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Gold Outlook Positive following Euro Stagnation, Paulson Hedge Fund's Position

Commodities / Gold and Silver 2011 Aug 16, 2011 - 08:14 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleSPOT MARKET gold bullion prices hovered around $1780 an ounce Tuesday morning London time – up 2.9% on yesterday's low – as stocks and commodities fell and US Treasury bonds rose after news of economic slowdown in the heart of the Euro area.

"Disappointing Eurozone GDP figures...have further dampened sentiment, encouraging investors to seek the relative safety of precious metals," says Marc Ground, commodities strategist at Standard Bank.

Earlier on Tuesday, gold bullion was "supported by Chinese buying...but flows have been limited" according to one Hong Kong bullion dealer.

Silver bullion prices meantime fell to a low of $39.32 per ounce – 0.6% below where they closed on Friday – before rallying around lunchtime in London, heart of the world's professional bullion market.

The volume of gold bullion traded in London's wholesale market rose 4% in July compared to the previous month, new data from the London Bullion Market Association said today.

By contrast, the average number of silver bullion ounces transferred went down – falling 7.5% month-on-month – but from July 2010, silver trading leapt 180% by volume and by 490% by value.

Gold bullion transfers in London rose 11.6% year-on-year by volume, up by 47.2% by value.

"Gold looks vulnerable...short-term,"  warns Standard Bank's Ground, noting "the strong drop-off in speculative longs" held by traders in US gold futures last week. 

The 9% cut in noncommercial – so-called speculative – trading positions on the Comex exchange "points to a market running out of momentum," says Ground. 

But "the short-term outlook for gold remains positive," counters VTB Capital analyst Andrey Kryuchenkov, because "There are still far too many macro uncertainties."

"Everything is pointing toward stagnation in the Euro area in the second quarter," said Juergen Michels, London-based chief Euro area economist at Citigroup, on Tuesday morning, as French President Nicolas Sarkozy and German chancellor Angela Merkel were due to meet in Paris for further discussions of the ongoing European debt crisis.

The issue of 'Eurobonds' – joint-government bonds collectively backed by all Eurozone nations – is expected to be on the agenda despite German denials.

"We don't plan on mentioning Eurobonds," Merkel spokesman Steffen Seibert told reporters on Monday.

"It's simply not a sensible idea."

But "the alternative [to Eurobonds]," counters Anton Boerner, head of Germany's BGA export association, "is the markets attack Italy, then France, we lose our AAA-rating and then it's our turn."

"We'll end up paying three times over. This way we pay just once."

Germany's economic growth slowed to 2.7% year-on-year in the second quarter of the year – down from a 4.9% annual growth rate in Q1 – according to data published Tuesday.

Eurozone-wide growth meantime slowed to 1.7% per year in Q2 – down from 2.5% the previous quarter.

Here in the UK, consumer price inflation rose to 4.4% in July, up from 4.2% the previous month. The Bank of England – which has held its benchmark interest rate at 0.5% for over two years – has an official CPI inflation target of 2%.

Retail price inflation, and alternative measure of the cost of living, remained at 5%.

Over in New York, hedge fund boss John Paulson meantime held onto his substantial gold bullion position during the second quarter of the year, documents filed with US regulator the Securities and Exchange Commission show.

"Paulson...believes that gold is earmarked to move substantially higher," reckons Mark Luschini, chief investment strategist at Janney Montgomery Scott, which manages $54 billion in assets, citing "Dollar-debasing" US monetary policy as a potential driver of higher Gold prices.

Paulson holds a $4.6 billion of shares in SPDR Gold Trust (ticker: GLD) – the world's largest gold ETF – news agency Reuters reports.

Fellow hedge fund manager George Soros, by contrast, cut his holdings in the GLD by 13% in Q2, according to the newswire. This leaves Soros holding around $6 million of GLD shares – down from around $800 million at the start of the year.

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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