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Gold "Strengthened" by New Euro Crisis; Still "Early Days" for Global Gold Investment

Commodities / Gold and Silver 2010 May 14, 2010 - 07:56 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleWHOLESALE GOLD BULLION PRICES rose to new record highs against all major currencies Friday morning in London, as world stock markets fell amid the ongoing Eurozone crisis.

The Euro sank through $1.25 – an 18-month low to the Dollar – as Spain's El Pais reported that French president Sarkozy threatened to quit the currency union last weekend unless Germany agreed to the €750 billion "stabilization" package.


"France, Italy and Spain formed a common front against Germany," the paper quotes private remarks from Spanish prime minister Zapatero, "and Sarkozy threatened [German chancellor] Merkel with breaking the traditional German-French axis."

Investment-gold prices on the international wholesale market this morning broke €1000 an ounce for Euro investors and touched £860 against Sterling

The Dollar price of gold came within 30¢ of $1250 an ounce.

"You have the great problem of a potential disintegration of the Euro," said former US Federal Reserve chief Paul Volcker in a speech in London last night

Deutsche Bank's CEO Josef Ackermann yesterday told ZDF television that "I doubt Greece will be in a position" to repay its debts.

Writing for Standard Bank today, "We expect the Euro to reach $1.20 within the next three months," says Walter de Wet, "[because] the Dollar is the beneficiary of the increased sovereign credit risk in Europe."

Noting Friday's drop below $73 per barrel, "Crude oil remains sensitive to Dollar strength," says de Wet. "A stronger Dollar against the Euro could weigh on nearby [i.e. short-term] crude oil prices."

For gold, in contrast, the "relationship with the Dollar/Euro exchange rate remains negative, so Euro weakness results in gold strength.

"Sovereign credit risk is clearly dominating."

The gold price in Euros today rose above €32000 per kilo (and beat €1000 an ounce), adding 5.6% from last Friday's finish.

UK and Swiss investors buying gold today also saw the price hit new record highs, rising 5.4% and 4.8% for the week respectively.

Gold priced in Japanese Yen held below Wednesday's 30-year peak, but added 4.3% from last Friday's Tokyo close.

"Gold and platinum prices withstood Tokyo futures and physical selling," says one Japanese dealer in a note.

"We are probably witnessing a flight from the European currency in search of a better reserve currency, gold," says an Italian bullion dealer.

A survey of Japanese fund managers by Bloomberg News today showed Tokyo institutions favoring US over Eurozone bonds for the first time since Oct. 2007.

"Investors appear to still be skeptical about the rescue plan," says Yoshio Takahashi, fixed-income strategist at Barclays.

Friday morning saw the MSCI index of Eurozone stocks drop 2.3% from Thursday's close, but remain higher for the week.

German Bund prices rose sharply, pushing the yield offered by 10-year debt back down to last week's 15-month lows. Greek bond yields, in contrast, spiked higher again as prices fell.

Over in India, meantime – source of gold's single largest consumer demand each year –record-high Rupee prices have dented gold buying for the traditionally strong Hindu festival of Akshaya Tritiya.

"Forget buying for the festival, on the contrary people are selling," says Suresh Hundia, president of the Bombay Bullion Association.

"There is a queue of sellers."

Looking at global demand-supply flows in the gold market, however, "Jewelry wasn't always the big demand in gold," said Martin Murenbeeld, economist at Dundee Wealth, in a speech this week to the Canadian Institute of Mining, Metallurgy and Petroleum's conference in Vancouver.

"That's a relatively recent phenomenon," he's quoted by MineWeb. "So I don't worry so much about jewelry demand decline...I believe commodities in general, gold specifically, are morphing into an investment asset class, so they're going to be held in portfolios.

"We are in the early days of investment demand."

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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