 4% growth in mining output and 10% growth in scrap supply expected to be offset by falls in government sales and producer hedging.

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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