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Gold retests $1800 as Italian Bond Yields hit "Dangerous Levels

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

By: Ben_Traynor


Best Financial Markets Analysis ArticleTHE DOLLAR gold price climbed to $1796 an ounce Tuesday morning London time – 2.3% up on last Friday's close – as stocks rallied and government bonds sold off ahead of a key budget vote in Italy.

The previous day, gold hit its highest level in nearly seven weeks during Monday's US trading, when it rose to $1798 per ounce.

"[The gold price] continues to grind higher and targets the all-time high around $1921," says Commerzbank technical analyst Axel Rudolph.

The silver price hovered around $34.85 per ounce on Tuesday morning – 2% up on last week's close – while other industrial commodities were also broadly flat.

Yields on 10-Year Italian government bonds meantime hit 6.74%– their highest level since 1997.
Italian bond yields "are really reaching very dangerous levels," reckons Alessandro Giansanti, credit market strategist at ING in Amsterdam.

"If we move above 7% it will become a completely different challenge for Italy to find non-domestic buyers."

Italy's Chamber of Deputies will take a vote on last year's budget plan later on Tuesday, in what will be the first vote since three members of prime minister Silvio Berlusconi's party defected to the opposition – and the first since six others publicly called on him to resign. 

The vote is seen by many observers as a test of whether the government still has a majority, and thus whether it will be able to deliver reforms pledged by Berlusconi in a letter to European Union leaders last month.

"What we are expecting from Italy is that Italy will implement all the measures which have been announced in Silvio Berlusconi's letter," Jean-Claude Juncker, chairman of the Eurogroup of single currency finance ministers, said Monday.

"It's essential now that Italy stick to its fiscal targets," added Olli Rehn, European commissioner for economic and monetary affairs.

The European Commission is due to send representatives to Rome this week to monitor Italy's progress on reforms.

Greece meantime remained without a government Tuesday lunchtime, as political parties continued to negotiate who should be the new prime minister. European leaders have asked Greece to commit in writing to the terms of its bailout, in order to receive the next tranche of funding, worth around €8 billion.

Japan has said it bought 10% of the €3 billion-worth of bonds auctioned by the European Financial Stability facility yesterday. Back in January, Japan bought 20% of a €5 billion issue of 5-Year EFSF bonds.

"The decision to buy fewer of the EFSF bonds reflects the government's caution," reckons Junko Nishioka, chief Japan economist at RBS Securities in Tokyo.

"The Euro's been falling and there's a risk it may drop even more."

European finance ministers – who will hold a second day of meetings today – have pledged to implement a scaled-up rescue fund by next month.

"It's all very well saying we've got a firewall," said Britain's chancellor George Osborne
"But the Eurozone now need to convincingly show the world that the firewall exists and it's got sufficient resources in it."

"This isn't a crisis you can solve quickly," warned Dutch finance minister Jan Kees de Jager on Monday.

 "It is a monster with many heads."

France meantime announced its second austerity package in less than three months yesterday. The measures are aimed at saving €7 billion next year, in an effort to meet a deficit target of 4.5% of GDP. 

The new measures "should not alleviate any of the concerns some market participants have over the country's triple-A rating," warns a note from economists at Credit Suisse.

Ratings agency Moody's last month warned that it was considering changing France's credit outlook from 'stable' to 'negative'. Were France to lose its AAA-status, it could compromise its position to aid other Eurozone members.

"While gold might be enjoying some safe-haven buying, we warn that should the Eurozone debt crisis result in a drying-up of the region's money markets, all commodities will suffer, including gold," says a note from Standard Bank commodities strategist Marc Ground.

China's gold imports hit a record high in September – a six fold increase year-on-year – according to data from the Hong Kong government.

"In September we saw some bargain hunters come back into the market," Janet Kong, managing director of research at Chinese investment bank CICC told the Financial Times, citing that months dip in the gold price.

"The [Shanghai Gold Exchange] physical premium is below zero this morning," said a note from the Mitsui Precious Metals Hong Kong desk on Tuesday, adding that this indicates "that physical demand is almost non-existent at current price levels."

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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