Euro Weakness Weighs on Gold and Silver

By: Ben_Traynor

THE SPOT MARKET gold price hovered around $1620 an ounce during Monday morning trading in London – slightly below last week's close – while stock and commodity markets were also broadly flat, after initial rallies that followed yesterday's Greek election result soon ran out of steam.

The silver price drifted lower to $28.41 per ounce by Monday lunchtime in London – a 1% drop on Friday's close – while US, UK and German government bond prices all saw gains ahead of the week's Federal Reserve policy meeting.

The Euro meantime briefly broke above $1.27 for the first time in nearly a month, before dropping by more than one cent by lunchtime.

"There is a downward bias [in gold and silver]," reckons marc Ground, commodities strategist at Standard Bank.

"Euro weakness weighs on precious metals as markets come to the realization that despite the Greek election resulting in a 'positive' outcome...the underlying problems facing the Eurozone are still very much present."

The pro-bailout New Democracy party is seeking to form a coalition government after narrowly beating the anti-bailout Syriza in Sunday's Greek elections.

"The result showed people want the Euro," one senior New Democracy official told newswire Reuters.

"But society remains divided. Syriza will be a militant opposition, possibly complicating the new government's efforts."

"Will [New Democracy's narrow victory] be the wake-up call [Eurozone] policymakers have needed to show that their policies are going wrong?" asks Standard Bank currency strategist Steve Barrow.

"Or [will they] see the Greek result a vindication of their approach? Unfortunately, we think it will be the latter and that keeps us bearish of the Euro."

European stock markets were broadly flat by Monday lunchtime in London following a short-lived rally in early trading.

On the bond markets, Spanish 10-Year bond yields set a fresh Euro-era high this morning, hitting 7.16%. Yields on Italian 10-Year bonds also spiked, climbing back above 6%.

Elsewhere in Europe, French president Francois Hollande – whose Socialists won a majority in yesterday's parliamentary elections – has sent fellow European leaders plans for a €120 billion 'growth pact', French newspaper Le Journal du Dimanche reported Sunday.

The €120 billion would reportedly include €10 billion from the European Investment Bank, whose activities include stimulating small business lending and infrastructure investment. This €10 billion would then be "leveraged", the report says, to €60 billion of private investment raised on international markets.

"No one has ever explained how €10 billion becomes €60 billion," says one senior European Union diplomat quoted by the Telegraph.

"This is funny money and risks politicizing an institution [the EIB] that works well because it is independent of the politicians and the dodgy Euro math that has fuelled the crisis."

Non-Eurozone leaders at the latest G20 summit, which begins today in Mexico, will "make the case" for further European fiscal and political integration as a way of bolstering monetary union, according to David Plouffe, senior adviser to US president Barack Obama.

G20 leaders "should encourage and support efforts made by Europe to resolve [the debt crisis] and send a signal of confidence to the market," China's president Hu Jintao said over the weekend.

"We are waiting for Europe to tell us what it is going to do," added Robert Zoellick, president of the World Bank, speaking on Sunday.

"The danger we're creating is the danger of policymaking that is increasing uncertainty and making markets more nervous, which has a negative feedback loop."

On the currency markets, private sector investors are facing a scarcity of US Dollars as a result of heavy buying by central banks aiming to build up their reserves, according to a report from Morgan Stanley.

"The market often assumes that people are long Dollars, but many of those Dollars are held by central banks, which are unlikely to move out," says Morgan Stanley's head of European currency strategy Ian Stannard in London.

"That leaves us with the private sector, which is short. In an environment where we see a global slowdown, the Dollar will be well supported."

The US Dollar Index (DXY), which measures the Dollar's strength against a basket of major currencies, hit its highest level for nearly two years earlier this month.

On Monday morning, the DXY was trading around 10% higher that it was when the Dollar gold price set an all-time record last September. Over the same period, Dollar gold prices are down around 15%.

Last November, six of the world's major central banks undertook coordinated action to lower the cost to banks of borrowing Dollars, in order to "provide liquidity support to the global financial system".

In the US, the Federal Open Market Committee is expected to extend its maturity extension program Operation Twist, which aims to lower longer-term interest rates, when it meets tomorrow and Wednesday, a number of analysts report.

"A short-term extension of Operation Twist is the most likely" says a note from Barclays.
People who buy gold are investing in a "dead asset", Indian finance minister Pranab Mukherjee told a television awards ceremony over the weekend.

Mukherjee, who has twice announced increases in gold import duties this year, urged India's financial advisers to "spread financial literacy" and encourage investment in other assets, adding that there is a need for India to develop wider and deeper securities markets.

Over in China, which looks set this year to overtake India as the world's largest source of private gold demand, property prices in major cities fell for the eighth month running last month, Reuters reports.

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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