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Gold Rallies, Dollar-Correlation Eyed as Irish and Greek Bonds Hit by Deficit Fears

Commodities / Gold and Silver 2010 Oct 28, 2010 - 08:37 AM GMT

By: Adrian_Ash

Commodities

INTERNATIONAL WHOLESALE prices for gold bullion rallied almost 1% from yesterday's four-session low in London on Thursday, reaching $1333.50 per ounce as European stock markets rose – along with the Euro – despite a fresh plunge in "peripheral" Eurozone bond prices.

Crude oil ticked back above $82 per barrel. Silver prices held steady around $23.75 per ounce after an "extremely volatile" session on Wednesday in the words of one London trader.


"Last week's low of $1316 [in gold bullion] appears pivotal considering the three-month [rising] trend line comes in today at $1319," says Scotia Mocatta strategist Russell Browne.

"Gold managed [on Wednesday] to hold trend-line support at $1319," agrees a London dealer, and "with gold falling below $1330," says Walter de Wet at Standard Bank, "physical demand for gold has picked up markedly since the start of the week."

In particular, believes de Wet, gold buyers in India – the world's No.1 gold consumer – will keep buying gold on price dips until the Hindu festival of Diwali one-week tomorrow. Whereas in the West, "the market still focuses" on the US quantitative easing expected at the Fed's meeting next Wednesday.

"We believe the gold market is pricing $500bn of QEII already. A gold price roughly 4% lower than current levels would be consistent with no QE. So, until 3 Nov., we see $1280 as a floor for gold and any price dips in gold should be bought."

"Next Wednesday's [Fed] announcement will carry our qualified endorsement [even though] check writing in the trillions is not a bondholder's friend" writes Bill Gross, head of bond-fund giant Pimco – and long-time advocate of quantitative easing – in his latest Market Outlook.

"It will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers – and, yes, equity managers – to adjust to a new environment."

Forecasting talk of not a second but a third round of QE in the United States within 3 months, "Emerging economies need a fresh spray of capital controls and higher interest rates," says former Morgan Stanley analyst Andy Xie, now a board member of Rosetta Stone Advisors, "because hot money inflows are about to go from boiling to molten.

"Russia gave foreign bondholders a deep haircut a decade ago. Now they are bending backwards to buy Russian bonds."

Noting that the Euro's strength vs. the Dollar has not translated into "excessive" strength against other currencies, "If the US were seen by markets as actively trying to debase its currency...the [European Central Bank] might well choose to offer investors who flee from the reserve currency a new home," reckons current Morgan Stanley analyst Joachim Fels.

"True, the price to pay for becoming a reserve currency is a significant loss in external competitiveness and a current account deficit reflecting the capital inflows. Yet, the benefits of offering investors a form of Ersatzgold would include higher asset prices and permanently lower interest rates, which would help especially highly indebted governments."

The ECB was seen buying Irish government bonds today according to Bloomberg report, after the yield on Dublin's debt jumped to new record highs compared to German Bunds, offering new buyers more than 7% over comparable debt.

Ireland's 2010 budget deficit is now forecast at almost one-third of the country's annual economic output.

Both Portuguese and Greek government bonds also fell hard in price, driving 10-year yields on Athens' debt above 10.5% after it revised its 2009 budget deficit figure up from 13.5% to 15.3% of last year's GDP.

Fears of a snap election are adding to concerns that Greece's targeted deficit of 8.1% may be impossible in 2010, says Reuters.

"Gold prices are currently being driven by the weakness/strength of the Dollar," says the latest Commodities Weekly from French bank Natixis, "unlike the early part of the year when gold prices were being driven predominantly by European [credit-default insurance] rates.

"Were we to see a shift in focus away from the Dollar after next month's Fed meeting...we could [also] see a move away from the highly negative correlation between gold prices and the Dollar."

"If the market senses any chance at all that the 'nuclear' option [of pan-Eurozone bond issues or quantitative easing] could be taken as a result of shifting political sentiment, the Euro is likely to endure a re-run of the weakness that we saw through the first half of 2010," says Standard Bank's currency strategist

By Adrian Ash

BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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