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London Gold Market Report 12/09/11 – BullionVault

from Adrian Ash
BullionVault
Fri 9 Dec., 10:05 EST

Gold Nears Weekend 2% Down as UK Quits New European “Fiscal Compact”, Politicians “Expect ECB Action”

WHOLESALE MARKET gold prices fell back to this week’s low of $1705 per ounce Friday lunchtime in London, as Asian equities closed sharply lower but Eurozone and US equities rallied following news of the “fiscal discipline” being agreed by political leaders meeting in Brussels.

All 17 heads of state in the currency union have agreed to being bound by European Commission approval of their national budgets, with “automatic sanctions” hitting any member whose annual budget deficit exceeds 3% of GDP.

That same level was set by the pre-Euro Growth & Stability Pact in 1997, but has since breached by all but two members – Luxembourg and Finland.

A further €200 billion is being added to the Eurozone’s Stability Fund rescue package for weaker states, with the start date brought forward to January 2012.

A further 6 or perhaps 9 non-Euro states will also join the new fiscal agreement, according to various press reports, but British prime minister David Cameron quit the talks last night after making what French president Nicholas Sarkozy called “unacceptable demands” to stymie treaty change and block a Europe-wide tax on financial transactions.

Gold prices measured in the single currency held flat around €41,200 per kilo – down some 1.7% for the week – as the Euro ticked lower vs. the Dollar.

US investors saw the gold price open New York trade 2.1% lower from last Friday’s finish of $1745 per ounce.

The price of silver bullion crept higher towards $32 per ounce, some 1.9% down for the week.
“It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the Euro-area members,” said Mario Draghi – president of the European Central Bank since October – of the overnight negotiations in Brussels.

Draghi yesterday cut Eurozone interest rates but repeated that the ECB cannot provide direct financial aid to member states under the terms of its treaty.

Quoting anonymous central-bank sources, the Reuters news-wire says the ECB will continue cap its government bond-buying – now totaling €270 billion – at €20bn per week. But last week’s move to provide unlimited funds to commercial banks “means that each state can turn to its banks, which will have liquidity at their disposal,” said France’s Sarkozy today.

Ireland’s minister for Europe Lucinda Creighton says she “and many other member states” expect the ECB to become more “pro-active…in the weeks ahead,” according to Reuters.

Greek, Italian and Portuguese government bonds meantime slipped in price Friday, pushing interest rates higher despite Germany’s Angela Merkel ceding her call for private-sector bondholders to “share the cost” of aiding over-indebted Euro states by suffering a write-down on their value.
“To put it bluntly, our first approach to [private-sector involvement], which had a very negative effect on debt markets, is now officially over,” said the European Union’s president Herman Van Rompuy this morning.

The Moody’s rating agency today cut the credit status of France’s biggest banks, saying that “Liquidity and funding conditions have deteriorated significantly.”

France’s own national credit rating is at risk, the Standard & Poor’s agency said this week, because of the weakness in its banking sector.
“Gold prices are still holding fairly well supported,” reckons VTB Capital’s Andrey Kryuchenkov in note, “and any negative reaction to the summit today would only see limited losses in gold as opposed to other…more volatile precious metals, also suffering from growth concerns. “On the downside [however] a break below $1700 would see losses to our key support at $1680 and the longer term January uptrend.”

Beijing is meantime planning to launch an aggressive investment fund to run $300 billion of China’s $3 trillion foreign exchange reserves, reports Reuters.

Part of the State Administration of Foreign Exchange (SAFE) – which acted to buy gold for China’s national hoard according to its last reserves update of 1054 tonnes in 2009 – an un- named official says the fund will target US and European assets.

Now the world’s second-largest private gold consumer, China saw consumer price inflation and industrial output both slip in October, under-shooting analyst forecasts at 4.2% and 12.4% respectively.
“Inflation is not a policy constraint [for the People's Bank of China] anymore,” believes Tao Wang, an economist at UBS in Hong Kong.

Future PBoC policy “is more a function of the economy slowing and foreign exchange inflows drying up,” says Wang.

Adrian Ash
BullionVault

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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