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Euro Escapes Gold's New Highs as ECB Fights for Credibility

Commodities / Gold and Silver 2011 Mar 31, 2011 - 08:00 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD price jumped to $1437 per ounce Thursday lunchtime in London – less than 0.8% below last week's new Dollar high – as European stock markets fell together with Eurozone government bonds.

Precious-metal trade in Asia had been "a one-way street" said one Hong Kong dealer, with silver "most responsive" to strong demand and rising to $37.80 per ounce in London – just over 1% below last week's new 31-year highs.


But gold bullion dealers in India – the world's No.1 physical consumer – reported "a few bookings," says Reuters, quoting a state-owned bank, as "traders still want clarity on prices.

"They are waiting for Friday's [US] jobs report."

Brent crude oil meantime jumped backed above $116 per barrel as base metals held steady.

The gold price in Sterling jumped towards new 2011 highs at £896 per ounce, but ahead of Thursday's "stress test" results on Irish banks – and ahead of next week's pre-announced rate hike – the gold price in Euros rose only to €32,600 per kilo, nearing the end of March more than 4% down for the quarter.

"The price of gold [in Euros] rallied strongly last year on the back of the Greek and Irish bailouts, but the current situation appears to be materially different," says the latest Commodities Weekly from Nic Brown and the team at French bullion bank Natixis.

Noting "the strengthening" of the European Financial Stability Fund by politicians, "Minor peripheral countries are no longer seen as a contagion risk for core countries," says Natixis, pointing to the lack of action in Spanish bond-insurance rates, as well as the Euro currency staying strong despite Portugal's sharp bond-market drop.

"Given that European investors were substantial buyers of gold in 2009...there is substantial scope for further disinvestment in coming months," says Natixis, "accelerated by any increase in interest rates by the ECB were the opportunity cost of holding gold bullion to rise significantly."

First estimates for March today showed consumer-price inflation across the 17-nation Eurozone jumping to 2.6% per year – well above the European Central Bank's 2.0% target.

"The ECB wants to bolster its anti-inflation credibility, and you don't do that by pulling out of a rate hike at the last moment," says Standard Bank currency strategist Steve Barrow in a note.

"Credibility has clearly been pulled through the wringer during the credit crunch," says Barrow, and while the Bank of England and US Fed "seem content to let this happen, the ECB is not."

Next week's rate-rise looks just a "one-off shot across the bows" of potential wage demands however, Standard's man concludes, because "Many Eurozone economies [now suffer] almost permanent recessions...the debt crisis drags on...and there's global shocks to bear in mind, such as the Japanese earthquake.

Due for release just after Thursday's London PM Gold Fix, Ireland's banking "stress tests" were expected to call for a further €25 billion in capital.

"The Euro could take a hit and put some pressure on the metals," warned Mitsui's London note to clients this morning, "if there is any truth to the talk that the remaining independent Irish banks may need to be nationalized."

Portugal's debt prices meantime fell again, pushing the yield offered by 10-year bonds up to a new post-Euro high of 8.33%.

Standing well over 4.50 percentage above comparable German Bund yields, Portuguese rates "have now breached [the] famous 'margin call' spread" at finance clearing house LCH Clearnet, notes the FT's Alphaville blog.

Breaching that level in November, Ireland's debt was hit with much higher downpayment requirements by LCH – a move since blamed for preciptating the Irish debt crisis and bail-out

"For once, it was not the rating agencies causing the trouble," writes Barbara Ridpath of the International Centre for Financial Regulation in the latest Alchemist magazine from the London Bullion Market Association.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

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 2011

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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