Gold Back above $1700, Investors Pricing In "Euro Endgame"

By: Ben_Traynor

THE SPOT MARKET gold price climbed to $1718 an ounce Monday morning London time – a 2.1% gain on Friday's close – while stock and commodity markets also rallied following news that leaders may be close to an agreement on the Eurozone rescue fund.

"News out of the US is also contributing to the more upbeat mood on markets, with preliminary reports from retailers suggesting that it was a good Black Friday weekend," says Marc Ground, commodities strategist at Standard Bank, referring to reports that Americans spent over $52 billion in the days following Thanksgiving on Thursday.

"With a slew of US data flow out this week [however] this optimism over the outlook for US economy is sure to be tested in the coming days."

Despite this morning's rally, the gold price remains nearly 5% off its November high.

The silver price also gained this morning, climbing to $32.22 per ounce – 2.8% up from the end of last week.

Eurozone finance ministers are due to meet tomorrow amid reports that they will finalize a plan to leverage the European Financial Stability Facility. European leaders agreed last month that the EFSF could offer part-guarantees to private sector buyers of distressed Eurozone government bonds at auction.

Germany meantime is continuing to push for changes to European treaties, according to press reports on Monday. A number of potential treaties and agreements are reported to be under discussion, all aimed at creating more robust incentives for national governments to exercise fiscal discipline.

"The Germans have made up their minds... they are doing everything they can to push for [treaty change] as rapidly as possible," a senior European Union official told news agency Reuters.

European nations that argue for a larger European Central Bank role, or for jointly-issued 'Eurobonds', are "those countries that have to sort out their budget problems and [have chosen] to misunderstand that they have to make more efforts," German finance minister Wolfgang Schaeuble said in an interview on Sunday.

"The goal," Schaeuble added, "is for the member states of the common currency to create their own Stability Union and to concentrate on that." 

The Organisation for Economic Cooperation and Development 's latest 'Economic Outlook', published today, calls for "a substantial relaxation of monetary conditions" in the Eurozone. The OECD has cut its global growth forecast and predicts recession for the Eurozone and the UK – adding that fiscal tightening could also "tip the US economy into recession".

Eurozone contagion is "rising and hitting probably Germany as well," Pier Carlo Padoan, OECD chief economist, said Monday.

"So the first thing, the absolute priority, is to stop that and in the immediate [term] the only actor that can do that is the ECB."

An auction of German government bonds 'failed' last week when only €3.9 billion of 10-Year bunds were sold – versus a maximum target of €6 billion.

"Markets continue to move faster than politicians," says Mansoor Mohi-uddin, head of foreign exchange strategy at UBS in Singapore – adding that investors have begun to "price in the endgame" for the single currency.

"Failure to come up with a comprehensive solution on December 9 [the next European leaders' summit] is certainly possible," adds Joachim Fels, chief economist at Morgan Stanley.
"We believe that it would open up a much darker scenario that, eventually, could entail a breakup of the Euro."

Ratings agency Moody's meantime says that its "central scenario remains that the Euro area will be preserved without further widespread defaults" but warns that "even this 'positive' scenario carries very negative rating implications in the interim period."

Elsewhere in Europe, the International Monetary Fund has denied a report in Italian newspaper La Stampa claiming that it was preparing to lend Italy €600 billion at interest rates of 4-5% – enough to cover Italy's financing needs for around a year-and-a-half.

The Italian Banking Association meantime is today promoting 'Buy a Bond' day, encouraging ordinary Italians to lend their savings to the government. The initiative is supported by the country's professional soccer players.

"Italian savers may be bondholders of last resort as banks and institutional investors are reducing holdings of government bonds," says Wolfram Mrowetz of Milanese investment firm Alisei SIM.

Here in the UK, chancellor George Osborne is expected to announce so-called 'credit easing' measures – designed to boost lending to small businesses by offering guarantees – in Tuesday's autumn budget report to parliament.

"We are making available £20 billion for the National Loan Guarantee Scheme," Osborne told a BBC interviewer on Sunday.

"However it sits within an envelope that could be as large as £40 billion."

The British Chamber of Commerce meantime has today predicted the Bank of England will increase the size of its quantitative easing program – through which the Bank buys assets (mainly government bonds) from institutions such as banks and pension funds – from the current £275 billion to £325 billion.

Over in Australia, gold mining output fell to around 66 tonnes in the third quarter of the year – down 2.4% from Q2 – according to an industry survey published Sunday.

Melbourne based mining consultants Surbiton Associates, which carried out the survey, explain the drop was party caused by some producers choosing to process lower ore grades – while preserving high grade ore in case of a fall in the gold price.

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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