Gold Gains Alongside U.S. Dollar, as Germany "Only Bond Haven Left in Eurozone"

By: Ben_Traynor

U.S. DOLLAR spot gold prices climbed to hit$1647 an ounce Monday morning in London – 0.8% below last week's high – while stock and commodity markets were broadly flat as markets absorbed Friday's news of cuts to nine Eurozone sovereign credit ratings.

"Spot gold [however] is expected to fall to $1417 per ounce over the next three months," warns Reuters technical analyst Wang Tao in the newswires Q1 2012 commodities outlook published Monday.

"[The] medium-term downtrend that started at the Sept. 6 high of $1,920.30 will continue."
Spot silver rose to $30.10 per ounce – 0.9% up on Friday's close.

The Euro meantime fell 1.8% in Monday's Asian session – hitting its lowest level since September 2010 – before stabilizing as Europe opened. Conversely, the Dollar Index – which measures the US currency against six others – hit a 16-month high at 81.7.

Spot gold in Euros hit its highest level since December 8 at €41803 per kilo (€1300 per ounce) – 5.4% off September's all-time high.

Ratings agency Standard & Poor's has cut its credit ratings for nine Eurozone members, having placed fifteen members on CreditWatch negative at the start of December. S&P cited "insufficient" policy initiatives from Eurozone governments as the main driver for the decision, as well as its concern that fiscal austerity measures could prove "self-defeating".

Those affected include France, which had its rating cut by one notch from AAA to AA+. Five others, including Germany, had their existing ratings affirmed. S&P's move, which was announced after markets closed on Friday, leaves only three triple-A rated Eurozone members – Finland, the Netherlands and Germany. Of those, only Germany has a 'stable' outlook, with S&P's outlook for the other two given as 'negative'.

"S&P's action has reinforced the market's view that the only haven in the Euro region bond market is Germany," says Peter Chartwell, fixed-income strategist at Credit Agricole in London.

"Germany comes out as a clear winner," agrees Jacques Cailloux, chief European economist at Royal Bank of Scotland.

"The French downgrade will complicate future negotiations around fiscal integration and comes at a delicate time domestically...[Germany] will have its position at the negotiating table strengthened even further."

"There are a lot of risks still ahead of us and we don't think gold has priced in these risks," reckons Societe Generale commodity strategist Jeremy Friesen, adding that S&P's decision "is one of the incremental pushes for gold to appreciate."

Representatives of Europe's banks meantime are considering asking French president Nicolas Sarkozy and German chancellor Angela Merkel to try to break the deadlock in negotiations over the size of losses private sector Greek bondholders should take, after talks broke down on Friday, the Financial Times reports.

European leaders agreed last October that private sector involvement (PSI) should amount to losses of 50%. However, "some [Eurozone government] collaborators are not following that decision," says Charles Dallara, managing director of the Institute of International Finance, which is negotiating with Greece on behalf of private sector bondholders.

Germany has long been a proponent of PSI as a key component of any Greek crisis solution. French banks meantime have the highest exposure to Greek sovereign debt of any major European banking sector, according to Reuters data.

In China meantime, protesting workers at the Sanyo electrical factory, have clashed with police in the southern city of Shenzhen, according to Chinese press reports. The protests over pay and job security are the latest to hit China's manufacturing sector. 

Last week, workers at Foxconn, which produces Microsoft's Xbox, threatened to jump off the factory roof in a dispute over severance pay and job transfers, while production was halted at an LG Display factory last month after workers went on strike.

China's Q4 2011 GDP figures are due to be released Tuesday, with many economists forecasting that growth will have dropped below 9% to its slowest pace since early 2009.

Here in London, representatives of the Hong Kong Monetary Authority met with UK Treasury officials today to discuss steps aimed at making London a major offshore center for Chinese currency dealing.

Demand for gold jewelry in India grew between 5% and 7% last year – and is set to grow by up to 15% in 2012 – according to Mehul Choksi, head of India's largest jewelry retailer said Sunday.
However, dealers in India report that last week's rise in spot gold prices has curbed demand at the start of the harvest season, which began yesterday.

The difference between bullish and bearish contracts held by noncommercial gold futures and options traders on New York's Comex exchange – the so-called speculative net long – rose  2.7% over the week ended last Tuesday to the equivalent of 433.7 tonnes of gold bullion, ending four weeks of declines, according to the latest data from the Commodity Futures Trading Commission.

"The change in the net position was the result of speculative shorts being unwound," says Standard Bank commodity strategist Walter de Wet.

"Although only a modest improvement this past week, the decline in short positions is encouraging. Perhaps the speculative market is becoming less apprehensive about gold's prospects."

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 2012

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