Absence of Far East Demand Sees Gold Succumb to Profit Taking

By: Ben_Traynor

WHOLESALE MARKET gold prices retreated to roughly where they started the week during Tuesday's morning session in London, making a 1% drop from yesterday's 6-week high to $1665 an ounce.

Silver prices slipped to $31.91 an ounce – a 1% drop on Friday's close – as stocks and commodities also fell following news that Greek debt agreement remains elusive after yesterday's Brussels finance ministers meeting.

"Key support [for gold prices] sits at the 200-day moving average, currently at $1643," says the latest report from Scotia Mocatta technical analyst Russell Browne.

"Gold succumbed to profit-taking yesterday," adds Marc Ground, commodities strategist at Standard Bank.

"The trend has continued into this morning, with the absence of Far East physical demand (due to Lunar New Year holidays) opening up the metal to further downside."

European finance ministers have backed Greece in calling for private sector holders of Greek debt to take bigger losses.

Private sector Greek bondholders agreed last October to accept 50% losses as part of a bailout deal aimed at reducing Greece's debt burden from 160% of annual gross domestic product to 120% by 2020. However, leaders now openly acknowledge that Greece's efforts to reduce its deficit look destined to fail.

"It is obvious that the Greek program is off track," said Jean-Claude Juncker, chairman of the Eurogroup of single currency finance ministers, following their meeting yesterday.

Greek finance minister Evangelos Venizelos has said he expects talks with private investors over Greek debt restructuring will be finished by February 1. His counterparts in other Eurozone governments meantime confirmed plans for a second Greek bailout of €130 billion should a deal be reached – without which Greece will be unable to repay €14.5 billion of bonds that mature on March 20.

"It seems as if we are far from an agreement,” reckons Yves Maillot, head of investments at French asset management firm Robeco Gestions , which oversees $6.8 billion.

"The problem of solvency of countries remains, along with the question of Greece. The market situation is fragile."

Euro finance ministers also discussed stricter budget rules for European Union governments as well as the introduction of the European Stability mechanism – the permanent bailout fund now due to replace the temporary European Financial Stability Facility in July, a year earlier than originally scheduled.

Italy's prime minister Mario Monti, along with International Monetary Fund chief Christine Lagarde, have called for the ESM to have an effective lending ceiling of €1 trillion. Germany, however, insisted it be capped at €500 billion – a proposal with which the Eurogroup agreed yesterday.

"I believe this is an important achievement," German finance minister Wolfgang Schaeuble said of the meeting's agreement.

"It demonstrates that the Euro group and the European Union as a whole is capable of taking the necessary steps."

Germany's manufacturing sector meantime has expanded this month for the first time since October, according to provisional purchasing managers index data released Tuesday.

Here in the UK, public sector net debt breached £1 trillion for the first time last month – equivalent to 64.2% of GDP – according to the Office for National Statistics.

The US on Monday imposed sanctions on Iran's third-largest bank, Bank Tejarat. Any firm that deals with it will be locked out of the US financial system. Also on Monday, the European Union banned Iranian oil imports and joined the US in imposing sanctions on Iran's central bank.

Monday's actions "will deepen Iran's financial isolation, make its access to hard currency even more tenuous, and further impair Iran's ability to finance its illicit nuclear program," said US Treasury Undersecretary David Cohen.

Earlier this month there were reports that sanctions imposed at the end of last year had led to Iranians buying gold as a currency hedge, and leading to concern among Iranian officials.

Japan meantime is expected to announce its first trade deficit since 1980 on Wednesday, the Wall Street Journal reports. The Yen has risen over 5% against the Dollar since the start of 2011 – and is up around 40% over the last decade.

Yen gold prices have risen by over 200% since January 2002 – compared to a rise in Dollar gold prices of over 450%.

"Gold is negatively correlated with the US Dollar," says the gold investment statistics commentary from the World Gold Council.

"In periods in which the US Dollar depreciates, gold prices tend to rise."

The report (which can be downloaded here (free registration required here)) notes however that the relationship is not symmetric, with the negative correlation often weakening when the Dollar is buoyant.

The report also comments that equity volatility rose faster than that of gold during periods of 2011 that saw extreme financial market stress.

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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