Investors "Looking to Short Gold"

By: Ben_Traynor

THE WHOLESALE MARKET price of buying gold bullion climbed to $1658 an ounce shortly after US markets opened on Friday – matching the level it rose to four hours earlier when London began trading – as European stock markets edged lower and commodity and government bond prices rose.

The cost of buying silver meantime hit $31.87 per ounce – 2.2% down on last week's spot market close.

Based on PM London Fix prices, it was unclear by Friday lunchtime whether gold would record its fourth straight weekly loss. Last Friday's PM Fix was exactly $1658 per ounce.

A day earlier, spot gold touched a 10-week low when it fell to $1628 per ounce at the start of Thursday's US trading.

"Sentiment towards gold is as low as it has been for many years, possibly since the rally started," Kamal Naqvi, head of commodity investor sales at Credit Suisse, tells the FT.

"For virtually the first time this cycle, buying gold is a contrarian trade."

Spot gold is down over 7% from its February peak on the final day of last month, but "investors are not using this as an opportunity to buy cheaper gold" says Edel Tully, precious metals strategist at UBS.

"Instead, more are looking at the potential to short it."

"In the past month gold prices have been strongly negatively correlated to the Dollar," says the latest precious metals note from French investment bank Natixis.

Natixis cites the recent rise in 10-Year US Treasury bond yields, which have risen around 25 basis points (0.25 percentage points) since the start of March.

"Higher interest rates increase the opportunity cost of holding gold, and are therefore a further negative factor for gold prices."

The US Federal Reserve may need to raise its interest rate next year – rather than leave it on hold until late 2014 as projected by most Federal Open Market Committee members back in January – Federal Reserve Bank of St Louis president James Bullard said Friday.

"Overcommitting to the ultra-easy policy could well have detrimental consequences for the US and, by extension, the global economy," said Bullard, who attends monetary policy meetings but is not a voting FOMC member this year.

US economic data continue to show signs of improvement, with manufacturing activity and private sector employment rising in recent weeks.

Fed chairman Ben Bernanke warned yesterday however that "consumer spending is not recovered" and remains "quite weak relative to where it was before the crisis".

"In terms of debt and consumption and so on we're still way low relative to the patterns before," Bernanke told students at George Washington University during the second of his four lectures on the role of the Federal Reserve.

Over in Europe, "the worst is over, but there are still risks", European Central Bank president Mario Draghi said yesterday in an interview with German tabloid Bild.

"The situation is stabilizing."

European banks borrowed over €1 trillion at the ECB's two longer term refinancing operations (LTROs) held in December and February.

"Is the ECB jumping the gun?" ask Standard Bank currency strategists Steve Barrow and Jeremy Stevens in their Friday research note.

"We think it is. We believe it is premature to think that stabilizing the banks automatically saves the Eurozone economy as well."

Preliminary data released yesterday suggests the Eurozone's manufacturing sector has accelerated its rate of contraction this month.

Here in the UK, the Bank of England's Financial Policy Committee revealed some of the policy tools it is considering implementing in order to improve stability in the financial system when it published its latest minutes on Friday. 

One option under consideration is imposing a maximum leverage ratio to limit the amount institutions can lend relative to their capital base.

"The Committee agreed that it would advise HM Treasury that the statutory FPC should have powers of Direction to set a maximum ratio of total liabilities to capital — and to vary it over time," the minutes report.

"A leverage ratio limit would constrain financial institutions' ability to increase the overall size of their exposures relative to their capacity to absorb losses."

Many gold dealers in India today continued their strike begun Saturday in protest at last week's gold import duty hikes, despite today marking the Gudi Padwa festival, traditionally an auspicious day for buying gold.

"As of Tuesday this week, it was estimated that the local gold market had suffered a loss of business worth $800 million," says Natixis.

"Historically, changes in tax and other regulations have not had a material impact on Indian demand for gold. As an integral part of Indian culture, gold traders have typically found a way to work within or around any restrictions...[so] we would not expect the new measures to have a significant impact on Indian demand for gold."

Turkey meantime is considering plans aimed at encouraging its citizens to deposit privately-held gold with commercial banks, the Wall Street Journal reports.

Like India, Turkey has experienced significant exchange rate and balance of payments problems over the last year, which has seen those countries' governments turn their attention towards gold.

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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