Gold Still as Basket Case Europe Means Germany Now Getting Paid to Borrow Money

By: Ben_Traynor

U.S. DOLLAR gold bullion prices touched $1623 an ounce Monday morning London time – a 1% rally from the low hit during Asian trading – before falling back slightly, while stocks, industrial commodities and major government bond prices all ticked lower.

"[Gold bullion] remains above its 3-year bullish support that now lies at $1544," says technical analyst Russell Browne at bullion bank Scotia Mocatta.

Prices for silver bullion rose to $29.26 per ounce – 1.9% down on last week's high – while the Euro rallied against the Dollar in early European trading but couldn't sustain momentum.

"The strength of the Dollar is playing a role in limiting appetite [for commodities]," says Nick Trevethan, Singapore-based senior commodity strategist at ANZ Bank.

"But Europe is still a basket case and investors are hoping to see more easing out of the European Central Bank at some point."

Germany successfully auctioned €3.9 billion of 6-month government bills – known as Bubills – Monday morning. However, the bid-to-cover ratio was down on the previous auction last month, falling from 3.8 to 1.8. 

In addition, some of the bills were sold at negative nominal interest rates – with the average yield coming in at minus 0.0122%.

Monday's was the first auction at which bidders could bid in terms of price rather than yield.

"Through the submission of price bids with prices above 100 it is possible to submit price bids reflecting negative yields," said a Bundesbank statement issued before the auction.

In other words, some investors were this morning prepared to pay more than €100 today in order to receive €100 in June.

Elsewhere in Berlin, German chancellor Angela Merkel is set to have talks with French president Nicolas Sarkozy today on how to implement tighter budgetary rules agreed at the December 9 summit.

"It's important we do start to see some progress," says Goldman Sachs chief European economist Huw Pill, adding that the Eurozone crisis will not be fixed without "German largesse".

Banks meantime will need to take "substantial haircuts" on their holdings of Greek debt, reckons International Monetary Fund chief economist Olivier Blanchard. Representatives for the banking sector agreed to take losses of 50% as part of an agreement reached last October, but their losses "may have to be larger" Blanchard said Friday.

By contrast, the governor of Cyprus's central bank, Athanasios Orphanides – who is also a member of the European Central Bank's Governing Council – has called on Eurozone leaders to abandon plans to impose private sector losses.

"It is a thoroughly inefficient way of dealing with the moral hazard issue that we are still paying for now," he wrote in Friday's Financial Times, arguing that reversing the decision would reduce financing costs for other Eurozone countries, even though it would raise them for Greece.

Officials from the European Union and IMF are due to visit Greece on Saturday. Before then, the ECB will hold its first interest rate meeting of 2012 on Thursday, while Italy and Spain hold bond auctions on Thursday and Friday.

China's money supply grew by 13.6% in the year to December – more than the consensus analysts' forecast of 12.9% – following the central bank's decision at the end of November to cut the amount of cash banks are required to hold relative to their assets, known as the reserve requirement ratio.

A note from economists at JPMorgan this morning says it expects the PBOC to announce three cuts in the reserve requirement ratio in the first six months of this year. 

This prediction follows an interview given by PBOC governor Zhou Xiaochuan to news agency Xinhua, in which he said the PBOC needs "to be prepared for a poor external environment".
Gold volumes on the Shanghai Gold Exchange – which hit record highs last Wednesday – remained strong on Monday, traders report. 

Chinese Lunar New Year falls on 23 January this year – the earliest since 2004, when it fell on January 2002. China's banks were last week "on the bid" to buy gold head of Lunar New Year, one trader noted last week.

In addition, last month China's authorities banned all gold exchanges with the exceptions of the Shanghai Gold Exchange and the Shanghai Futures Exchange.

Gold bullion, however, "is not cheap in local currencies in Asia," says one Singapore-based dealer, adding that his firm only saw "light buying" on Monday, although premiums over Spot Prices were up to $1.70 from $1.30 the week before.

Over in New York, the difference between the number of bullish and bearish contracts held by noncommercial gold futures and options traders on the Comex exchange – the so-called speculative net long – fell slightly the week ended last Tuesday at the equivalent of just over 422 tonnes of gold bullion, the latest data from the Commodity Futures Trading Commission show.

The decline marks the fourth-straight week of falls in the speculative net long, taking it to its lowest level since April 2009.

"The sustained deterioration in the net position is a signal that the speculative market remains wary of gold’s prospects, which might explain the failure of gold to sustain upward momentum," reckons Marc Ground, commodities strategist at Standard Bank.

The rebalancing this week of index funds that track commodity prices could weigh on gold and silver prices, according to one dealer, who reckons around $5 billion of gold bullion will be sold.

"The rebalancing is mostly but not exclusively a matter of selling the previous year's outperformers and buying the underperformers to bring the portfolio composure back in line," says a note from Saxo Bank.

Swiss National Bank head Philipp Hildebrand has resigned over the controversy surrounding his wife's purchase of US Dollars three week's before the SNB pegged the Swiss Franc to the Euro, newswires Bloomberg and Reuters reported Monday lunchtime.

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 2012

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