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Gold Making Gains on Stronger Dollar, AAA-rated Debt "An Endangered Species"

Commodities / Gold and Silver 2012 Jul 24, 2012 - 12:43 PM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleU.S. DOLLAR gold prices fell to $1573 an ounce Tuesday morning in London – a few Dollars above last week's low – as stocks and commodities also traded lower, while US Treasuries were flat and German bunds fell after Germany's credit rating was placed on negative outlook.

Silver prices briefly dipped below $27 per ounce – 1.2% below where they began the week.

On the currency markets, the Euro briefly dropped below $1.21 for the second day in a row, while Euro gold prices hovered around €1300 per ounce – 3.2% off its six-month high. The gold price in Euros has gained 8% since the middle of May.

"Thanks to the Euro's depreciation vis-a-vis the US Dollar, gold in Euro terms has been making gains for some time now," says a note from Commerzbank.

Ratings agency Moody's said last night that it is placing three Aaa-rated Eurozone sovereigns, Germany, Luxembourg and the Netherlands, on negative outlook.

"There is an increasing likelihood that greater collective support for other Euro area sovereigns, most notably Spain and Italy, will be required," said a statement from Moody's.

"Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the Euro area is to be preserved in its current form."

The German finance ministry responding by insisting that "Germany will, through solid economic and financial policy, defend its 'safe haven' status and continue to maintain its responsible anchor role in the Eurozone".

Moody's also said it will "assess the implications" of recent Eurozone developments for Austria and France, whose Aaa ratings the agency put on negative outlook in February.

"In all large industrialized countries, AAA is an endangered species," says Joerg Kraemer, chief economist at Commerzbank.

"They're all under fire."

Spain and Italy meantime both announced short-selling bans on Monday following heavy stock market losses. Spain's regulator CMNV has banned short-selling – by which traders bet on a fall in prices – on all Spanish securities for three months, Reuters reports. Italy's Consob has banned the short-selling of 29 banking and insurance stocks for one week.

Spain's Ibex stock index saw the biggest loss of major European bourses in Tuesday morning's trading, falling 2.7% by lunchtime, while Italy's FTSE MIB index was down 1.3%.

Both nations introduced short-selling bans last August, which also saw similar bans implemented by Belgium and France.

Benchmark yields on Spanish 10-Year government bonds continued to rise Tuesday to just below 7.6%, after two Spanish regions confirmed over the weekend that they plan to seek financial aid from the government in Madrid. Several other regions are also expected to ask for bailouts.

Despite this, Spain managed to sell just over €3 billion of three-month and six-month debt at an auction this morning, although borrowing costs were higher than at a similar auction last month.

In Italy, ten major cities, including Milan, Naples and Turin, are on the verge of financial collapse, according to a report in newspaper La Stampa, which also reports on growing calls on social media sites for a return to the Lira, as well as for people to withdraw funds from their bank accounts.

Italian 10-Year bond yields hit six-month highs at over 6.4% on Tuesday.

CME Group, the futures and options exchange operator that runs the New York Comex, announced Monday that is "exploring the concept of having clearing houses or other depositories hold all customer segregated funds".

A statement from CME Group said it "is appalled at the recent misuse of segregated funds by two firms, MF Global Inc. and PFG", adding that "the current system in which customer funds are held at the firm level must be re-evaluated".

Over in China – which has overtaken India in recent months to become the world's largest source of demand to buy gold – manufacturing has contracted at a slower pace this month than last, according to preliminary purchasing managers index data published by HSBC today.

HSBC's flash PMI for this month was 49.5, up from 48.2 in June, with a figure below 50 indicating sector contraction. The survey however showed a faster rate of employment contraction, with the sub-index for employment growth hitting its lowest level in 40 months.

"[This] should ring alarm bells in Beijing," says Nikolaus Keis, economist at UniCredit, who adds that he expects authorities to respond with fiscal and monetary stimulus measures.

"Creating enough jobs for millions of new graduates and rural migrant workers is crucial for the government."

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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