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Gold Hits New USD High as Europe's "Bail-Out Bounce" Fails

Commodities / Gold and Silver 2010 May 11, 2010 - 12:49 PM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD hit a new record high against the US Dollar at Tuesday's PM Fix in London, surging more than 3% from yesterday's low as world stock markets fell once again with commodities.

The Euro dropped 4¢ from yesterday's "bail-out bounce", giving back most of Monday's gain to trade below $1.27.


Gold priced in Euros touched fresh highs above €30,970 per kilo.

"Gold is bullish, as global financial markets are battling to gain traction," says Walter de Wet at Standard Bank.

"The market still doubts the success of any rescue package put in place in Europe. This is evident in US government bond yields that are pushing lower again as investors flee to safe-haven assets.

US investors wanting to Buy Gold saw the price jump to $1222 by mid-afternoon in London today, beating the previous Gold-Fix peak of $1218 set in Dec. '09.

Adding 3.2% from late-Monday, the gold price in Sterling also came within a few pence of last week's record high at £825 an ounce. But the Pound then spiked sharply on the currency market – undoing an overnight drop – on rumors that the current Labour government "knows" its coalition talks with the Liberal Democrat party "are over".

British government bonds also whipped higher as an apparent Conservative-led coalition looked likely.

"Gold continues to derive gains from the weakness in the Eurozone," says one London dealer in a note.

"Only a close back below $1169 will cause a long liquidation," says the latest technical analysis from bullion bank Scotia Mocatta.

European equity markets recovered a sharp drop to close Tuesday 0.4% lower after Asian shares dropped 1.1%.

US crude oil contracts crept back above $77 per barrel after an early loss.

The silver price extended its gains, meantime, adding 12% from last week's low to come within 40¢ of Dec. 2009's three-decade high at $19.49 an ounce.

"Can the plan work?" asks senior UBS economist George Magnus of the €750 billion 'stabilization mechanism' announced by European leaders as Asian markets began trading yesterday.

"It will work to the extent that Greece is now fully funded for the next 2-3 years and does not have to return to private markets for financing. [But] it will not stop Greek public debt rising to 150% of GDP by 2013. And it will have to be carried out as the Greek economy contracts by at least 10% over the next three years.

"Greece is a complete fiscal disaster," agree Simon Johnson and Peter Boone, former IMF and current MIT economists respectively, writing in the Financial Times and widening the issue to Portugal, Spain, Ireland and "perhaps Italy..."

"We cannot escape the possibility that gold reserves may ultimately form some part of an eventual solution," says the latest Commodities Weekly from French bank Natixis.

"Those Asian central banks which hold excess reserves of Dollars hold negligible quantities of gold...Italy, Germany and France are three of the world's top five holders of gold."

Promising one-third of the Eurozone's €750bn backstop funds, the International Monetary Fund recently sold 18.5 tonnes as part of the 400-tonne sale begun in 2009.

"Call it folly or call it catching a rising tide," says GFMS Analytics director Rhona O'Connell, writing at MineWeb, "but when the IMF sold a total of 23.5 million ounces of gold in the second half of the 1970s it was selling into a seemingly inexorable rising price.

"In this current frenetic environment, investment and speculative appetites are proving hard to sate. If any more IMF metal were to come into this market at the moment it would probably be snapped up."

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 2010

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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