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Sovereign Debt Worries Could Spur Gold Rally

Commodities / Gold and Silver 2011 Nov 22, 2011 - 10:57 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleU.S. DOLLAR prices to buy gold climbed to $1699 an ounce Tuesday morning London time – though still 1.5% down for the week so far – following yesterday's sharp drop which saw gold fall to a four-week low of $1668.

Sovereign debt concerns meantime continued to make headlines in both Europe and the US, as Spain saw its borrowing costs rise further and US politicians lamented the deficit super committee's collapse.

"[The] $1667.74 [level] underpins [gold] at present," says Commerzbank technical analyst Axel Rudolph.

"While trading above it on a daily closing basis, the medium term trend in the gold price remains bullish...failure here [though] will most likely be the beginning of a much deeper correction."

Silver meantime climbed to $32.03 per ounce – 1.1% off last week's close – while stocks and commodities also edged higher, following selloffs on Monday that saw the Dow lose over 2%.

Gold has now given up its gains for November – with prices to buy gold currently below where they started the month.

On the currency markets, the Dollar lost some ground against the Euro – though it remains 2.3% up against the troubled single currency since the start of November.

"Rising near-term uncertainty should be positive for gold," says a note from UBS today.

"Particularly if it hurts the US Dollar, though it is not clear whether the US debt issue will manage to distract investors from their fixation on Europe."

Spain paid an average yield of 5.11% earlier today when it auctioned three months Treasury bills – twice what it paid last month.

"Lower prices and higher yields are scaring investors rather than attracting new demand," says Gianluca Salford, fixed income strategist at JPMorgan Chase in London.

Spain paid an average yield of 6.97% last Thursday when it sold €3.56 billion of 10-Year government bonds. Quoted 10-Year yields, however, fell that day (though they have subsequently risen, hitting 6.6% this morning). 

The Financial Times explains that Spain asked data providers Bloomberg and Thomson Reuters to disregard the new bond when quoting their 10-Year benchmark yields and reference an older issue instead.

Monday evening brought confirmation that the US congressional 'super committee' has failed to reach an agreement on how to cut the country's deficit by $1.2 trillion over 10 years – with President Obama blaming Republicans' refusal to consider tax increases.

"They simply will not budge from that negotiating position," Obama said.

"So far that refusal has been the main stumbling block that has prevented Congress from reaching an agreement to further reduce the deficit."

"It is really discouraging," says former White House budget director Alice Rivlin – who has previously said Congress should be looking for $4 trillion in deficit cuts.

 "They could not agree even on the smaller challenge of $1.2 trillion...I do not see a way to get to the big deal before the [presidential] election [next year]."

Despite the talks' collapse, all three major ratings agencies reaffirmed their respective sovereign credit ratings for the US. Moody's, however, maintains a negative outlook, while Fitch – which said in August that super committee failure would likely lead to "negative rating action" – is due to complete a review of its US rating by the end of the month.

"[The] super committee's budget impasse still has potential to spur a gold rally," said a note from HSBC this morning.

"Emerging market and central bank buyers may take advantage of further drops [to buy gold] as they did in September."

Here in the UK, public sector net borrowing fell to £3.4 billion in October – down from £11.4 billion the previous month – data published this morning show. Despite the fall, however, forecasts due to be published next week by the Office for Budget Responsibility will suggest the government is behind schedule on its deficit-cutting targets, the FT reports.

China – the world's second-largest source of private gold demand – could post its first trade deficit for two decades in 2012, according to Xia Bin, an academic adviser to the People's Bank of China, the country's central bank.

"The US economy won't be good next year and Europe will be worse, meaning weak external demand for China," Xia told news agency Reuters on Monday.

Xia has repeatedly called for the PBOC to buy gold with its foreign exchange reserves.

In India meantime, a working paper from the central bank, the Reserve Bank of India, last month suggested that India too should look to again buy gold for its official reserves – and add to the 200 tonnes it bought from the International Monetary Fund in 2009.

The volume of gold held by gold-backed exchange traded products meantime – which include the major gold ETFs – hit an all-time high of 2339.97 tonnes last Friday, according to data compiled by news agency Bloomberg.

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 2011

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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