Physical Gold Demand "Picks Up" in Asia But Further Drop Could See $1500

By: Ben_Traynor

THE U.S.DOLLAR gold price fell to $1708 an ounce Friday lunchtime in London – a 0.9% drop on Friday's Asian session high – as stock and commodity markets also fell slightly amid ongoing uncertainty over the Greek bailout deal.

"Another move below $1690 will have the market refocusing back toward $1500," says the latest note from gold bullion dealing bank Scotia Mocatta's technical analysis team, referring to the low hit after Wednesday's $100 per ounce drop.

The gold price has not fallen so hard "since the days of Lehman's collapse" adds Scotia.

"The broader macro backdrop," adds Barclays Capital, "remains gold-favorable, given the negative interest rate environment, longer-term inflationary concerns and lingering sovereign debt uncertainties."

"At these price levels we've seen interest in the physical market pick up, particularly from Asian buyers," says Marc Ground, commodities strategist at Standard Bank.

The silver price meantime fell to $34.88 – a 1.7% weekly drop, but a 3.4% gain on where it ended the first Friday in February.

Heading into the weekend, the gold price was looking at a 3.6% weekly loss, and 1.1% down on the Feb. 3 close.

European leaders meeting in Brussels have signed off the Greek bailout deal. However, more than half the €130 billion rescue package will be held back until the Greek government provides a "detailed assessment" next week of how it will implement 38 required measures.

The funds being released will facilitate Greece's ongoing debt restructuring with its private creditors. Yesterday, the International Swaps and Derivatives Association's Decisions Committee ruled that the Greek government's retroactive insertion of collective action clauses (CACs) – which could force private sector bondholders to accept the agreed deal with haircuts estimated around 70% – does not constitute a credit event. 

ISDA's decision that the existence of CACs does not constitute default means credit-default swaps, held by many investors to hedge their Greek debt positions, will not pay out. However, ISDA could still be asked to adjudicate on the related question of whether enforcing those CACs should trigger CDS payments.

"They will have to enforce CACS," says Alessandro Giansanti, senior rates strategist at ING Groep in Amsterdam.

"At that point the exchange will become coercive and that will be a restructuring event for CDS."

"The sovereign CDS market is crying out for an injection of confidence," adds Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London-based consultancy specializing in sovereign credit risk.

"It's very important, particularly in much larger bond markets like Italy and Spain, that investors' hedges are perceived to be credible."

"If I were a buyer of protection on Greece...I would be upset [by ISDA's decision]," Bill Gross, co-founder of world's largest bond fund Pimco, told CNBC Thursday.

Pimco however was one of the fifteen financial institutions on the Decisions Committee that voted 'No' to the question of whether inserting the CACs should trigger CDS payments.

German opposition to increasing the size of the Eurozone's so-called firewall meantime appears to be diminishing, German newspaper Der Spiegel reports. 

"Madame Merkel and I agreed that we would take a decision at the end of this month on this subject," French president Nicolas Sarkozy told reporters in Brussels.

Germany has so far opposed taking unused funds in the temporary bailout mechanism, the European Financial Stability Facility, and adding them to the €500 billion European Stability Mechanism when the latter becomes operational in July. 

European leaders however were told by their G20 counterparts that they could not expect more International Monetary Fund aid unless the firewall was built higher.

European banks meantime deposited a record €776.9 billion with the European Central Bank on Thursday, one day after the ECB's second longer term refinancing operation saw banks borrow nearly €530 billion.

Bundesbank chairman Jens Weidmann has "squared up" to ECB president Mario Draghi in a letter leaked on Wednesday, today's Financial Times reports.

In the letter, the FT says, Wedimann tells Draghi the ECB should reconsider its December decision to extend the eligibility criteria for collateral banks can post against their ECB borrowing.

"The letter was only written so that it could be made public," the FT quotes one Eurozone official.
"It's no accident that it came just after the LTRO."

Over in the US, Federal reserve chairman Ben Bernanke spent a second day testifying to Congress Thursday, a day after his comments to the House Financial Services Committee were widely blamed for Wednesday's gold price plunge.

"We don't see at this point that the very severe recession has permanently affected the growth potential of the US economy," Bernanke told the Senate Banking Committee, in a session that finished ahead of schedule.

In Beijing meantime the Bank of China has partnered with the world's largest derivatives exchange operator CME Group – which runs the New York Comex – to explore Yuan-denominated futures contract settlement, China Daily reports.

Yuan-denominated gold futures will reportedly be one of the ideas investigated.

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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