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Gold Bounces as Bundesbank "Not the Time to Sell" the Ultimate Safe Haven

Commodities / Gold & Silver 2009 Jan 28, 2009 - 07:55 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF WHOLESALE SPOT BULLION bounced from an early 2% drop in London on Wednesday, picking up to $889 per ounce after the German Bundesbank denied rumors it was selling bullion to help fund the federal government's new €50 billion economic stimulus package.

The US Dollar also fell, slipping to $1.33 per Euro and $1.43 per British Pound and helping knock the Gold Price in Euros and Sterling to €666 and £620 per ounce respectively – more than a 5% discount to the all-time record highs hit on Monday.


World stock markets rose, meantime, with banking shares jumping sharply on news that the Federal Deposit Insurance Corp. (FDIC) may launch a "bad bank" to buy up toxic investments from commercial US banks.

The Federal Reserve – already holding $2 trillion of "toxic assets" taken from private-bank balance sheets – was due to detail its current monetary policy just after 2pm New York time.

"Everybody's talking about a big financial crisis," said Steffen Kampeter, budget spokesman for German leader Angela Merkel's Christian Democrat Party in Berlin, late on Tuesday.

"The Bundesbank has to consider, within its own autonomy, whether it will now use gold and currency reserves for refinancing or other areas."

A press officer for the central bank said today that rumors it was already selling gold on Kampeter's demands were "unfounded", but she added that the bank is "always free to assess its options on gold sales."

A member of the 15-nation Central Bank Gold Agreement , the Bundesbank holds 3,400 tonnes of gold on its balance-sheet – some 11% of Official Gold Reserves Worldwide .

The current CBGA – which limits European central-bank gold sales to 500 tonnes per year – is due to expire this Sept.

Last summer the Bundesbank re-stated gold's "confidence and stability-building function", especially given the risks presented by the global financial crisis.

To date, the German central bank has sold barely 20 tonnes of its 2004-2009 quota, and only ever for minting Gold Coins sold to the retail market.

Writing in today's Berliner Zeitung newspaper, "I remind all those who hastily talk about the sale of gold reserves of the negative experiences of many finance politicians, including Theo Waigel," says German finance minister Peer Steinbrück, referring to his predecessor.

Waigel created a political storm – and lost out to then-Bundesbank chief Hans Tietmeyer – when he proposed revaluing and selling a portion of Germany's gold hoard in 1997 in anticipation of European monetary union in 1997.

"Close coordination with the Bundesbank prevents you from falling into a media trap. I can only advise in favor of that," adds Steinbrück today.

Earlier this month, Steinbrück dismissed the UK government's financial stimulus package as "crass Keynesianism" before agreeing to a €50 billion stimulus in Germany this week.

"Every time the Gold Price is rising, and every time the Gold Price is at some important level, there is talk of sales," says Eugen Weinberg in Frankfurt for Commerzbank, speaking to Bloomberg.

"But I don't think there is any chance of it happening. It is not in the interests of the central banks at the moment to sell this ultimate safe haven."

"We would imagine this is not the last time a political party or influential public figure asks for similar [gold-selling] actions in other nations," agrees today's note from Mitsui, the precious metals dealer, in London – heart of the world's 24-hour Gold-Dealing Community .

Also noting today's interest-rate decision from the Federal Reserve, however – plus the expiry of February contracts in the options market – "one would expect some participants to remain risk adverse for much of today," it says.

Away from the Western Gold Investment market, meantime, "The sudden upsurge in Gold Prices has seen traders selling at 3% discount" to spot prices in Mumbai, center of gold trading in India – the world's hungriest consumer Gold Market – reports the Business Standard .

Retail buyers have "stayed away" in anticipation of lower prices to come, it reports.

"This is a normal phenomena whenever the price spurts suddenly," says Ashok Minawala, chairman of the All India Gems & Jewellery Trade Federation. "Retail investors keep off the market, but they soon absorb the [new higher] price and come back after two to three days."

Gold analyst Bhargav Vaidya at B.N.Vaidya & Associates – also in the India capital – adds that "Such discounts are offered only when wholesale stockists have bought at lower prices and run short of money to keep the ball rolling."

Back in the international markets, US crude oil futures meantime slid towards $41 per barrel today, ahead of weekly data showing stockpile inventories.

Government bond prices rose across the board, pushing yields lower for new buyers but holding above last month's multi-decade lows.

And back here in London, shares in the Lloyds TSB banking group added 31% Wednesday morning after Citigroup analysts rated it a "buy" and said the risk of Bank Nationalization – although possible – looks "exaggerated [and] more than adequately discounted in the current valuation."

"Last week gold profited from safe-haven buying," reckons Peter Fertig, a consultant with Dresdner Kleinwort in Hainburg, Germany.

"Some investors who bought gold on those fears might be switching back into stocks," he told Bloomberg News today.

The early 2% drop seen Wednesday "is related to the movements we're seeing in financial stocks."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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 2009

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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