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Gold Falls, Eurozone Debt Catastrophe And America's Lost Decade

Commodities / Gold and Silver 2011 Jun 13, 2011 - 07:22 AM GMT

By: Ben_Traynor

Commodities Best Financial Markets Analysis ArticleWHOLESALE MARKET gold prices fell Monday morning London time, dropping to $1525 per ounce – 2.3% off last month's record high – while stocks were flat and commodities mixed, as continuing economic worries prompted talk of catastrophe and economic stagnation.

Silver prices meantime dropped to $35.40 per ounce – 2.2% down on Friday's close.

"Disappointment selling from recent entrants" weighed on gold prices, reckons one bullion dealer here in London, citing gold's failure to sustain gains above $1555.

But low yields on assets such as government bonds "will continue to provide a gold supportive environment." 

Gold prices need "a sustained breach of $1550" bin order to gather sufficient momentum to continue their longer-term uptrend, reckons Ong Yi Ling, analyst at Phillip Futures in Singapore.
"Until then, gold could be range-bound with support established at $1525."

"Europe's debt crisis remains a long-term headache," adds Hwang Il Doo, senior trader at KEB Futures in Seoul, who says he continues to believe gold prices will "move much higher from the current level".

Greece meantime announced a €28 billion austerity program on Friday, which includes cuts to state pensions.

"Never in my life did I imagine that we would need to slash pensions in order for the state to continue to pay any pensions at all," said Greek prime minister George Papandreou in a newspaper interview on Sunday, adding that a Greek default would be "catastrophic".

The austerity program needs to approval of Greece's parliament before it can be implemented.
Financial aid pledged to Greece is subject to "strict conditions", including "massive and swift privatizations", new Bundesbank president Jens Weidmann told Germany's Welt am Sonntag newspaper on Sunday.

"If these commitments are not upheld, there will no longer be a basis for additional aid...Greece would have made its own choice and should assume the undeniably dramatic consequence of a default on its payments."

The United States, meantime, is "halfway to a lost economic decade", says former US Treasury Secretary Lawrence Summers, writing in the Financial Times.

Summers argues that "stimulus should be continued and indeed expanded", for example by cutting payroll tax for employers as well as employees.

"Discussions about medium-term austerity need to be coupled with a focus on near-term growth," he says, adding that recoveries have in the past been "murdered by the Federal Reserve with inflation control as the motive".

The government last December cut Social Security payroll tax from 6.2% to 4.2%, effective for one year.

The Congressional Budget Office projects that the federal deficit will hit $1.4 trillion this year, nearly 10% of US GDP.

Over in Beijing, meantime, data published by the People's Bank of China show Chinese lending in May was down sharply from a year earlier – 552 billion Yuan, compared to last May's figure of 639 billion. M2 – the PBoC's broadest measure of money supply – was up 15.1%, its slowest pace since 2008.

"This provides another data point highlighting the growth risk," says Tao Dong, economist at Credit Suisse in Hong Kong. 

"I think the economy is heading to a soft landing in the second half of 2011, but the risk of a hard landing seems to be on the rise."

The "sustained building of the middle class" in India and China should support gold prices, reckons Richard O'Brien, chief executive of Newmont Mining.

"Five years from now, $2,000 gold will probably be in reach."

Back here in London, the Bank of England's latest Quarterly Bulletin reports that there is "little evidence that inflation expectations are feeding through into wages" and that "long-term inflation expectations remain anchored by the [current] monetary policy framework".

The Bank's chief economist Spencer Dale however added a note of caution.

The risk of inflation expectations diverging significantly from the Bank's 2% target "remains a key area of concern", since inflation expectations "can only be assessed imperfectly.

Consumer price inflation in April was at 4.5% year-on-year, and has been above the Bank's upper tolerance of 3% for 14 consecutive months.

By Ben Traynor

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

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(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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