Gold Falls, Green Light Given to future Euro Bailouts

By: Ben_Traynor

U.S. DOLLAR gold bullion prices dropped to around $1833 an ounce Wednesday morning in London – 4.5% off yesterday's intraday record high.

Stocks and commodities rose and government bonds fell after Germany's highest court ruled the country's bailout policies are not in breach of its constitution.

Silver bullion prices dipped to a low of $40.86 around lunchtime – a 5.5% loss for the week so far.

"From a physical perspective, demand for gold remains supported by India's wedding season and desperate Chinese customers," says a note from Swiss refiner MKS.

"People have jumped to buy gold due to the current decline [in prices]" added a gold bullion dealer in Mumbai on Wednesday.

Earlier on Wednesday gold bullion prices saw a sudden drop during Asian trade – losing 2.3% in two hours.

"It was intra-day technical stops...it doesn't reflect any changes in fundamentals," reckons one trader in Sydney quoted by news agency Reuters.

European stock markets meantime continued to perform well during Wednesday morning's trading – with the FTSE up 1.8% by lunchtime, while the German DAX gained 2.8%.

"Valuations are attractive in the short term," reckons Guillaume Duchesne, Luxembourg-based equity strategist at BGL BNP Paribas. 

"Still, volatility remains significant and it's best to be cautious. Today looks like a technical rebound."

Germany's participation in previous Eurozone bailouts is not in breach of the country's constitution, according to a verdict delivered Wednesday by the Constitutional Court in Karlsruhe.

The verdict, however, "should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures," warned the court's president Andreas Vosskuhle.

"This gives a green light for continued bailouts," reckons Frederik Erixon, co-founder of the Brussels-based European Centre for International Political Economy, adding that such measures represent "the only track available to Eurozone leaders right now".

"Today's ruling should bring some relief to financial market," says Carsten Brzeski, economist at ING.

"But it shouldn't lead to euphoria...a bigger say for German parliament in future bailouts could easily find copycats in other Eurozone countries."

The Bundestag is due to debate a proposal to increase the size of the Eurozone's current bailout mechanism – the €440 billion European Financial Stability Facility – later this month. The proposals – agreed at the Eurozone summit of on July 21 but not yet enacted by national parliaments – would increase Germany's EFSF guarantees from €123 billion to €211 billion.

The German government last week granted the Bundestag a formal role in drafting future Eurozone aid packages. Two days ago 25 members of Germany's ruling coalition voted against the draft law to increase the size and powers of the EFSF.

Elsewhere in Europe, Athens has vowed to speed up its economic reforms – following comments from German finance minister Wolfgang Schaeuble that suggested inadequate progress would threaten Greece's next bailout installment. 

"If we don't complete structural reforms...we will be stuck," Schaeuble's Greek counterpart Evangelos Venizelos said Tuesday.

"Greece is not the pariah of the European Union," added Venizelos. 

"It is an equal, competitive country that has a very serious problem regarding its public debt and fiscal deficit."

Yields on Greek government bonds set new record highs on Wednesday as investors continued to sell. The yield on 10-Year bonds breached 20% – while 2-Year bonds this morning traded above 53%.

Over in the US, President Obama is due to announce a new job creation package on Thursday. The combination of spending and tax cuts Obama will propose will be worth $300 billion, according to some US media reports.

"I have no doubt the president will propose many things on Thursday that, when looked at individually, sound pretty good, or that he'll call them all bipartisan," said Senate minority leader, Republican Mitch McConnell.

"I'm equally certain that, taken as whole, they'll represent more of the same failed approach."
Kazakhstan's central bank meantime pledged Wednesday to buy all of the country's domestic gold bullion production until at least 2015.

Kazakhstan produced 26.9 tonnes of gold last year, making it number 20 in the world, according to leading precious metals consultant GFMS. The latest figures published by the World Gold Council put its official gold bullion reserves at 70.4 tonnes.

By Ben Traynor
BullionVault.com

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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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