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Gold Seeing Resistance at $1667, New Lehman-style Crisis Could Engulf Banks

Commodities / Gold and Silver 2012 Jan 18, 2012 - 11:09 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleTHE SPOT MARKET price to buy gold climbed to $1658 an ounce during Wednesday morning's London trade – 0.8% up on Asian session lows – following reports that the International Monetary Fund is seeking to boost its lending capacity by $1 trillion.

European stock markets also recovered from an early dip, with industrial commodities also edging higher.

Prices to buy gold remained below the five-week high of $1667 hit yesterday, though by Wednesday lunchtime it was up 1.0% for the week so far.

"Gold is working on its third up week," says the latest market commentary from technical analysts at Scotia Mocatta.

"[Gold] faces critical resistance at $1667 [which] was the mid-November low. Our view is that while $1667 holds then big picture risk remains bearish."

Price to buy silver meantime hit a Wednesday morning high of $30.43 – 2.1% up on last week's close – after briefly dipping below $30.

"We believe the medium term risk for silver is another move lower to $26.10," say the Scotia analysts.

If silver falls below $28 an ounce "industrial end-users should certainly be active again," adds the latest precious metals update from German refiner Heraeus, noting that industrial silver demand appears held back at current levels.

The IMF meantime is asking Brazil, China, India, Japan and Russia to help it boost its lending capacity by $1 trillion, according to one anonymous IMF official who spoke to newswire Bloomberg. 

Oil-exporting nations have also reportedly been asked to contribute, as the IMF prepares for a potential deterioration in the Eurozone crisis.

"Recent developments accelerate the long-run trends of [global] economic convergence and declining US hegemony," said Bank of England Monetary Policy Committee member Adam Posen in a speech yesterday.

"Importantly, this will reduce shock-absorption and provision of public goods to the international system as a whole."

In October last year, Brazil's finance minister Guido Mantega said he was opposed to the idea of Brazil buying European government bonds, adding that any assistance should come via the IMF. 

The World Bank today warned that ""the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains."

"In particular," says the twice-yearly Global Economic Prospects report, "the willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured. Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out."

Greece meantime will resume negotiations with its creditors over the level of 'haircuts' private sector bondholders, such as banks, should take. 

Talks broke down last Friday, with Charles Dallara, managing director of the Institute of International Finance, which is representing the banks, saying that some Eurozone government "collaborators" were not following an agreement reached last October that private sector losses should be 50%. 

There is also ongoing uncertainty over what would constitute voluntary or involuntary losses – and thus what would represent a formal default – amid fears that credit default swaps, a form of bond insurance, could be triggered.

"The policymakers don't want to reward the hedge funds for their perceived participation in the sovereign problem," says Ira Jersey, New York-based interest-rate strategist at Credit Suisse.
As things stand, Greece will be unable to make a €14.5 billion bond payment that comes due on March 20. 

On the currency markets, the Euro gained against the Dollar Wednesday morning, breaching $1.28 for to make a 1.5% rally from last week's low. The gold price in Euros meantime – in contrast to the Dollar price to buy gold – fell throughout Wednesday morning, approaching Asian session lows and hitting €41449 per kilo (€1289 per ounce).

Stocks also rallied, with the FTSE in London up 0.8% by lunchtime from its morning low.

"As we see it [though] a bearish reversal in risk sentiment is entirely plausible once the morsels of positive news that have sustained it so far in 2012 dry up and markets are forced to confront the larger issues," notes one gold bullion dealer here in London, adding that a "dramatic risk-off move" could lead more investors to buy gold, "although likely US Dollar strength could limit any gains.

UK unemployment meantime rose to a 17-year high last month, hitting 2.68 million, figures from the Office for National Statistics published Wednesday show. The unemployment rate meantime rose to 8.4% last quarter, the highest level since the start of 1996.

Over in China, a number of analysts report rumors that the central bank may cut the reserve requirement ratio – the amount of cash banks must hold relative to their assets.

"This is...adding to support for precious metals, [but] historically, changes in the reserve requirement have little bearing on commodity prices over the long term," says Standard Bank commodity strategist Marc Ground.

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 2012

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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