Gold Gets "Shot in the Arm" from Europe

By: Ben_Traynor

SPOT MARKET gold prices hit $1584 an ounce ahead of Friday's US trading – a 2.3% rise from the previous day's low – while stocks, commodities and the Euro also rallied following news of an "important" agreement at the European Union summit in Brussels.

Silver prices climbed to $27.38 by lunchtime in London – a 4.6% gain on yesterday's low.

"Resistance [for gold prices] is at the top of the past week's range in the $1587-88 area," says technical analysts at bullion bank Scotia Mocatta, who add that further resistance is seen at $1625.

News of an agreement among European leaders on the use of bailout funds ""has been positive for the Euro and positive for confidence in general," adds Scotia's head of precious metals Simon Weeks.

"[This] means that equities and commodities, including gold for the time being, have all received a shot in the arm."

European leaders meeting in Brussels have asked the European Council to consider proposals for the creation of a single Eurozone banking supervisor "as a matter of urgency by the end of 2012", an summit statement issued early on Friday said.

The creation of a supervisory body could then be followed by allowing money from bailout funds to directly recapitalize banks, rather than being loaned to governments for that purpose, the statement continued.

"We affirm that it is imperative to break the vicious circle between banks and sovereigns," said the statement from the EU summit, which continued Friday.

European leaders also confirmed that assistance given by the European Financial Stability Facility to Spain's government – up to €100 billion to fund banking sector restructuring – will transfer to the permanent bailout fund the European Stability mechanism when it becomes operational next month.

The loans will transfer to the ESM "without gaining seniority status" over other Spanish government bonds.

The statement also included a commitment to use "existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilize markets".

"We have taken important decisions last night," said German chancellor Angela Merkel, who prior to the summit expressed opposition to using bailout fund to buy bonds.

"We agreed that if countries need the instruments to buy bonds on the primary or secondary market from the EFSF or ESM then...conditionality would apply."

A country report would need to be presented and a memorandum of understanding drawn up, Merkel added.

"That would be the case if Spain or Italy, with regards to their interest burden, make use of such instruments."

Benchmark yields on Spanish 10-Year government bonds fell as low as 6.4% this morning, their lowest level this week. Italian 10-Year yields traded as low as 5.8%, also a weekly low.

"While not unwelcome, we do not see [the summit agreement] as a game changer," says a note from Societe Generale.

"We remain concerned that the EFSF/ESM will be seen as lacking in both efficiency and size to offer credible support to Spain and/or Italy if requested. Attention is thus likely to turn again to the European Central Bank."

European stock markets rallied this morning, with Germany's DAX up around 2.5% by lunchtime, though it remained 1.6% off last week's high. Spain's IBEX index was up 2.7%, while Italy's FTSE MIB gained 3.3%, although both indexes remained below June highs.

The Euro jumped 1.3% to $1.26 following the release of the summit statement, pushing Euro gold prices briefly below €40,000 per ounce Friday morning.

Based on London Fix prices, the gold price in Euros looked set by Friday lunchtime in London to end the second quarter of this year more or less where it began it. On a year-to-date basis, gold in Euros was heading for a 3.3% gain over the first half of the year. The Euro itself has lost around 3% against the Dollar during H1 2012.

Sterling gold prices by contrast looked set for a 0.8% H1 2012 loss, and a 2.8% loss over the second quarter. Gold prices in Dollars meantime were up slightly on where they started the year, but were sitting on a 4.9% quarterly loss by lunchtime in London, having given up gains made in the first three months of the year.

A PM London Gold Fix below $1581 per ounce would see gold record its largest quarterly loss since Q2 2004 – while a fix below $1553 would mark the worst quarterly performance this century.

"After 11 years [of gains] it is only natural that gold stops and pauses for breath before taking the next step higher," says Ole Hansen, commodities strategist at Saxo Bank.

"The worry is obviously that momentum has been completely lost and leveraged players (such a hedge funds) have left the building...they will come back, but the market needs to reassert itself before that happens, as they are more followers than instigators of trends."

Over in India meantime, Rupee gold prices fell to a two-week low Friday, as the Rupee gained against the Dollar, newswire Reuters reports.

"There was demand yesterday evening," says Ketan Shroff, director at Pushpak Bullion in Mumbai.
"If prices are maintained at this level, we can see some buying."

Gold demand in India, traditionally the world's biggest market, was down 29% for the first quarter of 2012 compared to the same period last year. The Rupee has fallen around 25% against the Dollar over the last 12 months – while India's government has twice raised its import duties on gold bullion since the start of 2012.

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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