Gold Importers Digesting Higher Prices with Sentiment Driven by Fiscal Cliff

By: Ben_Traynor

SPOT MARKET gold prices hovered just below $1738 an ounce Monday morning in London, close to three-week highs, while stocks and commodities were broadly flat and the Euro traded near two-month lows against the Dollar, as the US and Greece both contemplated upcoming fiscal difficulties.

Silver prices traded around $32.70 an ounce, also near three-week highs.

Bullion importers in India, meantime, which sees the celebration of Diwali tomorrow, slowed their purchases of gold Friday as the Rupee weakened and gold prices rose, newswire Reuters reports.

"Jewelry makers may have to wait before they come back to buy again," says one physical bullion dealer in Hong Kong.

"People are digesting the rebound in prices."

"Worries about the fiscal cliff continue to drive [international bullion market] sentiment," says Nick Trevethan, senior metals strategist at ANZ, referring to the combination of tax rises and government spending cuts currently due in the US at the start of January.

President Obama is due to hold talks this week with labor and business leaders to try to build a consensus on avoiding the fiscal cliff.

"We are [also] seeing some signs of compromise between Democrats and Republicans," says ANZ's Trevethan.

"That may take some of the steam out of the upside story for gold, but the prospect of negative real interest rates and longer-term inflationary risks remain positives for bullion."

"The lesson of Europe," says Congressional Budget Office founding director Alice Rivlin, "is don't wait until you're in a crisis to act. Do it now. The other lesson is that austerity is not a good prescription for weak economies."

Here in Europe, the Greek parliament passed its 2013 budget Monday by 167 votes to 128, less than a week after it the Greek government narrowly won a vote in favor of around €13.5 billion of austerity measures.

"Just four days ago, we voted the most sweeping reforms ever in Greece," said Greek prime minister Antonis Samaras.

"The[se] sacrifices will be the last. Provided, of course, we implement all we have legislated."

Greece may be unable to meet a €5 billion debt repayment that comes due this Friday. Eurozone finance ministers meet later today to discuss whether Greece should be paid the delayed next installment of its bailout funding, worth €31.5 billion.

The latest report on Greece by the so-called troika of lenders – the European Central Bank, European Commission and International Monetary Fund – has been completed, Eurozone finance ministers' chief Jean-Claude Juncker confirmed, although there will be no decision today on whether Greece gets its funding.

"Greece has done what it was asked to do and now is the time for the creditors to make good on their commitments," said Greek prime minister Samaras.

Greece is hoping to raise funds to cover Friday's repayment through an auction of Treasury bills tomorrow, the Financial Times reports, although the report adds that Greek banks that would buy the debt can only raise €3.5 billion of collateral to post with the ECB in order to fund their purchases.

Japan's economy shrank by 0.9% in the third quarter, and 3.5% year-on-year, according to provisional GDP figures published Sunday.

The Bank of Japan "is committed to continuing with aggressive monetary easing" its governor Masaaki Shirakawa said Monday.

The United States is set to become the world's largest oil producer by 2017, largely thanks to shale production, the International Energy Agency reports.

Elsewhere in the US, the so-called speculative net long position of gold futures and options traders on the Comex – measured as the difference between bullish and bearish contracts – fell for the fourth week running in the week to last Tuesday, weekly data published Friday by the Commodity Futures Trading Commission show.

"[Gold] prices have recently been supported by official sector [central bank] buying," London Bullion Market Association chairman David Gornall told the LBMA's annual conference in Hong Kong this morning.

"Will the gap between the amount of gold held in reserve by the developing markets and that of the developed world close?... comparing China to the US, it would seem that in China, gold asset allocation can only go in one direction."

"Gold plays a very important role in the formation of the financial market system," Xie Duo, general director of China's central bank, told the LBMA conference Monday.

"[There has been] big progress in the Chinese gold market...but there is still a long way to go."

The Agricultural Bank of China, one of nine Chinese banks licensed to import gold, has said it plans to start trading precious metals overseas.

"We will start trading globally in the next year or two, most likely in London and New York," said Wang Xinyou, head of precious metals at AgBank, which currently enables retail investors to buy and sell gold on the Shanghai Gold Exchange.

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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