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Gold Tracks Dollar, as Ticking Debt Time Bombs Threaten Euro

Commodities / Gold & Silver 2009 Dec 10, 2009 - 08:29 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD was little changed Thursday morning in London, recording its lowest AM Fix since Nov. 13th at $1125 per ounce as the US Dollar held onto this week's rally on the currency market.

Both the Swiss and UK central banks kept their key interest rates at historic lows of 0.25% and 0.50% respectively.


Gold priced in Euros and Sterling hit new 3-week lows below €762 and £690 an ounce.

The Paris stock-market fell hard on news the French government is following London with a one-off 50% levy on banking bonuses.

"While gold holds below former support at $1138, the risk remains for a deeper correction to channel support at $1086," says the latest analysis from Scotia Mocatta, noting the uptrend in gold starting Sept. 1st.

"Major support in gold is seen at $1019 which is the 38.2% Fibonacci correction of the $683 to $1226 one-year up move," it adds.

Crude oil contracts meantime struggled to recover above $71 per barrel after Wednesday's surprise build in US petroleum-product stockpile inventories.

Copper prices fell for the sixth session running in London, extending their longest drop in 12 months.

"Gold and silver basically were tracking the Euro today," reports a Hong Kong dealer in a note.

"The correlation between the Dollar and gold is very strong and that is prima facie reason why gold is holding above $1120," agrees Pradeep Unni in Dubai for Richcomm Global Services, noting the flat action in currencies but adding that the metal remains "vulnerable to profit-taking."

New York's SPDR Gold Trust, which allows investors to "track" the gold price through  shares in its trust-fund, has cut its bullion holdings by 1.4% in the last week – "testament to shifting market sentiment" according to one analyst.

"The chance of gold bottoming near $1100 is increasing," says another.

On the forex market today, "We don't see much attraction in major currencies," writes Standard Bank strategist Steven Barrow.

"The Dollar still looks poor, Sterling is being beaten up by the policymakers, and even the previously strong Euro has had the rug pulled out from beneath it by downgrades from within the periphery Eurozone countries.

"The Swiss Franc could rise – if the SNB would only let it – while a return to quantitative easing in Japan is hardly what the doctor ordered for future Yen strength."

London's Bank of England today confirmed it will continue a £200 billion ($325bn) program of quantitative easing, creating new money to buy mostly government debt as the UK's fiscal deficit hits a peace-time record equal to 14% of GDP.

Switzerland's central bank meantime halted its 9-month program of buying corporate bonds with newly created money. But in his last policy speech as SNB chairman before handing over to former hedge-fund manager Philipp Hildebrand in 2010, Jean-Pierre Roth noted that the Swiss Franc's recent stability vs. the Euro "shows that the monetary policy followed since March has been effective."

The SNB has been selling Francs in the currency market to "decisively prevent any excessive appreciation."

Gold priced in Francs has risen 29% so far in 2009.

"The ball lies in Greece's court," said European Central Bank policy-maker Axel Weber today, urging Athens to address its 13% fiscal deficit after Greek bonds were downgraded by the Fitch rating agency on Tuesday.

Spain was placed on "negative watch" by S&P analysts on Wednesday.

"Within the [Eurozone] stability and growth pact, there is no role for the IMF – rightly," Weber added.

Germany's Der Spiegel quotes Josef Ackermann, head of Deutsche Bank, saying that "a few time bombs" are ticking in the European single currency project, launched 10 years ago and now encompassing 350 million people across 17 member states.

Reuters says the danger is that a sovereign debt default "could destroy the common European currency."

UK gilts on Thursday led a worldwide fall in government bonds, with the yield offered by 10-year gilts rising to a four-week high of 3.82%.

Ten-year German Bunds offered 3.17%. Mid-dated US Treasury yields rose to 3.24%.

"One of the fundamental lessons of the [financial] crisis is that when we underestimate financial risks and focus only on the short term, we set the stage for a future catastrophe," says ECB president Jean-Claude Trichet in an interview with the Belgian press published today.

"I will not make any specific comments regarding gold," Trichet added when asked about "a return to risk-taking on the part of investors."

Eurozone central banks have sold little more than one tonne of bullion between them since the end of September, when the new Central Bank Gold Agreement – limiting aggregate sales of 400 tonnes per year until 2014 – came into effect.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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