Gold "Caught in Range" as Europe Heads for Suicide by Austerity

By: Ben_Traynor

SPOT MARKET prices to buy gold remained steady around $1650 an ounce during Friday morning's London trading – well within their range from mid-March – as stock markets and commodity prices were also flat and US Treasury bonds gained following a credit ratings downgrade for Spain.

Heading into the weekend, gold looked set to record its seventh successive Friday PM gold fix between $1600 and $1700 an ounce.

Prices to buy silver meantime held above $31 an ounce this morning after rallying in Thursday's US trading – though they remained 2% down on the week by Friday lunchtime in London.

"Our concern with silver," says the latest precious metals note from investment bank Natixis, "as with gold, is that when global markets begin to return to a greater degree of normality, the outflow from investors may be substantially larger than the inflow from industrial or jewelry demand, which could lead to substantial weakness in silver and gold prices."

Ratings agency Standard & Poor's last night downgraded Spain two notches from A to BBB+, adding that the outlook for the sovereign is 'negative'.

"The [Spanish] government has committed to a target of 5.3% of GDP in 2012 and 3.0% in 2013," said an S&P statement.

"In our opinion, these targets are currently unlikely to be met given the economic and financial environment. We forecast a budget deficit of 6.2% of GDP in 2012 and 4.8% in 2013."

Yields on 10-Year Spanish government bonds rose to touch 6% this morning, but by Friday lunchtime actually looked set to close slightly down on the week. 

German 10-Year bund yields meantime fell as low as 1.65% Friday morning, close to record lows hit earlier in the week.

Despite the Spanish downgrade, European stock markets edged higher this morning, although the Euro Stoxx 50 index of the leading Eurozone blue-chip firms remains more-or-less where it was six months ago.

"We are probably going to see more downgrades from other rating agencies," reckons Philippe Gijsels, Brussels-based head of research at BNP Paribas Fortis Global Markets.

"You will continue to see this consolidation phase [in stocks] for some more time as the newsflow is likely to be predominantly negative."

"Europe is headed to a suicide," said Nobel Prize-winning economist Joseph Stiglitz Thursday.

"There has never been any successful austerity program in any large country...the European approach definitely is the least promising."

French Socialist Party leader Francois Hollande, who received the highest share of the vote in last Sunday's French presidential election first round, called this week for European economic policies to prioritize growth rather than austerity, adding that he would hold a "firm, friendly discussion" with German chancellor Angela Merkel if elected.

"It's not for Germany to decide for the rest of Europe," Hollande told French television last night.
Earlier in the week, Hollande said the European Stability Mechanism, the permanent bailout fund due to come in in July, should be given "the necessary firepower" by the European Central Bank.

"I've always campaigned for the statute of the ECB to be revised," Hollande said.

"I know Germany's reticence, but it would be better for the ECB to be able to intervene as the first and last resort for states."

"Herr Hollande has misunderstood the problems in his country and in other Euro area countries," Michael Meister, a member of Merkel's CDU party, told Bloomberg Friday.

"If one throws money into a country with structural problems that won't solve those structural problems...the aim is to gain control over excessive debt, not increase it."

"A growth pact has to be focused on structural reforms," agreed Spain's economy minister Luis de Guindos yesterday.

"I do not see that the growth pact should involve any sort of fiscal boost or stimulus."

The Euro meantime rallied against the Dollar in Friday morning's European trading, climbing back above $1.32.

"The Euro/Dollar has held above $1.30 for some time, in the $1.30-$1.32 range, which coincides with gold also being caught in a range," says Robin Bhar, head of metals research at Societe Generale.

"If the Eurozone crisis deepens and we see the Euro/Dollar correct below $1.30, that could give a bit of a lift to gold." 

The Pound also rallied against the Dollar Friday, hitting breaking through $1.62 to hit its highest level since last September.

Prices to buy gold in Sterling fell to £1019 an ounce – 0.6% below yesterday's high for the week.
Earlier on Friday, the Bank of Japan announced a further ¥5 trillion ($62 billion) in quantitative easing on Friday, while also leaving interest rates on hold at 0.1%.

Over in China, the Shanghai Futures Exchange said Friday it is cutting its commission on various gold futures contracts in an effort to support liquidity. Commissions on gold trading will fall from 30 Yuan per lot to 20 Yuan per lot.

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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