Gold Jumps Again "But Rangebound Below $1640" as Spanish, Italian Debt Prices Undo €1.1 Trn in Bank Loans

By: Adrian_Ash

The WHOLESALE MARKET gold price rose again as New York trading began on Wednesday, extending yesterday's 1.8% jump to reach $1620 per ounce as new data showed US retail sales falling faster-than-expected in May.

Silver bullion recovered an earlier slip to trade just shy of $29.00 per ounce. The Euro currency held flat but European stock markets slipped with commodity prices.

Spanish borrowing costs rose to new Euro-era highs at 6.73% for 10-year debt, while Italian bond yields also rose to a 6-month record, unwinding the effect of €1.1 trillion in LTRO loans made by the European Central Bank to commercial lenders last winter.

Rome today cut to €6.5 billion the amount of new 1-year debt being sold at auction, but it still had to pay investors 3.97% per year in interest – well over one-point-five percentage points more than at the last time of asking in May.

"If Euro bond yields continue to escalate," says one gold dealer in Asia, "gold could remain [well] bid."

Weaker-economy Eurozone bond yields have now reached or breached levels seen before the European Central Bank lent commercial banks €1.1 billion in 3-year loans starting December last year.

The gold price for Euro investors today jumped €41,500 per kilo, a level first reached in mid-August 2011 and approached this week on what analysts variously called "central bank...Chinese [or] Indian...private banking [or] electronic buying."

"Who knows?" asks one precious metals strategist in a note. "Apparently no one in the market."

Tuesday was "the 7th consecutive day of alternating between 'Up' and 'Down' days" in the gold price, notes Russell Browne at market-making bullion bank Scotia Mocatta.

"From a price perspective, the 1559 support is key ahead of 1528 [while] 1640 is the topside trigger for a move higher."

"Consolidation is ongoing," agrees Axel Rudolph at Commerzbank in Luxembourg, also saying the gold price "remains essentially range bound within the confines of its major 1532 support zone...and the 1641 current June peak."

Buying commodities such as gold "at current lows" has "always been profitable" over the last 18 months, said Kevin Norrish, managing director of commodities research at Barclays, speaking in Johannesberg, South Africa today.

"A break below [current levels] would be a major change" to the long-term trend, he said.

After Finnish finance minister Jutta Urpilainen said Helsinki wants collateral for its portion of the €100 billion credit line agreed with the Spanish government to support its banking sector last weekend, "Rumors about backing for the EFSF [Eurozone stability fund] could prove to be bearish news for the gold price," says a note from Swiss refining and finance group MKS, "as countries may have to use their gold reserves if they run out of other assets to post, should gold be allowed as collateral."

Over in the United States, says a new presentation from Societe Generale's Cross Asset Research team, "The prospect of the Fed launching QE3 soon now that the US economy appears to be slowing [means] gold should rally.

"We see scope for the gold price to trade back above $1700 soon, but we are no longer forecasting new all-time highs," says SocGen, pointing to weak jewelry demand.

"A significant supply surplus" requires what the banks' analysts call "investors and speculators" to buy almost 2,000 tonnes both in 2012 and 2013 to balance the market.

Meantime in the Eurozone, withdrawals from Greek banking deposits "have seen a marked increase" according to un-named bankers speaking to Reuters.

Daily outflows from ATM cashpoints, investment and Greek bank accounts to other Eurozone member states now total some €500-800 million per day, say the sources.

"Despite the [gold price] push above $1600," says today's note from Standard Bank's commodity analysts, "physical demand remains fairly robust."

However, the bank adds, the premium over benchmark London prices asked by Shanghai dealers "came off slightly" overnight, indicating a market "that is cautious on gold and unwilling to add long positions."

World #1 gold consumer India could see its credit status cut to "junk", said the Standard & Poor's rating agency Monday, owing to the slow pace of economic reforms and yawning

Taking the Rupee back towards all-time record lows against the US Dollar, "this has resulted in near record prices for gold in Rupee terms," says Standard Bank, "and a consequent fall-off in physical buying from India."

By Adrian Ash
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

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