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Gold Falls with Dollar But "Way Under-Owned" as Euro LIBOR Rates Rise

Commodities / Gold and Silver 2010 Jul 01, 2010 - 10:32 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleTHE PRICE OF GOLD fell hard alongside the Dollar early Thursday in London, dropping to $1235 for US investors but losing more than 2% vs. the Euro as the single currency jumped on the forex market.

"Gold was [already] weakened by sporadic selling from Chinese dealers," says one Hong Kong trader in a note.

"Risk-aversion is still evident, but...I think people are just waiting for some clear direction," says Andrey Kryuchenkov, analyst at VTB Capital analyst in London.

As a percentage of global financial assets, investible gold has gone from 17% in 1982 to 4% today, notes J.P.Morgan Private Bank's chief investment officer Michael Cembalest.

Put another way, "Gold is way under-owned compared to other times when the world sucked," says Paul Kedrosky at Infectious Greed.

On the currency market today the Euro rose sharply, leaping 2¢ to a two-week high – and pushing the gold price in Euros down through €1000 an ounce for the first time since June 17th – after the Spanish government successfully raised €3.5 billion ($4.3bn) in new debt.

The auction of 5-year bonds was well bid by investors, despite a warning from ratings agency Moody's that it might cut Madrid's AAA status.

New data meantime showed Japanese business confidence rising to a two-year high, while Germany's PMI index of manufacturing activity also beat Frankfurt forecasts.

But world stock markets were already 1% lower on average before new US jobs data showed last week's continuing jobless claims rising sharply.

Tokyo's Nikkei stock index closed the day 2% lower at a new 2010 low. London's FTSE-100 extended its year-to-date losses to almost 11%.

Crude oil fell through $75 per barrel. Government bonds ticked lower, nudging open-market interest rates higher.

Earlier this week, and ahead of tomorrow's official June jobs report, payroll services firm ADP said private jobs rose by 13,000 last month, well below the 60,000-level analysts expected.

"Gold denominated in Euros remains highly correlated vs. the [credit default swap] rate of PIIGS," notes Nic Brown and his colleagues at French bank and London bullion dealer Natixis.

The average cost of insuring government debt from Portugal, Italy, Ireland, Greece or Spain rose sharply at the start of this week, "close to the highs recorded early in May.

"This leads us to conclude that it is the Eurozone's current problems that remain the driving force behind the elevated price of gold...problems highlighted this week by the concerns voiced by Spanish banks ahead of the expiry of the ECB's €442bn one-year repo [today]."

Following Wednesday's smaller-than-feared €132 billion loan of 3-month funds taken from the European Central Bank, Thursday saw 78 Eurozone banks borrow a further €111.2bn in 6-day money.

"Although higher prices of gold for the next few months would not surprise us, we find it very difficult to imagine gold maintaining its current price in the long run if the global crisis begins to dissipate," says Natixis.

The ECB's attempt to "sterilize" the inflation risk of its new government-bond purchases, meantime – whereby it takes on deposit the same volume of cash it pays to those banks selling it Greek and other weak government bonds – "landed with a resounding thud" on Tuesday, says the FT's Alpha blog.

Selling less than 60% of the €55bn offered in fixed-term deposits on Tuesday, the ECB also had to pay a higher interest rate to attract what money it got.

Interbank lending rates in Europe meanwhile rose again on Thursday, with 3-month LIBOR hitting a fresh 10-month high above, more than treble its level of February.

"We favor a move higher in gold in H2:10," says Walter de Wet at Standard Bank today, "but there is resistance to a higher gold price at the moment.

"We continue to see selling in the physical market, and resistance is sticky when gold moves above $1250 an ounce.

By Adrian Ash

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 , 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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