Gold "Testing $1550" as Stocks Plunge, German Bund Yields Vanish, Investors Flee Risk for Cash

By: Adrian_Ash

The WHOLESALE gold price bounced from a 4-session low at $1552 per ounce Wednesday morning in London, rallying with the Euro currency as world stock markets slumped.

The Athens stock market hit a fresh 22-year low, and Wall Street futures pointed 0.7% down, while US Treasuries rose sharply together with Japanese, German and UK bonds.

The Brazilian Real continued to weaken, hitting new 3-year lows on the forex market despite the Banco Central do Brasil selling some $2.8 billion in US Dollars via currency swaps over the last 3 trading days in a bid to stem the slide.

As recently as March, Brazil's government accused the United States of under-pricing the Dollar, cutting its own interest rates to try and devalue the Real in what ministers repeatedly called a "currency war" threatening the country's exports and attracting inflows of "hot money" to its strong natural resources sector.

Commodity prices today fell to a 5-month low on Standard & Poor's GSCI index.

Silver prices held over $1 below last week's finish, trading at $27.75 per ounce as the start of New York dealing approached.

"There was no real dip buying" overnight as the gold price bottomed, says one wholesale dealer in a note, although Hong Kong premiums over benchmark London prices held firm between $1.00-1.50 per ounce Wednesday.

"Gold is acting more as a risky asset," Robin Bhar of Société Générale is quoted by Thomson Reuters, "and everything is tumbling this morning ahead of the informal [Eurozone] finance ministers meeting [tonight], where nothing good is really expected."

"Gold has pulled back to test support at $1550-1500," says a note from Bank of America-Merrill Lynch technical analysts Mary Ann Bartels and Stephen Suttmeier, quoted by BusinessWeek.

"This support is holding, which sets up gold for a rally.

"Our longer-term view remains that gold is in a secular bull market with upside potential to $2000-2300 to as high as $3000 in coming years."

In Athens on Wednesday, former prime minister Lukas Papademos sought to "clarify" comments quoted by Dow Jones Newswires yesterday in which he said "It cannot be excluded preparations are being made to contain the potential consequences of a Greek Euro exit."

Prime minister Fredrik Reinfeldt of Sweden – like the UK, a European Union member still outside the Eurozone currency bloc – today repeated last week's comments from finance minister Anders Borg that the Greek situation was "very close to the end of the road."

Germany meantime sold Germany sold €4.5bn of two-year government bonds Wednesday morning at an all-time record-low of 0.07% in annual yield, dispensing with a formal interest coupon altogether.

"There is no way of introducing [pan-Eurozone government bonds] under the current treaties," said an un-named official in Berlin today, rejecting an idea widely mooted as a way of using Germany's strong credit rating to finance weaker states' deficits.

"Indeed, there is an explicit ban on them. That's a firm conviction which will not change in June."

Citigroup analysts said in a new report that the odds of a Eurozone break-up are now at 19% according to financial markets.

"In the event that the implied probability of a break-up increases further," Citi believes, "then [2-year German bond] yields could fall to minus 0.75%" as more capital pours into 'safe haven' debt, driving the price higher.

Thomson Reuters' latest poll of portfolio managers says they're now holding more cash than any time since the 8-year high hit in January.

"Our Sentiment Indicator dropped to almost zero one week ago, and has failed to pick up," says Société Générale's cross-asset quant analysis research.

"The extent and consistency of this move suggest taking this signal seriously, and staying away from long risk positions for the moment."

Tuesday saw the $68 billion SPDR Gold Trust ETF shed 17.5 tonnes from the gold backing its shares, the sharpest 1-day redemption since August.

"Event risk is stacked towards the tail end of the week," says a note from Japanese conglomerate Mitsui.

"After new home sales [today], on Thursday we have a slew of European PMI's, US goods orders and jobless claims plus Comex option expiry, where a considerable chunk of open interest is situated at $1600."

Data from Thomson Reuters showed a marked rise in put options, with speculators looking to sell gold futures at $1550 and $1575 per ounce in particular.

Meantime in India, where the government in New Delhi has acted to curb gold imports in 2012, "Scrap gold sales have picked up by 30% in the span of just one week as gold prices in local terms surged," says bullion market-maker HSBC.

If consumer selling continues, "India may require lower gold imports," says the bank. But "weak bullion import demand may present headwinds to any near-term gold rally."

By Adrian Ash
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

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