from Ben Traynor
Tuesday 13 December, 08:30 EDT
Gold "Remains Under Pressure" as Banks "Forced to Sell Crown Jewels" to Raise Dollars, But Physical Demand for Gold "Responding to Pull Back in Prices"
U.S. DOLLAR gold bullion prices climbed 1% Tuesday morning in London – reaching $1669 per ounce around lunchtime – while stock and commodity markets also regained some ground, despite mounting evidence of funding stresses in the banking sector.
Silver bullion meantime hovered around $31.30 per ounce – nearly 3% down for the week so far.
"Gold remains under pressure," says Walter de Wet, commodities strategist at Standard Bank.
"The next crucial support is said to be pegged at $1650," adds a note from Swiss gold bullion refiner MKS.
"If the metal happens to break this support than it is very likely to test lower, all the way down to $1500s."
Earlier in the day, gold bullion traded as low as $1652 per ounce – a drop of 3.4% from Friday's close.
"This pullback finally encouraged a response from the physical community," says today's note from UBS precious metals analyst Edel Tully.
"The physical response seen this week, though not yet enough to call a trend, should somewhat calm these investors."
"The price slide comes partly on the back of a very firm US Dollar," says Daniel Briesemann, Frankfurt-based analyst at Commerzbank.
"[We] do not exclude the possibility of a further drop in the price of gold in the short term. That said, we are still convinced that gold can serve mid- and long-term as a store of value."
Eurozone banks' overnight deposits at the European Central Bank hit another 2011 high yesterday, as banks deposited €346.4 billion – up from €334.9 billion last Friday, which was the previous record for the year.
The 3-month LIBOR-OIS spread – the gap between the London Inter-Bank Offered Rate (the rate at which banks lend to other banks) and the Overnight Index Swap rate (determined with reference to a published overnight rate such as the Federal Reserve's federal funds rate) rose above 45 basis points (0.45 percentage points) yesterday for the first time since for first time since May 2009.
Banks in Europe are raising cash by selling their "crown jewels", news agency Bloomberg reports. Spanish and Portuguese banks, for example, are selling "the most profitable parts of their business", says Azad Zangana, London-based European economist at asset manager Schroeders.
"They're being forced by regulators to sell them off...your business model stops working if you're being forced to lend only to an economy that’s going through a very deep recession."
"Many of [the shares in] those banks are trading at 50% of their book value," points out Symon Drake-Brockman, managing partner at London-based private-equity firm Pemberton Capital Advisors.
"If you can sell an asset at more than that, it's a cheaper way to raise capital [than issuing equity]." Hedge funds meantime saw redemptions more than triple in October compared to the previous month, according to independent Iowa-based hedge fund data and analysis provider BarclayHedge.
There are also reports that Dollar funding stress is impacting on the gold bullion market.
"People are lending gold out to raise Dollars," an unnamed senior metals banker told the Financial Times last week.
Over in the US, analysts expect today's Federal Open Market Committee meeting will yield no new policy developments, with a third round of quantitative easing considered unlikely by some.
"The base case is that QE3 probably will not unfold," reckons Sam Bullard, senior economist at Wells Fargo Securities, adding that the US economy has "got some momentum".
"The data that's been coming in has been stronger than expected and prior months' data have been revised up."
The Federal Reserve has held its main interest rate below 0.25% since December 2008.
Here in the UK, inflation as measured by the consumer price index fell to 4.8% last month – down from 5.0% in October – official data published today show.
"Looking ahead we can be reasonably confident that inflation will fall sharply at the start of next year as the contributions of VAT, energy and import prices decline," BoE governor Mervyn King said last month.
"The extent and the pace of the fall, however, remain uncertain."
The Bank of England has held its main interest rate at 0.5% since March 2009. That same month it launched its first round of quantitative easing – a £200 billion asset purchase program that in October grew to £275 billion.
"Yes: QE is inflationary," BoE chief economist Spencer Dale said in a speech today.
"And yes, inflation would almost certainly have been lower had we not undertaken the first round of asset purchases in 2009. But no, that does not mean that the MPC is any less determined to bring inflation back to target."
The BoE launched its initial round of QE, Dale explained, because it feared "that if the recovery faltered and our economy fell into a further prolonged recession, underlying inflationary pressures in our economy would weaken and there would be a risk that inflation would materially undershoot the inflation target in the medium term."
China's gold bullion imports from Hong Kong – viewed by many as a measure of its wider gold imports – hit a fresh monthly record in October, according to Hong Kong government statistics.
China imported 85.7 tonnes of gold bullion from Hong Kong that month – 50% higher than September's figure, and 40times what it shipped in from Hong Kong during October 2010.
India, by contrast, is set to see gold bullion imports for 2011 come in lower than those for 2010, according to the Bombay Bullion Association – which predict a 16% drop to 800 tonnes.
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
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