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Gold Sideways Trading Supported by Physical Demand and Debt Warnings

Commodities / Gold and Silver 2012 Feb 14, 2012 - 07:57 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleTHE WHOLESALE market gold price eased to $1713 per ounce Tuesday lunchtime – 1.1% down on the previous day's high – while stock and commodity markets were broadly flat despite several European countries having their sovereign ratings or outlooks lowered last night.

The silver price dipped to $33.37 per ounce – a 0.8% fall on last week's close.

Following falls Tuesday's Asian session, the gold price rallied in early London trading, at one point touching $1721 per ounce.

"Physical demand continues to place a floor on prices," reckons Standard Bank commodities strategist Marc Ground, who expects the gold price "to continue tracking Euro/Dollar movements today".

"As gold has been trading sideways since the correction on February 3," adds the latest technical analysis from bullion bank Scotia Mocatta, "we are neutral until we see a downside break of the low $1700s".

Ratings agency Moody's downgraded Italy and Spain on Monday. Malta, Slovakia and Slovenia were also downgraded, while Austria, France and the UK all had the outlook on their Aaa ratings changed to 'negative'. 

"[Europe's] policy makers have made steps forward but we do not think they have done enough to reassure the market that we are on a stable path," says Alistair Wilson, Moody's chief credit officer for Europe.

Fellow ratings agency Standard & Poor's last month stripped both Austria and France of AAA status, while affirming the same rating for the UK. Moody's is the first of the three major ratings agencies to announce a negative outlook on the UK's rating, saying yesterday that it expects Britain's debt-to-GDP ratio to hit 95% over the next two or three years.

"For me it was a reality check," British chancellor George Osborne said on BBC radio Tuesday morning.

"It's yet another reminder that Britain doesn't have an easy way out of its economic problems...people have a choice about where to put their money. If they don't see Britain dealing with its problems, they will take their money elsewhere."

Also in the UK, annual consumer price inflation fell to 3.6% last month – down from 4.2% in December – though this remains above the bank of England's official target of 2.0%.

Forced to write his 14th open letter since 2007 explaining why UK inflation has breached the official upper limit of 3.0% per year, Bank of England governor Mervyn King today blamed "increases in VAT [sales tax], import prices and energy prices that were largely unexpected." 

Those factors are now "waning", says King, repeating his forecast – first made in March 2009 – that "inflation will fall back to around target" in the next 12 months. 

Inflation on the UK Consumer Price Index has averaged 3.8% over the last three years. The gold price in Sterling has risen 70% over that time. 

Last week the Bank of England extended its money-creation program, first launched three years ago, from £275 billion to £325bn, using the money to buy more than 27% of all UK government debt currently in issue.

Elsewhere in Europe, industrial production in the 17-nation Eurozone as a whole fell 2.0% in the year to December, figures published Tuesday by European Union statistics body Eurostat show. Across the 27-member European Union the fall was 0.9%.

Greek leaders meantime were today looking to identify €325 million in budget cuts ahead of tomorrow's Eurozone finance ministers meeting, where they hope European leaders will sign off on Greece's €130 billion second bailout.

Over in Washington, US president Barack Obama called for additional government spending and higher taxes on the wealthy as part of his 2013 budget proposals to Congress on Monday. 

The president called for $800 billion for job creation and investment in infrastructure, according to news agency Reuters, which says projected deficits would add over $7 trillion to the US national debt over the next decade. In addition, Obama is seeking a top individual income tax rate of 39.6% next year, according to newswire Bloomberg.

The world's first Yuan-denominated gold exchange traded fund launched in Hong Kong Tuesday. The Hang Seng RMB gold ETF – which is designed to track the London Fix price – made a "weak" debut, according to Reuters.

Bloomberg reports that the equivalent of 3.18 kilograms of gold were traded – around $176,000 worth based on the gold price at this morning's London Fix.

"It will take time for investors to understand the product before they jump in," says Hou Xinqiang, gold analyst at Jinrui Futures in China.

"Besides, Hong Kong has a lot of gold investment products and the market is already very savvy, so investors will probably take some time to assess its selling point."

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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