Silver Hits 5-Month High with Gold "In Consolidation Period"
Commodities / Gold and Silver 2012 Feb 28, 2012 - 10:14 AM GMTBy: Ben_Traynor
SPOT MARKET gold prices climbed to $1781 an ounce Tuesday lunchtime in London – 0.3% off last week's high – while stock markets gained along with the Euro, as European leaders postponed a decision on whether to increase the size of the single currency's bailout fund.
Commodities were mixed, while longer-dated UK and German government bonds ticked higher.
Silver prices meantime moved above $36 per ounce for the first time since last September.
"Flow wise it has been a quiet day," said one Hong Kong bullion dealer this morning.
"Silver seems to be the most firm amongst all [the precious metals]"
Gold prices "may be entering a period of consolidation," says a note from HSBC.
"The inability of the market to clear the November 8 high of $1803 an ounce is leading to light profit-taking."
"$1800 will be a key resistance level for the time being," adds Li Ning, analyst at CIFCO Futures in Shaghai.
"[Though] as long as central banks around the world lean towards further easing, gold will rise further."
European leaders have postponed a decision on whether to increase the size of the €500 billion European Stability mechanism – the Eurozone's permanent bailout mechanism due to be launched in July. Eurozone leaders were expected to announce a decision on Friday afternoon, following the weekend's G20 meeting at which international policymakers urged Europe to do more.
"There is no need now for a debate on increasing the [ESM's] capacity," said German chancellor Angela Merkel on Monday, ahead of the German parliament's vote on whether to approve last week's Greek bailout deal.
The Bundestag yesterday voted to ratify the bailout agreement – although 17 members of Merkel's coalition government opposed the decision.
In her comments on Monday, Merkel cited falling borrowing costs for Italy and Spain as one reason the Eurozone does not require a larger bailout mechanism.
Yields on Italian and Spanish government debt traded on the open market have fallen steadily since the end of last year. They have remained low despite the ECB conducting no bond purchases over the past fortnight. The ECB set up its Securities Market Programme in 2010 to support distressed government bond prices on the open market, extending the SMP to Italy and Spain last August.
On Tuesday, Italy's government saw its borrowing costs fall further when it sold €6.25 billion of 5-Year and 10-Year bonds. The average yield on 10-Year bonds was 5.5% – down from 6.08% at the last 10-Year auction on January 30 and its lowest level since last September.
Spanish and Italian banks bought record amounts of their own governments' debt in January, the Financial Times reports, citing European Central Bank data published Monday. Banks from Spain and Italy were among the heaviest borrowers at the ECB's three-year longer term refinancing operation in December, which saw €489 billion borrowed by the continent's financial institutions.
The ECB's second 3-Year LTRO begins today, with several analysts forecasting similar levels of borrowing will be announced tomorrow.
"Investors are positioning for a huge pick-up in the LTRO, especially from the Italian and Spanish banks," says Alessandro Giansanti, senior rates strategist at ING Groep in Amsterdam.
"In the short term, the LTRO operation should be risk- and Euro-supportive," adds Jeremy Stretch, London-based head of currency strategy at Canadian Imperial Bank of Commerce.
"The liquidity that the operations have injected into the market has reduced some of the solvency fears, particularly in the European banking market, and that's provided a much better risk environment."
However, "the markets are well aware of what the ECB is going to do," argues Daniel Brebner, head of metals research at Deutsche Bank.
"I don't think it is likely to act as a further catalyst for strengthening gold prices...in the near term, I'm more inclined to sell into this strength."
ECB Governing Council member and governor of Austria's central bank Ewald Nowotny said on Monday that the LTRO should not be viewed as a regular feature of ECB policy.
"If number one was a success and number two was a success, that doesn't mean there has to be number three," he said.
Greece meantime was placed in 'selective default' by ratings agency Standard & Poor's Tuesday, as the restructuring of its debts held by private sector creditors continued.
Representatives of private sector creditors have agreed to take haircuts equivalent to an estimated 75% of the value of their Greek bonds. So-called collective action clauses, applied retroactively, have compelled all private sector bondholders to go along with the agreement.
"[This] constitutes the launch of what we consider to be a distressed debt restructuring," said S&P.
"We believe the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange."
Despite its move, S&P says it will likely raise Greece's rating again once the restructuring is complete.
Gold investment demand helped jewelry sales in China rise 42% in 2011, China Daily reports, citing data from China's National Bureau of Statistics.
"China's jewelry sector has become a hot spot fueled by surging investment demand for gold and precious stones," it quotes Jiang Wenwei, senior analyst with US consultancy Frost and Sullivan.
"While the future for the stock market and housing sector still looks gloomy, more investors purchased gold to maintain or increase its value."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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