from Ben Traynor
Tuesday 20 December, 08:45 EST
Gold "Could Be Weak but Volatile" to End of Year, "Large Scale Liquidity" Required to Restore Confidence to Markets
SPOT MARKET gold prices climbed to $1608 an ounce Tuesday lunchtime in London – a 2.8% gain from last week's low – while stocks and commodities traded higher, with the exception of the FTSE in London which fell lower.
Silver prices rose to $29.51 per ounce – still 0.9% down on last week's close – while major government bond prices fell and the Euro gained amid signs of progress on the Eurozone crisis.
"Liquidity in the precious metals space remains light," warns Walter de Wet, commodities Strategist at Standard Bank.
"Short-term the [precious metals] complex is likely to remain vulnerable to bouts of long liquidation amid concerns over funding levels," agree analysts at Swiss refiner MKS.
Despite this morning's rally, gold remains around 8% down since the start of December.
"Profit-taking and year-end book squaring by large investors, including mutual funds and macro hedge funds...help explain the recent drop in prices," says a note from HSBC.
"Gold prices may stay weak but volatile for the rest of this year, we believe, as trading volume is likely to dry up in the run-up to the year-end holidays."
Eurozone finance ministers agreed Monday to lend an additional €150 billion to the International Monetary Fund. Four other European countries outside the Eurozone – Czech Republic, Denmark, Poland and Sweden – also said they will contribute extra funds.
Britain meantime did not offer additional funding, but added it will "define its contribution" early next year.
"The UK has always been willing to consider further resources for the IMF, but for its global role and as part of a global agreement," said a statement from HM Treasury.
Germany's Bundesbank pledged €41.5 billion – but on condition that these funds go to the IMF's general resources and are not earmarked for Europe, news agency Bloomberg reports.
Boosting the IMF by €150 billion is "obviously a small-scale solution" says former UBS chairman Peter Kurer.
"What really would be needed in the ideal world would be Eurobonds or a substitute which can bring large-scale liquidity and confidence into the markets."
Tuesday saw the beginning of the European Central Bank's 3-Year Longer Term Refinancing Operation (LTRO), whereby banks will be able to borrow from the ECB for three years while posting distressed Eurozone government debt as collateral.
"These measures address the risk that persistent financial markets tensions could affect the capacity of Euro area banks to obtain refinancing over longer horizons," ECB president Mario Draghi told the European parliament yesterday.
Draghi also confirmed that the ECB has lowered the reserve ratio – the proportion of a bank's balance sheet it is required to hold with a central bank – from 2% to 1%, as well as expanding the list of collateral eligible for refinancing.
Spain's government saw its borrowing costs fall Tuesday morning when it auctioned €5.64 billion of short-term Treasury bills. The average yields on 3-month T-bills fell to 1.735% – down from 5.11% last month – while 6-month yields were down from 5.227% to 2.435%.
"The expectation is that a lot of banks have been buying [peripheral Eurozone government debt] into the LTRO," one trader told Reuters.
"It's going to be an interesting battle in January when we start getting big chunks of supply, but at the moment people were probably underweight their benchmarks and short Italy and Spain, and this is an opportunity for them to square positions."
Banks in the United States meantime are still vulnerable to the Eurozone crisis, despite selling most of their European government bonds, research published by the Federal Reserve Bank of San Francisco warns.
"US banks have mostly shed their direct exposure to European sovereign debt," noted San Francisco Fed research advisor Sylvain Leduc earlier this month.
"But they remain subject to the risk that European trading counterparties might not be able to meet their obligations."
Over in India, gold demand remained subdued yesterday despite last week's fall in gold prices, newswire Reuters reports.
"Consumers are not buying due to an inauspicious period," says Ashok Jain of Mumbai jeweler Chenaji Narsinghji.
"Demand will improve only after January 14," he added, explaining that the Hindu calendar month of Khar Mass – considered an inauspicious time to buy gold – runs until then, having begun on December 16.
Rupee gold prices have fallen from all-time highs hit in recent weeks, as the Rupee fell on currency markets to record lows against the Dollar.
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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